By on March 28, 2010

Some people think that Geely’s acquisition of Ford’s Volvo is driven by the desire for sorely needed know-how for China’s auto industry. Who thinks that way is “totally underestimating” the technological advances made by businesses in the Far East. This comes from none less than GM’s Nick Reilly. If anyone understands the true capabilities of the Chinese Auto industry, then it’s Reilly. He’s been there, in charge of a big part of China’s auto industry. He knows: Geely’s Volvo purchase can mean the great leap forward for Chinese car exports.

Reilly became GM group vice president and president of GM Asia Pacific in 2006, In 2009, Nick Reilly was appointed President of GM International Operations based in Shanghai, China. GM is an old China hand. They came to China in 1997 and started the second large joint venture with China’s SAIC in 1997. Buick is still alive only because it is an important brand in China.

In an interview with London’s Telegraph, Reilly warned to stop joking about the Chinese car industry. He urges everybody to acknowledge the Chinese as a very serious competitor:

“The general political climate is that these guys must be cheating and we need to get more protectionist, rather than actually admitting what is happening. Generally I think there is a complacency or a refusal to accept the huge economic shift there has been.”

Geely “signed a binding deal Sunday to buy Ford Motor Co.’s Volvo Cars unit for $1.8 billion, allowing the independent Chinese automaker to expand its foothold in Europe,” as the Wall Street Journal reports. The agreement was signed by Geely’s chairman, Li Shufu and Ford Chief Financial Officer Lewis Booth, and witnessed by Li Yizhong, the Chinese minister of industry and information technology, as well as Swedish Minister for Enterprise and Energy Maud Olofsson.

Geely, or any of the Chinese car companies don’t need to buy Western companies to get access to vaunted intellectual property or secret technology. China had this access for more than 20 years, ever since the first joint venture plants were set up. Many Chinese plants are more modern than U.S. plants, where modernization clashes with unions. Reilly agrees:

“Their rate of progress in terms of technology, innovation and quality improvements is really remarkable, and we are totally underestimating the technological advances they are making. The gap has completely shrunk. It is a tenth of what it was and a quarter of what we expected it to be. I think everybody thought we had 10 or 15 years before China became competitive, and that is just not true.”

Of course, Reilly said that to extract more money from the U.K. government by creating an automotive version of the missile gap. But nevertheless, the threat is real. Geely’s purchase of Volvo may just be the key to unlock the Chinese export might.

China has “the largest market in the world now,” said Reilly. “So adding 10 percent in order to export isn’t huge to them but is huge in terms of the number of exports.”

According to the Telegraph, “China has held its manufacturers back from an offensive on Europe to meet its massive home market.” The Telegraph is dreaming. Or they listened to closely to Reilly who whispered off the record that it’s all a big conspiracy, and that all the Chinese government needs to do is to flip the switch and unleash its car companies on unwitting export markets. The opposite is true.

For more than two years, we have reported that the Chinese government is unhappy with China’s car exports. Measures enacted in 2008 to prop-up exports fizzled. By the end of 2009, the Chinese government issued strong marching orders to its car industry to step up exports. There is reason for alarm: China is the world’s largest auto market with 13.6m units sold in 2009, and some 15 to 16m to be sold in China this year. Chinese car exports however are a disaster. China’s already anemic auto exports dropped another 46 percent in 2009. The value of car imports beat exports 3:1.

Why?

The Chinese government is not holding its manufacturers back. Western manufacturers do. Joint venture agreements with Western or Japanese automakers forbid the exportation without the say-so by the joint venture partner. Which they are loath to give, except in tightly controlled small scale trials. Cars made in China under joint venture agreements according to Western or Japanese standards, using Western or Japanese technology, and Western or Japanese production methods are as good as or sometimes better than their Western or Japanese counterparts, and could be exported tomorrow. They would be indistinguishable in the market. Especially in a market, where locally produced cars are already full with China sourced parts.

