Global Business 3rd Edition by Mike Peng

Exercise 46

The largest privately owned Chinese automaker acquired an iconic Swedish car company. What motivated this acquisition? Would this acquisition work?
In 2011, Geely Automotive was still a relatively unknown Chinese automaker. Geely had started off manufacturing home appliances in 1986 and it had only been manufacturing automobiles since 1993. But Geely's founder and chairman, Mr. Shufu Li, had ambitious plans for Geely. In a relatively short period of time, he had steered Geely into becoming the largest privately owned carmaker in China and he hoped to bring Geely up to world-class standards. He wanted Geely to be able to compete with Daimler, Ford, and Toyota. He knew this would be difficult as independent Chinese automakers were known to have problems in operations, design, safety, quality, and branding. As part of this plan, Geely's parent company, Zhejiang Geely Holdings, acquired the iconic Swedish automaker Volvo from Ford Motor Company in 2010. Could this former refrigerator company from China absorb one of world's most sophisticated automobile brands, or was it doomed for failure like the majority of cross-national mergers and acquisitions (M As)?
Geely's History
Geely Motors was founded by Mr. Shufu Li in 1986. By 2011, Geely was among the top ten Chinese automakers with production capacity of approximately 300,000 cars per year. Geely had 12,000 employees, including more than 1,600 engineers and technical personnel with plans to greatly increase capacity and employment over the next few years.
Geely produced automobiles under five key brand groups: Geely, Maple, Gleagle, Emgrand, and Englon. It was the only Chinese car manufacturer to have developed its own range of engines. By 2010, Geely was ranked as one of the country's top 500 firms. It was a fully integrated independent auto firm with complete control over design, R D, production, distribution, and service. Geely began to attract attention as the company experienced rapid growth. Through a broad distribution network consisting of 500 dealers and nearly 600 service stations all over China, Geely sold over 330,000 vehicles in 2009.
The Global Automobile Industry
After suffering from the downturn, US auto sales were sputtering back to life. Analysts were projecting sales to continue increasing into 2011. With sales of around 11.5 million new cars and trucks, 2010 was still the second-worst year in almost three decades (only behind 2009). This was quite a drop from the heights of the early 2000s, when credit was cheap, incentives were rampant, and US sales topped 17 million. In 2010, Ford sold 1.9 million vehicles (a 15% increase over 2009), GM sold 2.2 million (a 6.3% increase), and Chrysler sold 1.1 million (a 17% increase).
For foreign automakers, winners included South Korea's Hyundai, whose sales rose 24% for the year to 538,000 vehicles. Nissan reported an 18% increase for 2010 to nearly 909,000 vehicles. Honda sold over 1.2 million vehicles in 2010, a 7.6% increase. However, Toyota continued to struggle. Its sales were flat in 2010, a casualty of the company's tarnished safety record and supply problems from the massive earthquake and tsunami of March 2011. Virtually all car companies had downsized, so they did not have to resort to costly incentives in order to clear out inventory. But in general, the economy was slowly improving, and car companies were cautiously optimistic about prospects in 2011.
The Rise of China's Auto Market
In China, automobile sales increased by an explosive 32% in 2010. China had already overtaken the US as the largest car market in 2009, and it was also the largest market for GM. China's middle class was expanding and its large land mass and infrastructure could support a huge car fleet. To get an idea of the growth, note that China produced only two million cars in 2000. But between 2002 and 2007, China's auto market grew by an average 21% per year. By 2009 China surpassed Japan as the world's largest auto producer. In 2010, China produced a staggering 18.06 million vehicles. Total revenue was RMB 512.81 billion (US$76.67 billion), and profits were RMB 117.28 billion (US$17.53 billion).
Of the automobiles produced, 44% were local brands, such as BYD, Chery, Chang'an, Geely, Great Wall, Hafei, Jianghuai (JAC), Lifan, and Roewe. The rest were produced by joint ventures with foreign automakers, such as Ford, GM, Honda, Hyundai, Mitsubishi, Nissan, Toyota, and Volkswagen. Most of the cars manufactured in China were sold within China, with only 369,600 cars being exported in 2009.
