Volvo Could be the Gateway the Chinese Needed into Western Auto Markets
Ford Motor Company has sold Volvo Cars to China’s Geely Group for $1.8 billion. Ford originally paid $6.5 billion for Volvo Cars in 1999.
The attraction of the deal is clear for Geely. Although Volvo last made a profit in 2005, the company clearly possesses serious Western motor manufacturing technology. Volvo is a well-known brand in the West, and Volvo know how to make cars that not only meet Western regulatory standards, but are serious and credible in Western markets.
In fact, several of Ford’s current models are built on platforms that were designed by Volvo.
Geely was only founded in 1986, to make spare parts for refridgerators. It employs only 12,000 people and can only make 300,000 cars per year. It is a bit player even in the Chinese car market, and a non-entity in world terms. But with Volvo technology at its disposal, together with low cost Chinese-based manufacturing, that could very well change rapidly.
Until now, the Chinese have been held back from accessing Western markets by the technological head-start that the Western car-makers have. Despite many attempts, no Chinese company until now has managed to obtain access to first class modern motor manufacturing know-how. This deal changes that.
Ford’s intention is apparently to divest itself of non-core businesses in order to concentrate on its central Ford brand. Last year, they sold Jaguar Land Rover to India’s Tata Motors. However, this deal to sell Volvo is of a different order. Jaguar Land Rover make specialist vehicles that do not, and will not, compete with mass market cars like Fords. And India does not have the supply chain infrastructure to obtain any major cost savings by manufacturing Jaguars or Land Rovers locally and exporting them to the West.
Perhaps Ford think that Volvo are in the same category as Jaguar Land Rover. They are not. Volvo make cars that are only slightly up-market. They are only “semi-premium”. And the Chinese most certainly do have the capability to manufacture successfully. If Geely can make Volvo cars in Chinese factories, and export them to the West, they won’t be competing with BMW, Mercedes or Jaguar. They will be priced directly against mainstream brands like Ford. And who would choose a Ford Focus rather than a Volvo S40 if the price were the same?
General Motors have been struggling to rejuvenate their business too. In one sense, they have been less successful than Ford at selling their unwanted brands. They agreed a sale of Hummer to the Chinese, only to see the deal fall through, and they are now proposing to shut down the brand. They have agreed to sell Saab to a Swedish company for just $1. But at least the deals that GM have done are unlikely to come back to haunt them.
The $1.8 billion that Ford are getting for Volvo is relatively small beer in comparison to the size of Ford. The potential for Geely to use Volvo to undermine Ford’s own business is not small beer. It would be less dangerous for Ford to have divested Volvo for peanuts to some small Western buyer, rather than provide a hostage to fortune like this.
Joseph Stalin said, “When we hang the capitalists they will sell us the rope we use”. It seems that Ford may be in this position.
Ford may come to rue the day they agreed this sale. The deal breaches the dam that has held back the Chinese auto companies. The resulting flood may wash Ford themselves away.