Imagine what would happen if China would export cars made by their joint ventures, and you will understand the importance of the Geely/Volvo deal.

The only cars that were attempted to be exported were cars made by private manufacturers who, more often than not, had previously made refrigerators. To the delight of Western or Japanese manufacturers, these cars fail crash tests, videos of which go viral through Youtube and stop any export attempts dead. Manufacturers are not giving up. They quietly seek ECE Whole Vehicle Type Approval for their cars – and are increasingly successful.

Nevertheless, there are other barriers to overcome. If you had a choice between a Great Wall Florid, Coolbear, Hover 5, or Wingle 4, and, say, a brand new Volvo S60, which one would you take?

Exactly.

What Geely buys is an accepted brand, a brand that is associated with safety and reliability. What Geely buys is a range of already homologated cars, and a cadre of engineers that already is working on cars to be launched 5 years from now. Other than in the case of Rover and Saab, where old tooling was trucked off to China, Geely buys a fully functioning car company. They will leave manufacture and engineering in Europe. They will build new manufacture in China. Ford, and Ford’s Visteon, which already has a large footprint in China, will be more than happy to sell parts and technology to Geely, as long and as many as they desire.

It was much easier for Ford to shed a Volvo to a Chinese company, than for GM to sell a Saab or even a Hummer. Ford is a relative nobody as far as Chinese joint ventures go. Their three-way JV with Mazda and Chang’an just fell apart. They’ll most likely make more money supplying Geely with technology. Speaking of which, keeping an eye on the current Volvo joint venture with government-owned Chang’an should be interesting.

Just  like the Volvo deal opens the doors to markets which are all but closed to other Chinese makers, Volvo gives Geely a trusted and respected brand it can successfully market in China. Geely is planning to open a 300,000 unit plant in China, which would double Volvo’s current worldwide output. That plant could have a very important customer:

Much to the chagrin of government-owned Chinese car manufacturers, who are in bed with foreign joint venture partners, a Volvo owned by Geely may profit big from a possible edict by the Chinese government. The plan is that at least 50 percent of government cars must be home grown. If passed, this would hamper sales of the ubiquitous Audi A6, which has become the unofficial Chinese state car, and take a big bite out of the sales of joint ventures. Cars are the biggest item on China’s government shopping list, accounting for 20 percent of the year’s government procurement in 2008.

Government owned companies like FAW, SAIC, Dongfeng, or BAIC will watch closely how privately owned Geely will digest the Volvo purchase. If successful, western car companies will be on their shopping list again. It is no coincidence that China’s SAIC is flexing its muscles in the SAIC/GM joint venture, which it already officially controls. As we said in the beginning, if anyone understands the true capabilities of the Chinese Auto industry, then it’s GM’s Reilly.

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21 Comments on “The Importance of Geely’s Volvo Purchase For The Chinese Auto Industry...”


  • avatar
    snabster

    Bertel, as always a well argued piece. The emphasis on the JV system preventing exports is very useful.

    That being said, Swedish and Americans, Volvo’s two biggest markets, are very aware of the sale to the Chinese and will be wary. Any slip of quality will bring a lot of teeth-nashing. Much like when Lenevo bought the Thinkpad line, it is going to take a lot of corporate hand-holding and PR to keep those consumers happy and Volvo running. Does Geely have those smarts?

    The surprise at the end is your point about whether this is just about government sales. Why do I suspect that?

    I fear Volvo will go the way of Ssangyong.

  • avatar
    sqrl

    Off topic, what’s that car in the youtube vid that the Chinese president is in? It looks badass…

  • avatar
    L'avventura

    Due to logistical, economic, as well as political considerations, automobiles are usually built within, or near, the country which it is sold. American and EU markets are examples of this, any significant large volume model sold in those markets are built there as well.

    China does have the potential to displace for some America/European/Japanese-made cars for certain brands. Especially vehicles with lower volumes. Honda, for instance, does import Chinese-made fits for some of their European left-hand drive markets, but still builds most of the Euro Fits are built in Swindon, UK.

