The Importance of Geely's Volvo Purchase For The Chinese Auto Industry
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.
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 s top 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?
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.
TomH on Mar 29, 2010
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.
Robert.Walter on Mar 29, 2010
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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