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March 31, 2010

CHINA: Volvo will give Geely crack at government sales

Geely hopes to use its takeover of Volvo to crack China's growing luxury car market and become a global player using the Swedish brand's cutting-edge technology, local analysts have said.

Geely hopes to use its takeover of Volvo to crack China’s growing luxury car market and become a global player using the Swedish brand’s cutting-edge technology, local analysts have said.

Zhejiang Geely Holding agreed on Sunday to pay Ford US$1.8bn for Volvo in the biggest overseas acquisition by a Chinese carmaker, launchin Geely into a market dominated by Audi, Mercedes-Benz and BMW.

“I think if they do things properly and maintain the Volvo image in China and don’t mix it with the Geely brand, I think they have got a very big chance to be successful here,” John Zeng, an analyst at IHS Global Insight, told AFP.

Geely will spend $2.7bn on the takeover – the original price tag plus $900m in working capital — to turn around loss-making Volvo Cars.

Better known for making cheap small cars, Geely has insisted the two brands will remain separate.

Geely plans to keep Volvo manufacturing plants in Sweden and Belgium and is considering opening factories in China.

“Volvo will retain its own distinctive features and will… continue to develop in the top luxury car sector,” Geely chairman Li Shufu said on Tuesday after flying back from Sweden, where the deal was signed.

“Relations between Geely and Volvo in the future will be like brothers, not father and son. They will respect and support each other and grow together.”

Volvo will give Geely the “perfect platform” to improve its own product line and enhance its image in China, where it has struggled to make an impact, Jerry Huang, a Shanghai-based analyst with CSM Worldwide, told AFP.

“There is quite a big gap between Geely’s product line and brand awareness and those of Volvo’s,” said Huang. “Geely gets a platform to learn and gain experience in the industry.”

Geely vice-president Zhao Fuquan likened the relationship between Volvo and the Chinese carmaker to that of teacher and student.

“Volvo as a top brand in the world has accumulated enormous technology know-how,” Zhao said at Tuesday’s press conference in Beijing with Li.

“It is a strong resource for Geely and we will learn actively as a student to improve ourselves.”

Geely is expected to use Volvo to tap the lucrative government procurement market for cars, estimated to be worth CNY100bn (US$14.7bn) this year, analysts said.

Beijing requires Chinese brands account for no less than half of government vehicles.

“(Volvo) may even overtake Audi and other foreign luxury brands to become the new-generation official car,” independent auto analyst Jia Xinguang said in comments posted on a Chinese website.

If more bureaucrats are seen driving Volvos instead of Audi sedans, it could enhance the image of the Swedish brand among China’s increasingly wealthy middle class, Zeng said.

“You can see the Volvo S80 becoming a strong competitor for the Audi A6 in terms of government procurement,” he added.

“The luxury market is growing very fast. China is the largest market for Audi, and Mercedes-Benz and BMW also record very fast growth in China.”

BMW makes special long wheelbase versions of its models in China where many luxury car owners employ chauffeurs.

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