    Chinese made car exports have the largest growth potential in Asia; India, South East Asia, Indonesia, Russia, Middle East, etc. This is where they’ll concentrate first, but those nations also have an ambitious expansion plan for their automotive industries as well.

    Chinese suppliers are likely where most of the export growth is going to be at, particularly for certain parts; batteries, motors, etc that are being popularized with hybrids and EVs. The Japanese supplier industry has always talked about the “China Price” and how they need to match it, or offset it with quality and technology, if they are to survive.

    Either way, this is all another example of the automotive market becoming increasingly Asia, and perhaps variably BRICs, centric.

  • avatar
    Stingray

    Given how the SAIC-GM matter has developed during the last few months, I wouldn’t be surprised if GM comes next.

    If I were a gringo, that wouldn’t be something I’d be proud of.

    In any case, as reported here, they’re already using GM’s brands to market their products abroad. I saw the ugly Wuling van in the Chevrolet Colombia’s site sold as a… Chevy

  • avatar
    Steven Lang

    “The Chinese government is not holding its manufacturers back. Western manufacturers do. Joint venture agreements with Western or Japanese automakers forbid the exportation without the say-so by the joint venture partner. Which they are loath to give, except in tightly controlled small scale trials. Cars made in China under joint venture agreements according to Western or Japanese standards, using Western or Japanese technology, and Western or Japanese production methods are as good as or sometimes better than their Western or Japanese counterparts, and could be exported tomorrow. They would be indistinguishable in the market. Especially in a market, where locally produced cars are already full with China sourced parts.”

    I’m genuinely curious about this remark. Geely was an absolute failure with exporting scooters to the West five years ago. Yet it’s the ‘Western partner’ that is apparently holding them back?

    I’m inclined to think that Chinese car companies have a substantial quality gap at home and abroad given the current 3:1 ratio between imports and exports. That gap has been earned by the (lack of) quality of their models compared with the Western automakers.

    One other comment…

    “Geely, or any of the Chinese car companies don’t need to buy Western companies to get access to vaunted intellectual property or secret technology. China had this access for more than 20 years, ever since the first joint venture plants were set up. Many Chinese plants are more modern than U.S. plants, where modernization clashes with unions.”

    This is a comment based in Fantasyland. If you would like to share how the Chinese automakers applied the same lean production methods of many Western companies of that time please let me know.

    The ‘intellectual property’ component is belied by the fact that the Chinese automakers have shown absolutely no respect or care for the intellectual properties of Western automakers. Which is why we have seen certain Chinese automakers be banned from participating in certain markets. Copying designs, patents, and generally short cutting R&D by ripping off the industry and the general public is not a healthy template for long-term growth.

    The Chinese automakers just happen to be the ‘home team’ with the ‘right market’ at the moment. Sound familiar?

    • 0 avatar

      Steven:

      This matter obviously is not your area of expertise. I have worked for more than 30 years for the first and largest Chinese joint venture partner, Volkswagen. Work for Volkswagen brought me here. I wouldn’t argue with your expertise at car auctions. You can grant me a little know-how of the Chinese auto market.

      1.) Geely never had a foreign joint venture partner, therefore, none could hold them back. The joint venture partner remark is directed at SAIC who makes world class GM cars and world class Volkswagen cars, at FAW who makes world class Volkswagens, Audis, and Toyotas, at BAIC, who builds world class Mercedeses etc., etc. THOSE are the ones who are held back, and wait until they are unleashed.

      2.) The 3:1 ratio of imports to exports is a pimple on an elephant trunk. Chinese bought 13.6m cars last year. Nearly all were made in China. About half of them made in joint ventures, the other half home grown. China exported 369,600 cars, imported 420,800 cars. Insignificant in both directions. The 3:1 ratio is a value ratio, they love to import S-Class Mercedeses, the exports are mainly cheap pick-ups to Africa. As far as domestically made joint venture cars go, there is no quality gap. Trust me, I spent 30 years in car factories and going over quality stats.

