If you have been following recent news regarding the U.S. automotive industry, than you may have noted that Ford Motor Company has been shopping for some months for a prospective buyer of its Volvo auto unit.  A recent article appearing in the Wall Street Journal (subscription may be required) outlines some of the plans for Ford’s preferred bidder, Geely Holding Group Company, parent of Geely Automotive Holdings Ltd., one of China’s largest privately owned auto producers. Geeley has been preparing a $2 billion bid to acquire Volvo, and the proposal has been months in the making.

According to the article, Geely has developed a turnaround plan for Volvo that targets the selling of one million Volvo vehicles globally in five years, including the selling of 200,000 cars a year in China. The plan also sets ambitious plans for selling vehicles in Volvo’s traditional European and U.S. markets.  Geely, one of China’s top ten passenger car brands, is a relatively small producer by volume, but has managed to market and produce autos for the Chinese market without leveraging an alliance with other global brands.

Plans call for high volume production to be established in China, but engineering and development would remain in Sweden.  The article cautions however that negotiation talks could still drag on, and issues of intellectual property protection remain to be overcome.

I see this proposed acquisition as a very shrewd move by Geely, for a number of business, marketing and supply-chain related perspectives. 

First and foremost, Geely stands to gain a highly recognized global brand in the premium category, one with a stellar reputation for building solid and very safe automobiles.  It’s been amazing to observe how Ford has encouraged Volvo’s safety engineering expertise to be applied to the broader offering of Ford’s vehicles.  The fact that Ford can now boast about its advanced safety features in its product promotions comes from the direct influence of Volvo engineers.  Geely stands to benefit from this same engineering expertise, and would be wise to allow Volvo engineers to apply their expertise to the entire Geely line-up. Geeley can also benefit from the global management and marketing skills that both Volvo and Ford have invested in the brand.

Second, since Volvo’s are still sold from independent dealers in Europe and the U.S., Geely stands to inherit an existing distribution channel for not only Volvo, but other Geeley vehicles in the future.  Volvo, in-turn, can gain the benefit of Geely’s knowledge of the Chinese automotive market and channels of distribution. Premium brands are becoming much more attractive in China, by evidence of the fact that brands such as Audi, BMW, General Motors Buick, and Mercedes are experiencing double-digit sales growth rates.  Audi expects to sell over 130,000 vehicles, and Buick has sold in excess of 300,000 vehicles this year. Geely has ambitious plans to make Volvo’s more appealing to the most discriminating and wealthy Chinese buyers. The acquisition of Volvo can place Geeley directly into this competitive race for attracting evolving upscale auto buyers in China.

The third benefit lies in deployment of a high-volume global production and efficiency value-chain for producing Volvo vehicles.  Geely’s initial plans call for building a new Volvo plant in China capable of producing 300,000 vehicles per year, and also leverage China’s advantages in material and labor costs.  That also implies the development of new Chinese-based suppliers. The company further indicates that it will maintain Volvo’s current manufacturing capacity in Europe to distribute to both European and U.S. markets.  My speculation is that once Geely’s Chinese manufacturing and Chinese value-chain capabilities are ramped-up and matured, that facility can be the focal point for exporting Volvo’s to other countries.

Finally, if Geely is successful in its bid, it will acquire an outlet to introduce and market autos in the U.S. without having to overcome U.S. government or consumer perceptions regarding Chinese auto companies taking over from U.S. based companies.  Consumers tend to have short memories, and Volvo buyers are a loyal group.  If Geely can maintain Volvo’s engineering and safety standards, build in additional quality, and produce in a far more efficient manner, than consumers will overcome their political objections.  That’s exactly what happened with every other foreign based brand that successfully entered the U.S. market.

Geely’s plans are both bold and shrewd, and could provide strategic advantages from a business and value-chain perspective.  But the potential for slip-ups also exist.  Future developments will tell the complete story of whether all of the strategy and operational execution will fall into place.

 Bob Ferrari