Independent Chinese car companies had to fight the perception that they lacked innovative designs. Market observers at the Detroit Auto Show in 2006 were unimpressed by the simple curves of mainland cars. They also commented on the shoddy finish and the tinny sounds of the doors.4 Furthermore, Chinese products had a reputation for allegedly infringing upon other firms' intellectual property rights. For instance, Chery and Geely were both accused of copying technology from GM and Toyota, respectively. In 2011, Geely was sued by Land Rover over a trademark dispute.
Geely's Research and Development and Product Positioning in the China Market
Geely had been ploughing more than 10% of annual revenue into R D and had established the Geely Automobile and Engine Research School. Geely had begun cooperating with foreign automakers from countries such as South Korea, Germany, and Italy. Furthermore, Geely's employees went abroad to receive training.
Initially, Geely competed in the low-end segment by providing models from RMB 30,000 (US$4,485) to RMB 80,000 (US$11,960). These prices put an automobile within reach of average consumers. Geely had developed an effective cost control system, and cost-saving was also achieved through vertical integration.
In 2004, Geely introduced its first mid-level model, the Beauty Leopard, which ranged from RMB 80,000 (US$11,960) to RMB 120,000 (US$17,940). Twentythree new models were introduced at China's automotive expo in 2008. Geely introduced Emgrandec 8, a limousine model with distinct Chinese elements at the Auto China Show 2010. This was a sign that the independent Chinese auto makers had arrived on the scene. "We are not the Geely of five or six years ago," chief executive Gui Shengyue said. Geely planned to produce a luxury SUV with annual capacity of 50,000 units and it was also in the process of developing eight new higher-end models. 6 By 2010, there were more than eight million Geely cars on the road and the company's trademark was recognized throughout China. Geely also became the first Chinese auto company to have a 24-hour call center, and it was the first to sell cars on Taobao (www.taobao. com.cn), China's largest online shop.
Overseas Market Development and Acquisitions
The import/export unit of Geely Holding Group was founded in 2002. Offices were established in strategic markets: the Middle East, Africa, Southeast Asia, and Central and South America. In 2009, Geely exported about 19,000 vehicles, making it the second-largest automobile exporter from China. In 2005, Geely began to design and build a car model just for export to Western countries.8 The company had set up production plants in Indonesia and Russia, each with the capacity to produce 50,000 cars. It was reported that Geely was in discussions to set up assembly plants in Africa, Europe, and the United States.
In 2006, Geely purchased a controlling share in Manganese Bronze Holdings, which manufactured London's iconic black taxis. In mid-2008, a plant was established in Shanghai that shipped car kits to the Coventry, UK, plant for assembly. This was to save nearly US $5,000 per car. In 2009, Geely acquired Drive Train Systems International, a leading Australian transmission developer. In March 2011, the Geely MK became the first Chinese passenger car to enter the Australian market with retail prices beginning at A$11,990. Geely saw Australia as an ideal test market for the savvy Western consumers.
To support its global ambitions, Geely had developed a network of more than 500 retail distributors in 45 countries across five continents and planned to expand this global footprint with additional manufacturing facilities and dealer networks.
Questions about Quality and Safety
Questions remained concerning the safety of Chinese cars. For example, the Landwind, a Chinese SUV, was crash-tested by German Allgemeiner Deutscher Automobil-Club and received a zero out of five. The passenger cabin completely collapsed upon collision. In 2006 the body responsible for Chinese car safety carried out a crash test on a small sedan from Geely. The pillar between the driver door and rear left hand side door was extremely weak. Similarly, a Geely sedan also took part in a Russian crash test in 2008, conducted by the Russian magazine Automotive Review. Although this test was conducted two years after the first test, the car still scored zero stars. The editors of the magazine began calling the car the "death vessel" (see YouTube videos: search "Geely Crash Test").
Since safety was an important factor in consumers' decision to buy, this eroded Western consumers' confidence in Chinese car safety. For this reason, Geely was determined to improve safety and quality control, and it believed the Volvo acquisition could help in these areas.