      3.) As far as “based in fantasy land” goes, in how many German and Chinese car manufacturing plants have you been? Trust me: The German engineers that set up a plant in China, or the Japanese engineers that set up a plant in China, they do it just like home. They don’t know it any other way.

      If you don’t believe me, then listen to John Reilly. You are making the very same mistake he’s talking about, rooted in “complacency or a refusal to accept the huge economic shift there has been.”

      And the longer people refuse to admit reality, the easier they make it for the competition. I’m old enough to have witnessed the same with Japan and Korea. Just that China has 10 times the people of Japan and about 30 times the population of Korea.

    • 0 avatar
      porschespeed

      “The ‘intellectual property’ component is belied by the fact that the Chinese automakers have shown absolutely no respect or care for the intellectual properties of Western automakers. Which is why we have seen certain Chinese automakers be banned from participating in certain markets. Copying designs, patents, and generally short cutting R&D by ripping off the industry and the general public is not a healthy template for long-term growth.”

      Stealing IP is just the way Chinese business is done – cars are merely part of the picture. A healthy template for long-term growth? Kinda depends on which end of the theft you’re on.

      Xenophobic? One does not need to look far to find incident after incident of Chinese Government sponsored IP theft, it’s rampant in the US and EU. Do a joint venture in China and your corporate secrets will be gone before you flip the power on for the first time.

      The thought that the Chinese got where they are without stealing most of it is simply propaganda. A quick look across reputable sources will provide decades of reporting on the wholesale theft of IP that the Chinese have engaged in.

      That the world continues to tolerate the Chinese government’s continued corporate espionage speaks volumes about how dependent the world had become on exploiting cheap labor.

      The race to the bottom continues.

      Bertel,

      There are huge differences between Korea/Japan and China. There was never any reason to fear Japan/Korea – they are (relatively) small countries with few, if any, natural resources. The laws of economics were sure to reign them in – and did. China has raw materials, plenty of land, and plenty of (relatively) cheap labor.

  • avatar

    The Chinese government is not holding its manufacturers back. Western manufacturers do. Joint venture agreements with Western or Japanese automakers forbid the exportation without the say-so by the joint venture partner.

    That’s the fault of the Chinese, not the foreign mfgs. The foreign companies are just playing by the rules of the Chinese government, which does not allow 100% foreign direct investment, and forces foreign companies to take Chinese JV partners. It’s a foolish policy because it ultimately cripples the Chinese partners, not just because of export restrictions. If you have a JV partner, there’s less incentive to come up with your own original ideas than if that partner wasn’t a partner but a competitor.

    India allows 100% FDI. What has China produced that comes close to the Tata Nano in terms of forcing the major international players in the car biz to pay attention?

    The more things change the more they stay the same. Japan and Germany were once low cost producers. Some day, sooner than most think, China will no longer be the low cost producer. Already some Chinese auto suppliers have moved their operations to other locations in China as wages have risen in developed areas.

    • 0 avatar

      Don’t get me going on the Nano. It’s been around since 2008 and how many have they made? 26,000 I hear. A lot of them go up in flames as they leave the factory. But the world is paying attention.

      In the meantime, a Cherry cranks out 500,000 QQs per year, and the world ignores it.

      Sure, India may allow 100% FDI in car factories, but how long does it take you to get through the maze of bureaucracy to open it? And once you have your factory built, what are the chances that the government changes and with it the complete industrial policy?

      Just getting in and out of an airport is a nightmare.

    • 0 avatar

      Well, yes, one party states often have more continuity in their policies than messy democracies.

      As for the Nano, the reason why production figures are so low is that Tata had a plant ready to go in Singur, they were already installing the production machinery to make the Nano, when politicians in the opposition to the ruling party (ironically the communists) in West Bengal ginned up protests by farmers who were displaced and there was violence. Tata ended up building an entirely different plant in Sanand in Gujarat state, where production on the Nano started earlier this year. While that plant was coming online, Tata began smaller scale production at its Pantnagar plant in Uttarakhand state.

