Geely buys Volvo. It could work

Mergers and acquisitions in the car business have a terrible record. DaimlerChrysler stands tall as the worst example of a bad marriage. General Motors made a hash of Saab and Hummer and its tie-ups with Isuzu, Suzuki and Subaru didn’t yield much either. Tata has struggled with Jaguar and Land Rover and now that Ford is sending Volvo off in a boat to China, we have to ask, can Geely make a go of this?

It’s going to be a tough job. Geely is paying $1.8 billion for the brand. Volvo sales of 335,000 globally are off 11% this year and 27% off their peak, according to this Bloomberg story. The Swedish carmaker has lost $2.6 billion during the last two years. The brand hasn’t been a real moneymaker for a very long time. Its costs are high and prices are strong, but Volvo doesn’t command luxury premiums for its cars.

On paper, at least, this could be a very good deal for Volvo. Be clear about one thing. Zhejiang Geely Holding Co., not the carmaker, is buying Volvo. This is an important distinction, says Jim Hall, principal of 2953 Analytics in Birmingham, Mich. It indicates that Volvo won’t just be folded into Geely and lose the brand’s strong Nordic identity. Geely Chairman Li Shufu said with unintentional humor that, “I see Volvo as a tiger. It belongs to the forest and shouldn’t be contained in the zoo,” Li said in Mandarin. “The heart of the tiger is in Sweden and Belgium.”

Volvo will keep its own management team, board of directors and headquarters in Gothenburg, Sweden. That would indicate that Volvo will keep its Swedish heritage and cachet. European and American Volvo loyalists will still be buying cars engineered in Gothenburg and built in Europe. .

What that would mean, however, is that Geely is buying Volvo and lingering on with the same money-losing structure. That’s where China comes in. The Chinese luxury market is booming and still has room for some other players to come in and build a brand. Geely will assemble Volvo cars in China using cheaper manufacturing, Hall says. The brand is upscale and Geely ownership might even be seen as preferable by Chinese consumers. So the company car grow sales and get fatter margins in China. That makes the business case work better than it ever did either under Ford or as an independent carmaker.

After so many failed auto deals. This one has the makings of a success. Of course, it means Geely can’t manhandle Volvo. They need to rely on Ford and the Swedes for technology that will make the Chinese cars real Volvos. In short, they should manage it as a separate subsidiary the way Volkswagen Group runs Audi AG. Give it autonomy and let the tiger run. Volvo is a niche brand and will never be a cash cow. But it certainly could work if Geely gives it some independence.

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