Similar to Warren Buffett's bet on BYD last year, Goldman Sachs' play likely will make Geely stand out among Chinese car companies
It took four months of negotiations for China's Geely Automobile to sell a 12% stake to a Goldman Sachs (GS) investment fund for $245 million. But the seeds of the deal, announced on Sept. 22, were planted a year ago. On Sept. 29, 2008, one of Geely's Chinese rivals said it had won a $231 million investment from a company controlled by Warren Buffett. That news made little-known BYD an investor favorite, and its stock has since surged 750%.
Executives at Geely took notice. "We weren't satisfied with our shareholder structure," says Daniel Dai, vice-president for international business at Hong Kong-listed Geely. "There were too many hedge funds." Geely management decided they needed a star investor like Buffett interested in making what Dai calls "a long-term commitment to our future development." And not just any investor would do. Geely wasn't looking for small names. The goal, says Dai, was to secure "a VIP investor, like Mr. Buffett."
Teaming up with the world's most successful investment bank, he says, should do the trick. "Goldman Sachs has endorsed Geely as one of the best Chinese auto players," crows Dai. Geely has less than 3% market share in China but has global ambitions, with assembly plants in Russia, Ukraine, and Indonesia and interest in buying Volvo from Ford (F). "Goldman Sachs," says Dai, "can help us reach every corner of the world."
A spokesman for Goldman would not comment on the deal, but investors in Hong Kong displayed their enthusiasm. Geely's stock price jumped 19% and is up 238% so far this year. Not bad for a company that's not even among the top 10 automakers in China. Geely earned $127 million last year on sales of $620 million.
Why so much excitement about what appears to be a second-tier player? The Chinese auto market is now the world's largest as recession in the U.S. has dampened demand in what had been No. 1. Car sales in China are likely to grow 33% this year, according to CSM Worldwide, an automotive industry consulting firm. In part, that's because of government measures designed to stimulate demand and fight a slowdown caused by the global recession, such as tax cuts and the elimination of an annual user fee for road maintenance.
Especially promising for automakers is the increase in demand in the country's interior. While sales are flat in wealthy areas along the coast, first-time owners are buying in the less developed provinces farther inland, says Yale Zhang, CSM's director for Greater China. This market "is really taking off," says Zhang, and local automakers stand to gain more than foreign companies like Volkswagen (VOWG.DE), General Motors, and Toyota (TM).
Geely may be a small company, but it is one of the few Chinese automakers not owned by the state. (Buffett's bet, BYD, is another.) Outsiders looking to capitalize on China's growth often prefer private-sector partners, says Klaus Paur, North Asia regional director for market research firm TNS. "State-owned companies may be a little bit slower," he says. "A Chinese market player that is privately owned and ambitious is a very promising combination."
Despite Geely's relatively small stature today, the Goldman investment could help the company earn a reputation as one of the future powers in the industry. There are about 20 major Chinese automakers today, and investors are trying to guess which ones will survive. The Goldman deal, like BYD's Buffett investment, "means hey, they're for real," says Michael J. Dunne, vice-president for J.D. Power and Associates (MHP) in Shanghai. Investors, he says, will think "Goldman has already done its homework, so if they're in, why not [follow]?"