  • avatar
    ttacgreg

    bit off topic, but, that car has lots of stylistic resemblance to a Chevy Vega

  • avatar
    Steven Lang

    Points well taken…

    1) It’s my understanding that Geely is a major player in the Chinese automotive market. If that is the case, then the argument then becomes that the Chinese industry simply can’t do it alone.

    But there is an excellent point based on advantages. Quality for quality, product for product, what type of price advantage would the Chinese enjoy if they could bring the joint venture products to the west? Given that every Western automaker is a minority shareholder in China and that the Chinese government interests aren’t exactly aligned with the Westerners, does it even make sense over the long-term for the Western automakers to cannibalize and perhaps wind down their operations?

    It’s a complex question with no easy answer.

    2) Is there a substantial perceived quality gap? I don’t think that this is an easy thing to overcome, or a pimple in the butt of an elephant, unless the Chinese automakers are able to offer superior products. As the 3:1 ratio exemplifies, price really isn’t everything.

    3) You’re right. I would be curious to find out if the Chinese government has ever demand higher levels of employment or production in these joint ventures. Regardless of standards, any automaker with high production targets will begin to fail their customers.

    You have no issues with my ‘refusal to accept the huge economic shift’. It’s the main reason why I’m looking at purchasing a residential property outside the United States. Costa Rica to be exact.

  • avatar
    N8iveVA

    whether it’s their government, their exploitation of cheap labor, ripping off intellectual property, or xenophobia, i would never buy a Chinese made car. Sometimes it’s difficlut to avoid some cheap small Chinese made product, but when it comes to a big ticket item like a car, i wont do it. If they do start releasing Chinese made versions of JV products and i’m in the market for, say an A6, and there were both German and Chinese made A6’s on the lot; i’d make sure i was buying a German made one.

  • avatar
    homeworld1031tx

    In what receipt does car procurement account for 20 percent of government expenditure?

  • avatar
    Tstag

    SAIC and Geely now have everything they need to sell cars in the west. SAIC got MG Rover’s technology but more critically they also nabbed most of their engineers. People forget that and you just need to look at the MG 6 and MG 3 to see that they are catching up fast. Neither model is far off being competitive in Europe.

    Geely have now made an even bigger buy….

  • avatar
    snabster

    I don’t think we’ll see Chinese cars in the US anytime soon. There isn’t a market for them. Cars for under 10K are a smallish market anyway, and Sukuki and Kia have plenty of product. Ditto for the EU. You need to get a foothold. I don’t think Volvo is that foothold.

    Where I do think China will start exporting is to the rest of the world.

  • avatar
    TomH

    Bertel,

    I believe you are “dead nuts on” with regard to Geely/Volvo. While everybody else is pondering the bricks and mortar, Geely is focused on the brand, the channel, and a few good people. This is the same logic that drives Sergio to develop Chrysler, as it (literally) gives him a ready-made distribution channel in the US.

  • avatar
    Robert.Walter

    Thanks Bertel, nice summary and I agree with everything (esp the sad fact that many in the West still view China as backward and are in denial as to our dependence on, and our need to adjust to the new reality of China as an economic powerhouse.)

    One item though, “Ford’s Visteon” is really no more accurate than saying “GM’s Delphi” as for the most part, these companies were independent spin-offs from the mother ships sometime around 1999/00.

    Despite their uncompetitive natures, lifelines could not be completely severed by the parents, and, in the case of Ford/Visteon, Ford now holds some of Visteon’s senior debt (and there may be similar agreements between GM & Delphi), as well as Ford taking back some failing chunks of Visteon (think ACH, LLC), and GM likewise taking back Delphi Steering (think Nexsteer) but for the most part, both Delphi and Visteon are not owned by their former parents.


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