After Paying $1.5 Billion For Volvo, Geely Must Pay Seven Times More

by Bertel Schmitt

Published: December 3rd, 2012

after paying 1 5 billion for volvo geely must pay seven times more

Two years ago, China’s Geely bought Sweden’s (and Ford’s) Volvo lock, stock, and barrel. Among the assets: A few good Volvo platforms, along with a fair technology licensing contract from Ford. However, the platforms are not getting younger, and from what I heard back then, the licenses with Ford also have their limits. Geely has to invest into the future if Volvo is supposed to have one. Price of admission to the future: Many times the purchase price of the car company.

In August 2010, Geely bought Volvo for $1.5 billion. Now, Geely will pour more than seven times as much, $11 billion until 2015, into a development program for the next generation Volvos, Reuters says.

The billions should also be a lecture to private equity funds and closet captains of industry who want to snap up moribund car companies on the cheap.

The main part of the R&D will be performed in Sweden. About half of the $11 billion will go to building the infrastructure in Sweden that helps bringing the new technology to market. According to Volvo, this amounts to “one of Sweden’s largest ever industrial investments.”

At the heart of the project are two programs: SPA (Scalable Product Architecture) and VEA (Volvo Engine Architecture).

VEA is the basis for a new four-cylinder fuel-efficient engine family. The big challenge is SPA.

SPA appears to be a variation on the modular systems that have been pursued mostly by European and Japanese carmakers. Volvo says its SPA consists “of shared modules and scalable systems and components, all manufactured in a flexible production system.” These frameworks are considered to be the high art of automotive engineering. Volkswagen’s MQB/MLB/MSB architecture is a notable example.The modular systems, and not cheap labor are key to flexible low cost mass production.

Explains Volvo’s R&D chief Peter Mertens:

“SPA makes us technologically independent, without any link whatsoever to our previous owner. The new architecture covers about two-thirds of our total sales volume. With about 40 percent of all components shared by all car models irrespective of size, we will benefit from economies of scale.”

The architecture was first shown at last year’s IAA motor show in Frankfurt in Volvo’s Concept You vehicle. The first car model based on the new architecture is the Volvo XC90, planned for the end of 2014.

When Geely bought Volvo, many expected that the company would be dismantled and shipped to China, and used as a Trojan Horse for cheap Chinese cars coming to the West.

None of this happened. To this date, there is no Volvo production in China, although Volvo took steps to get Chinese production going. Being a Swedish entity however, Volvo is treated by the Chinese government just like a foreign carmaker and needs to wait for government approval.

#BertelSchmitt #China #Geely #Sweden #Volvo

Bertel Schmitt

Bertel Schmitt comes back to journalism after taking a 35 year break in advertising and marketing. He ran and owned advertising agencies in Duesseldorf, Germany, and New York City. Volkswagen A.G. was Bertel's most important corporate account. Schmitt's advertising and marketing career touched many corners of the industry with a special focus on automotive products and services. Since 2004, he lives in Japan and China with his wife <a href="http://www.tomokoandbertel.com"> Tomoko </a>. Bertel Schmitt is a founding board member of the <a href="http://www.offshoresuperseries.com"> Offshore Super Series </a>, an American offshore powerboat racing organization. He is co-owner of the racing team Typhoon.

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3 of 20 comments

Mulled whine on Dec 03, 2012

The question is, does Geely have the said 11 billion dollars?

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Dimwit on Dec 03, 2012

How much has Volvo made during Geely's ownership? You might be surprised. Yeah, it's not Ford but it's still a large manu. That's the thing about autos. It runs like any other mfg co. but the numbers are huge. It's the cost of doing business. Another thing... where does it say that Geely has to do it all by themselves? PSA, Renault, FIAT, Opel are all in the same boat. Aging, less competitive platforms. And it's not the platforms that are the issue in this case. It's future mfg. These modular systems are for ease of building, not superior cars. If the platforms are so flexible, why not licence them from someone else? Ford? VW? How's that for a giggle? Use the new Ford platform, leverage Ford's supplier network but build something that's a Volvo through and through. Customer gets an excellent car and you save a ton of money on a modern platform and Ford gets a piece of the action on every car sold.

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- Corntrollio on Dec 03, 2012
  
  That's what Mercedes and Infiniti are doing already.
  
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