Volvo:the Freak Is Not That Bad

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Recently， volvo Group offi- cially announced that it has gained the approval of the Chinese government for its localization of production in China. Meanwhile， the joint venture between Volvo and Geely is going to be put into work.

Three years after Geely’s acquisition of Volvo in March 2010， the localization of Volvo finally saw substantial progress. During the process， both Geely and Volvo met losses and gains.

The Losses

From the stake ownership， Geely and Volvo are actually like “father and son” since Volvo is the subsidiary company of Geely， which owns 100% stakes of this Swedish company. However， the localization of Volvo’s production in China did not go very well. “The father and the son” have to “marry each other” according to the policies and the contracts about the joint venture had only one signature Li Shufu， board chairman of both Volvo and Geely. This made Volvo look like a freak.

In addition， all products Volvo made in China are not completely within the framework of the joint venture， according to the localization pattern that has been approved. As Volvo’s plan reveals， Daqing， Liaoning will host the manufacturing base of assembling cars while the manufacturing base of engines is located in Zhangjiakou. These two facilities are the part of the joint venture， but another base of assembling cars located in Chengdu is run by Zhejiang Haoqing Automobile Manufacturing Corp. In addition， it is still a question for the ownership of Volvo’s R&D center in Shanghai. Both the joint venture and Volvo China can claim it.

Volvo’s manufacturing and R&D systems are rather a mess in China. But the mess is not caused by the localization of Volvo； instead， it is caused by Volvo’s formation.

It is not exaggerated to say that Volvo is a freak born during the development of China’s self-owned automobile brands.

The Chinese government has issued many policies in recent years to develop self-owned world-level big brands. For example， it stipulates that the governmental departments should only buy cars of self-owned brands for the public use， which is considered a measure to support the development of self-owned brands.

And the Chinese government has mentioned the goal of building worldclass multinational companies more than once.

How to build it， however， remains a question. Generally speaking， internal growth and absorbing foreign forces are the only two possible methods. The former takes a long time while the latter needs a good opportunity.

Geely is a private company， but it is still a self-owned automobile brand in China. Li Shufu， who is a congressman in China， wants to build Geely into a world-class multinational. And if he makes it， it could be considered a success of Chinese self-owned brands.

Then here happened the story known to everybody. Volvo， a worldknown auto brand， met great problems under the management of Ford. In spite of many difficulties， Geely still bought Volvo from Ford and turned the Swedish brand into a part of Geely.

But the problems just started. Theoretically， Geely is self-owned brand in China， and Volvo， a subsidiary company under Geely， should be considered a selfowned brand as well. However， Volvo was classified as a foreign auto brand.

If this happened years ago， such a categorization was good news for Volvo， because the foreign brands could be treated better than domestic companies， but the “super national treatment” has been gone for a while， meaning that the freak Volvo will meet more trouble in the development.

Since Volvo is considered a foreign brand， it has to build a joint venture with a Chinese company. The joint venture will serve as the main body and the construction of manufacturing base for the localization of production.

Then， someone might ask why Volvo wanted localization as if imported cars were not good enough. The answer is that Volvo did not do well enough in China based on imported cars just for the ignorance of localization under Ford’s management. Experts have pointed out that the localization is necessary to make Volvo rise again. The faster the localization is made， the better the result is.

But obviously， the identity as a foreign brand of Volvo significantly slowed the process of localization.

Firstly， Geely did not have any inadvance preparation for the localization of Volvo. It did not even think about the joint venture thing. It is not completely its mistake. Naturally a brand acquired by a Chinese company should be considered a self-owned brand and can be produced in China in the name of Geely Volvo. So when the Chinese government’s list of foreign automobile brands made Geely know that it needed to found a joint venture with Volvo， more than one year had passed.

Secondly， Volvo’s localization needs to be done with a domestic company. But what partner is the best one？ If Geely chooses another company none other than itself， it will be definitely a loss for Geely. But if Volvo chooses to partner with Geely， the long-existing image of Geely’s cars as low-end products could hurt Volvo’s profile. Therefore， at last Li Shufu made Volvo work with Geely Holdings， the parent company of both Geely and Volvo， leading to the strange “marriage between father and son”.

