CLOSING CASE
Geely Holdings: China’s First Global Car Company
Zhejiang Geely Holding Group Co. Ltd—or Geely, for short—is a Chinese auto manufacturer that started in 1986 as a manufacturer of refrigerators. Founded by Li Shufu, an energetic entrepreneur and car enthusiast, the Hangzhou-based company did not enter the automobile business until 1997. Today, it is the second-largest private automobile manufacturer in China, selling 1.36 million cars in 2019.
Li Shufu reportedly has a great appreciation for design. He scrapped three batches of poorly designed and built models before finally arriving at one that met his expectations: a four-door subcompact sedan introduced in 2002 and known as the Ziyoujian (Free Cruiser in English). In a clear sign that Geely had yet to develop its own design and engineering skills, the car was actually designed by the South Korean firm Daewoo Motors.
It was around this time that Li started to think about owning Volvo, his personal favorite carmaker. Based in Sweden, Volvo had been acquired by Ford Motor Company in 1999 for $6.45 billion. In 2009, Li got his chance when Ford, battered by the Great Recession that had hammered the auto market in the United States and Europe, announced it would sell many of its specialty car brands, including Volvo. In 2010, Geely reached an agreement to purchase Volvo for $1.8 billion. At the time, this was the largest overseas acquisition by a Chinese automaker.
Many observers had low expectations for the acquisition, but they have been proved wrong. The marriage of Volvo’s brand and engineering design skills with Geely’s manufacturing capabilities has proved to be a winning combination. Today, Volvo cars are still engineered, designed, and tested in Gothenburg, Sweden, and they still retain their Swedish character, but they are assembled at two new plants in China and a new plant in South Carolina, all built after the acquisition.
Geely has big plans for the South Carolina plant. It is now producing Volvo S60 sedans for sale in the United States, and for export to China. In a few years the plant is expected to be expanded to produce Volvo SUVs for the United States market, increasing output to 150,000 units a year and doubling the number of U.S. employees to almost 4,000. According to Katarina Fjording, Volvo’s vice president of manufacturing and logistics for the Americas, the U.S. plant required a bigger commitment than those in China, where Geely was already building cars and where it had an established logistics and supplier base. In South Carolina, the company has had to do everything from scratch.
Geely and Volvo executives admit it has not all been plain sailing. There have been some cultural clashes along the way. In 2012, for example, when Li visited Sweden to discuss plans for a Chinese version of Volvo’s S90 executive sedan, he was horrified by the designs for the back seats. In a Swedish car, “the back seat is where the dog goes,” said Volvo’s CEO. “Our engineers don’t pay much attention to the back seats.”
“But you guys don’t get it,” countered Li, “In China, the guy who’s paying for the car is sitting in the back!”
Since the acquisition, China has emerged as a major market for Volvo cars, where the brand is valued for its safety and elegance. The company’s aim is to produce the safest car on the road that handles well under any roadside conditions. Geely has pledge to produce a “death-proof” car, with a commitment that no one should be seriously injured or killed in a new Volvo. The technologies required to achieve this include auto steering, adaptive cruise control, and pedestrian and animal detection for collision warnings and avoidance, all technologies that are being developed in Gothenburg.
The proof of the strategy is in the sales figures. In 2018, sales of Geely’s Volvo brand rose 12.4 percent year-on-year to a new record high for the 92-year-old brand. All regions contributed to the 642,000 Volvo cars sold. Sales in China grew by 14 percent, and sales in the United States grew by 20 percent. China is now the largest market for the Volvo brand, with 131,000 units sold in 2018, followed by the United States, where 98,000 units were page 406sold. Preliminary figures suggest that 2019 was an even better year for Volvo.
Since the acquisition, Geely and Volvo have continued to be managed as separate companies. Both Geely and Volvo are owned by Li’s investment fund, Zhejiang Geely Holding Group. However, in February 2020, Li announced that the companies were in talks to combine the two entities into a single integrated operation. If the plan is approved, the combined entity would be listed in Hong Kong and possibly Stockholm.
In other developments, emboldened by its success with Volvo, Geely is now making more foreign investments. In 2017, it acquired a controlling stake in the British sports car manufacturer Lotus Cars; a 49.9 percent stake in Proton, Malaysia’s largest car company; and minority stakes in the Swedish Truck Company, the Volvo Group (the one-time parent of Volvo Cars), and Daimler-Benz (where it took a 10 percent stake and is now the company’s largest shareholder).
Case Discussion Questions
Which of the strategies described in the chapter is Geely pursuing with Volvo? How might this strategy create value for Geely, enabling it to make a positive return on its investments in Volvo?
What are the risks associated with Geely’s strategy for Volvo? How might internal company factors and macro-environmental changes impact Geely’s ability to maximize its return on investment? What should Geely do to mitigate such risks?
In 2017, Geely doubled down on its international expansion with its acquisition of Lotus, a manufacturer of luxury sports cars. What do you think is Geely’s objective here? What strategy do you expect Geely to pursue with Lotus? Does this strategy make sense?