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March 29, 2010

COMMENT: China is key to Volvo Cars future

They'll perhaps be looking east this morning at Volvo Cars HQ in Gothenburg. But they can turn their heads with hope rather than trepidation.

They’ll perhaps be looking east this morning at Volvo Cars HQ in Gothenburg. But they can turn their heads with hope rather than trepidation.

As predicted late last week, a deal was announced yesterday between Ford and Geely for the sale of Volvo Cars by Ford to Geely. It’s a ‘definitive agreement’ that should be completed by the end of the third quarter of this year. Call me cautious, but after what happened with Saab and Koenigsegg, I’d just be a little wary of the deal actually being completed.

Assuming that it is completed, this deal’s greatest significance lies in what it says about the rising internationalisation of China’s auto industry. By comparison, it amounts to the tying up of a loose end at Ford in terms of consolidating Alan Mulally’s ‘One Ford’ strategy and drawing a line under the foray into European-based premium brands that was trailblazed under Jac Nasser.

This deal has a very different feel to the Nanjing Auto acquisition of failed MG Rover assets in 2005. That became an opportunistic ‘lift and shift’ of tooling and intellectual property to China.

By contrast, Geely has been doing its utmost to reassure Swedish interests that it recognises the core values of the Volvo brand and that manufacturing activity will be retained in Sweden (and Belgium, though I’d guess there may be more of a long-term questionmark on Ghent).

Geely chairman Li Shufu has talked in reverential terms about the Volvo brand and the considerable opportunities that arise from an industrial tie-up with a Chinese company.

As far as the transition of ownership goes, there are apparently similarities – in terms of the continued supply of Ford technology to the new owner – with the Jaguar Land Rover divestment.

The key to the long-term success of this deal is developing manufacturing and much greater sales volume for Volvo Cars in China in order return the company to profitability.

When you think about the premium sector of the car market globally, it’s not an easy place. The mighty German brands are in a strong position. If you’re a smaller player losing money you need something compelling in the competitiveness locker that can turn things around. Saab, for example, is going for retro/heritage appeal and a collaborative business model.

Volvo has a reputation for building reliable cars with class leading safety features. Is that enough to secure long-term survival? No, not now that ‘safety’ is proliferating so widely – it’s not a great brand differentiator the way it was ten or twenty years ago.

Unlike the position with MG Rover a few years ago, the China link could be Volvo Cars’ eventual saviour. Geely will be getting an important boost to its internationalisation strategy and does not want to harm that prize asset. The Chinese government has also clearly signalled its approval of this deal. The times, they are a changing.

Dave Leggett

SWEDEN: Ford reaches deal to sell Volvo Cars to Geely

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