Even though this is the best method among all choices， such a process still cost a lot of time， causing Volvo to miss the best time of China’s automobile industry. In 2009， the Chinese government issued the policy to boost the consumption of cars， which brought dramatic growth to China’s automobile market. But Volvo， whose products have strong competitive power， was placed outside it. Is that an encouragement or punishment for the selfowned brand？ Li Shufu must feel very distressed about the truth.

“The said joint venture is like marrying my left hand with my right hand. Both Party A and Party B on the contract are me. I have never met such a ridiculous thing and I do not want to meet it again，” Li Shufu says.

Maybe it is the policy that makes things go on like this. But such a contradictory policy not only hurt Volvo and Geely， but also set up a bad example for other Chinese companies which want to be international through acquiring foreign companies. When the internal growth is slow and cannot make an established multinational in a short while， the acquisition of foreign assets is the best chance for Chinese companies. If that door is shut， Chinese government’s dream of creating representative brands of China will lay dormant for a while.

The Gains

Well， as a clever businessman， Li Shufu never did something stupid. Even though the inflexible policy of China set up unexpected hurdles for its development and wasted him three years to bring Volvo into China， he quickly changed his strategy， focusing on making the best of Volvo’s foreign identity in the future.

To make the deal of acquiring Volvo the most profitable for Geely， two things need to be done： one is to make Volvo rise again； the second one is to make Geely’s original brands grow fast under the influence of Volvo.

The rise of Volvo has been slowed by the trouble of joint ventures， but it provided a condition for Li Shufu to let Volvo transfer technologies to Geely.

During the negotiation of acquiring Volvo， Li Shufu emphasized an important principle that Geely and Volvo were separated from each other. Such an emphasis was to release Volvo from the worries about any negative influence from Geely and to reassure the investors of Volvo. Actually， those objecting Geely’s acquisition of Volvo held onto their opinion because they thought Li Shufu would move out the technologies and talents of Volvo to fill in the blanks of Geely.

For Li Shufu， whether Geely can be further improved is the final index to review the success of the Volvo deal.As one of the earliest self-owned auto brands in China， Geely is always haunted by the lack of technologies， brand awareness and talents in spite of more than ten years’ history. The assistance from Volvo is necessary for this Zhejiang-based company to realize substantial progress in the high-class brands.

However， the promise of Li Shufu about separating Volvo from Geely stopped him from gaining the technological assistance from Volvo for Geely. But now here came the opportunity. The joint venture， which came out three years later than it should be， became the perfect excuse for Li Shufu to do this.

Setting up a joint venture was not within the negotiation or the agreement as neither Geely nor Volvo had ever predicted that the unpredictable policy of China could set up a hurdle that they could not bypass.

Generally speaking， when a foreign automaker founds a joint venture with a Chinese company， the two companies usually spend a long time in negotiation since they all want the best for themselves from the deal. But this is not the case for Geely and Volvo as Li Shufu is actually talking to himself about this matter.

In the new joint venture， Geely holds 70% stakes while Volvo holds 30%， giving Geely the dominance in the joint venture.

All of the joint ventures between Chinese automakers and foreign companies followed one pattern： foreign companies owned the brands and technologies while Chinese companies are actually the OEMs for those foreign brands. But this is not the case for Geely and Volvo either， because “a son has to listen to his father”.

Meanwhile， the joint venture itself is a platform where Geely can get the help， both in technologies and strategies， from Volvo. In this platform， everything from Volvo is visible to Geely. The joint venture indeed provides a lot of help for the development of Geely’s self-developed brands.

For example， during the foundation of the joint venture， Geely and Volvo signed a technological transfer agreement and at the beginning of 2013， Geely built a R&D center in Sweden with the help of Volvo.

It is not hard to imagine the outlook for Geely to accelerate its brand development and product competitiveness im- provement after the establishment of the joint venture.

Are the gains enough to offset the losses？ Maybe Li Shufu himself does not know about the answer， which could be only seen as time goes by.

But one thing is certain. We do not see too many reports about the establishment of joint venture between Geely and Volvo. Maybe two parties know this is a freak not worth talking about at all.