The Volvo Acquisition
In 2009, Geely's parent company announced that it was acquiring Volvo Car Corporation from Ford. At the time, this US$1.8 billion acquisition was the largest cross-border acquisition by a Chinese privately-owned enterprise. Volvo was known as a leader in automobile safety. This appealed to Geely, which was stinging from being labelled a "death vessel" in overseas crash tests. Volvo thought that it could benefit by the infusion of new resources and greater access to the burgeoning China market. Geely hoped to preserve Volvo's existing manufacturing facilities in Sweden and Belgium. The collaborative relationships that Volvo had built with employees, unions, suppliers, dealers, and customers were also valuable for Geely. On completion, Volvo would be a separate company based in Gothenburg, Sweden. The management would have a mandate to develop Volvo's leadership in safety and environmental technologies, with a presence in more than 100 markets and ambitious plans for the fast-growing China market. Shufu Li would be Chairman of Volvo and Hans-Olov Olsson, former President and CEO of Volvo, would become Vice- Chairman. On February 2011, Volvo announced that it would open a new Volvo plant in Southwest China in 2013 with an annual capacity of 100,000 units.
Geely hoped to capture market share from Audi to boost Volvo's China sales to over 200,000 units annually by 2015. Geely wanted to sell Volvos to wealthy Chinese consumers and especially government officials in China, at prices ranging from US$40,000 to US$100,000. It was hoped that patriotic Chinese consumers might prefer buying a car from a Chinese-owned company. It was the same strategy that Chinese computer maker Lenovo used when it bought IBM's PC business and became a world-class player. However, this strategy could harm the Volvo brand in foreign markets, where the association with Chinese-made automobiles might signify lower perceptions of quality or safety.
Turnaround, Branding Disagreements, and Potential Culture Clash
Volvo posted revenue of US$12.4 billion in 2009 by selling 334,000 cars, but it recorded a pre-tax loss of US$653 million. Geely planned to double Volvo's sales in Europe and North America and gave primary importance to building the brand's market share in China and other emerging markets. Yet the auto industry was ferociously competitive. In mature markets such as the United States and Europe, entrenched incumbents would fight to the death and mobilize politicians to defend their turf. Geely had little experience outside of China. Many industry analysts predicted that the 13-year-old Geely, barely known abroad, would have a difficult time turning around Volvo.
Geely also faced challenges regarding brand management. An important reason for the Volvo acquisition was the value of the Volvo brand. In China, Volvo was considered as luxurious and safe as Mercedes-Benz and BMW. Geely wanted to improve its brand name by acquiring Volvo, so as to move to the higher end of the market. However, the ability to buy was not the same as the ability to manage. Geely was known as a manufacturer of cheap cars with a short history that included poor safety and questionable quality, while Volvo was a premier European luxury brand. If Geely began to use more Chinese-made components in Volvo cars, it could tarnish Volvo's high-end and high-safety reputation. Geely's basic cars were sold for US$6,000 each and the company was still viewed as a low-end car maker.
Three months after the merger, differences began to surface. Mr. Li disagreed with the product and brand strategy of company executives in Sweden. He wanted Volvo to develop larger, more ostentatious luxury cars for China, while Volvo wanted to keep with their conservative, yet quality, image for safety and environmental protection.
As Doug Speck, acting senior VP for marketing and sales put it: "We all need to understand what we are doing with the brand and what activities it will take to deliver the brand aspirations that we have... and we all need to be heading in the same direction." Later on, they decided to reconcile their visions and chart a course for Volvo's revival. Volvo's latest concept car was a compromise between Volvo's tradition of understatement and Li's intention to plant Volvo more firmly in the luxury segment.
Post-acquisition integration is always a challenge, even when the involved companies come from the same country. This challenge is compounded in crossborder acquisitions, where there are differing national cultures on top of differing corporate cultures. While Geely had some international experience, the company had limited experience in cross-cultural management. In this case, the acquirer was smaller and less experienced than the acquired. Volvo had a long and proud tradition and a deeply entrenched corporate culture that reflected its proud Scandinavian heritage. This situation had the potential for wounded pride on the Swedish side and/or loss of face on the Chinese side.
Conclusion
A year after the merger, Volvo managed to make a profit in 2010-a first since 2005. Volvo sold nearly 374,000 units globally, up 11.2% from the previous years. Sales in China increased 36% to 30,522 cars. But given the potential challenges, it was not clear if this was a trend or simply an aberration. To succeed, Geely would need to successfully integrate its new acquisition, which still faced many challenges. "Volvo cannot fail," said David Zhao, auto industry analyst of Frost Sullivan, noting that the government that supported Geely's move would lose face if Geely's acquisition proved unprofitable.
Case Discussion Questions
What can Geely do to successfully integrate Volvo?