Posted by Michael Schuman
Many people reading this post probably know little about the Chinese
carmaker Geely. Perhaps you've never heard of the company at all. That's
not surprising, since it has almost zero presence in major car markets
(outside of China). But that changed instantly on Sunday when Geely
finalized its purchase of Volvo from Ford for $1.8 billion.
That acquisition is a big, big deal for Geely, and for China. It
sends up a bright, flashing warning signal to the rest of the global
auto industry that China is deadly serious about becoming a significant
player in the international car market, and that its companies command
the resources and guts to make that goal a reality. The deal also
continues a recent pattern of aggressive carmakers in emerging economies
taking advantage of their weakened American competitors to buy assets
to upgrade and expand their operations. India's Tata Motors snagged
Jaguar and Land Rover from Ford in 2008, while China's Beijing Auto
agreed last year to purchase some technology from GM's Saab unit. Such
transactions represent what may be an important long-term trend in the
global car industry – the shift of focus to fast-growth emerging
economies, such as China and India, both in terms of production and
sales. After all, China surpassed the U.S. as the world's largest car
market last year.
However, I have some doubts about how much of a difference Geely's
Volvo grab will really make in China's quest for a globally competitive
car industry.
The reasons why Geely wanted Volvo make perfect sense. Geely has had
ambitions to expand internationally for several years. (It was the first
Chinese automaker to display a car at the Detroit auto show, in 2006.)
Buying Volvo is a quick and easy way to do that. The investment of time,
money and effort Geely would have required to create a Volvo-like
operation overseas on its own would likely have greatly exceeded Volvo's
$1.8 billion price tag. Geely also gets its hands on a well-known brand
name and oodles of technology and expertise it can absorb into its
operation in China to help the firm compete there and elsewhere. Geely,
in fact, is planning to expand Volvo's output by manufacturing Volvos in
China.
On the other hand, Volvo-style deals don't have a promising history.
Companies in assorted emerging markets have for many years tried to use
the acquisition shortcut to build a global presence, hoping to get a
quick fix of brand power, technology and market share. But more often
than not, things don't turn out as planned. Usually the sellers of these
operations want to ditch them for good reason – because they're in some
way troubled or dog-eared, and need some hefty restoration work to make
them into viable, sustainable businesses. Then the emerging markets
firms discover that they don't possess the expertise to effectively run
or benefit from their new, supposedly prized assets. An example of this
pattern is the acquisition by Chinese PC giant Lenovo of IBM's PC unit.
Sure, Lenovo got a global sales network and top-notch engineering and
management talent it would have otherwise taken years and years to
develop independently. But it also inherited a ton of problems with the
IBM unit – most notably, its feeble presence in the fast-growing
consumer segment of the PC market – which Lenovo's management team has
yet to resolve, five years after the deal was completed.
I'm wondering if Geely is heading down this well-trod and unfortunate
road. Volvo, which has factories in Sweden and Belgium, has been losing
brand equity and money, and its cars need a major image overhaul. (My
mom has driven Volvos for as long as I can remember. Need I say more?)
And though Geely has been a big success within the China market, proving
itself more than capable of competing against bigger, foreign players,
the company's managers have limited experience operating outside of
China. They definitely haven't managed a corps of Swedes before.
I'm not saying the Volvo deal will turn out badly. Geely will no
doubt gain from it. But it's not a game changer either. Cut-rate
acquisitions produce cut-rate results. In my opinion, there are no easy
shortcuts for up-and-coming carmakers, no easy way to swerve around the
hard, gritty work of building a car people want to buy, and convincing
consumers it's reliable and safe. Volvo is an important step – but just a
step – in what will likely be a long haul for Geely and China in the
global auto industry.
©
Many people reading this post probably know little about the Chinese
carmaker Geely. Perhaps you've never heard of the company at all. That's
not surprising, since it has almost zero presence in major car markets
(outside of China). But that changed instantly on Sunday when Geely
finalized its purchase of Volvo from Ford for $1.8 billion.
That acquisition is a big, big deal for Geely, and for China. It
sends up a bright, flashing warning signal to the rest of the global
auto industry that China is deadly serious about becoming a significant
player in the international car market, and that its companies command
the resources and guts to make that goal a reality. The deal also
continues a recent pattern of aggressive carmakers in emerging economies
taking advantage of their weakened American competitors to buy assets
to upgrade and expand their operations. India's Tata Motors snagged
Jaguar and Land Rover from Ford in 2008, while China's Beijing Auto
agreed last year to purchase some technology from GM's Saab unit. Such
transactions represent what may be an important long-term trend in the
global car industry – the shift of focus to fast-growth emerging
economies, such as China and India, both in terms of production and
sales. After all, China surpassed the U.S. as the world's largest car
market last year.
However, I have some doubts about how much of a difference Geely's
Volvo grab will really make in China's quest for a globally competitive
car industry.
The reasons why Geely wanted Volvo make perfect sense. Geely has had
ambitions to expand internationally for several years. (It was the first
Chinese automaker to display a car at the Detroit auto show, in 2006.)
Buying Volvo is a quick and easy way to do that. The investment of time,
money and effort Geely would have required to create a Volvo-like
operation overseas on its own would likely have greatly exceeded Volvo's
$1.8 billion price tag. Geely also gets its hands on a well-known brand
name and oodles of technology and expertise it can absorb into its
operation in China to help the firm compete there and elsewhere. Geely,
in fact, is planning to expand Volvo's output by manufacturing Volvos in
China.
On the other hand, Volvo-style deals don't have a promising history.
Companies in assorted emerging markets have for many years tried to use
the acquisition shortcut to build a global presence, hoping to get a
quick fix of brand power, technology and market share. But more often
than not, things don't turn out as planned. Usually the sellers of these
operations want to ditch them for good reason – because they're in some
way troubled or dog-eared, and need some hefty restoration work to make
them into viable, sustainable businesses. Then the emerging markets
firms discover that they don't possess the expertise to effectively run
or benefit from their new, supposedly prized assets. An example of this
pattern is the acquisition by Chinese PC giant Lenovo of IBM's PC unit.
Sure, Lenovo got a global sales network and top-notch engineering and
management talent it would have otherwise taken years and years to
develop independently. But it also inherited a ton of problems with the
IBM unit – most notably, its feeble presence in the fast-growing
consumer segment of the PC market – which Lenovo's management team has
yet to resolve, five years after the deal was completed.
I'm wondering if Geely is heading down this well-trod and unfortunate
road. Volvo, which has factories in Sweden and Belgium, has been losing
brand equity and money, and its cars need a major image overhaul. (My
mom has driven Volvos for as long as I can remember. Need I say more?)
And though Geely has been a big success within the China market, proving
itself more than capable of competing against bigger, foreign players,
the company's managers have limited experience operating outside of
China. They definitely haven't managed a corps of Swedes before.
I'm not saying the Volvo deal will turn out badly. Geely will no
doubt gain from it. But it's not a game changer either. Cut-rate
acquisitions produce cut-rate results. In my opinion, there are no easy
shortcuts for up-and-coming carmakers, no easy way to swerve around the
hard, gritty work of building a car people want to buy, and convincing
consumers it's reliable and safe. Volvo is an important step – but just a
step – in what will likely be a long haul for Geely and China in the
global auto industry.
©
