Geely's next challenge: selling a made-in-China Volvo

HONG KONG Fri Jan 8, 2010 8:07am EST

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HONG KONG (Reuters) - Now that Geely Automotive has won the bidding for Sweden's Volvo car unit, China's No. 1 private auto maker is making plans to set up a local production base, according to sources familiar with the company.

An even bigger challenge might be convincing status-conscious Chinese consumers to buy a made-in-China Volvo.

China's car market is certainly an alluring prize. The country's auto sales surpassed those in the United States in 2009, and Beijing has said it would continue to encourage domestic consumers to buy new cars with subsidies.

Those sales are growing fast. This week Geely rivals General Motors and Volkswagen -- the leaders in China's car market -- reported their 2009 China sales leapt 67 and 37 percent, respectively.

Geely's first order of business is to work out where to produce its new vehicles. Sources familiar with Geely's future strategy for Volvo told Reuters that the company plans to cooperate with local city or provincial governments in China to build plants for Volvo cars tailored for Chinese consumers.

In China, Ford currently runs a car venture with Chongqing Changan Automobile Co, a domestic rival of Geely, to make Volvo S40 and S80 cars.

The S40s produced at the Changan plant in western Chinese city of Chongqing sell for around 250,000 yuan ($36,620), or about 50 percent cheaper than the imported made-in-Sweden model.

Geely is in talks with the Chongqing government to continue to make Volvo cars in the city, said the sources, who declined to be identified as they were not authorized to speak to the media.

The company's initial plan is to take over Changan's Volvo production lines and also partner with other Chinese enterprises, which would invest in a new Volvo plant in Chongqing jointly with Geely.

The Chongqing government, whose top boss Bo Xilai is former commerce minister, is keen to keep the Volvo plant in the city, said the sources. But no final deal has been reached yet.

MADE IN CHINA

But do consumers want to buy a made-in-China Volvo?

After all, Volvo cars are known for high safety standards and careful manufacturing. Despite improvements in recent years, Chinese car makers have a different reputation.

According to the 2009 J.D. Powers Initial Quality Study (IQS) -- a measure that tracks new-vehicle quality during the first 90 days of ownership -- China's domestic producers averaged 258 problems per hundred vehicles. That's nearly twice the 142 problems for locally produced international brands. U.S.-made cars had just 108 problems per hundred.

Geely, known in China as the maker of such bargain brands as the Free Cruiser and the Geely King Kong, seems to know what Western customers will want.

For loyal European consumers, a made-in-Sweden Volvo will remain available, the sources told Reuters. Geely executives have already said they will keep Volvo's management and operation in Sweden intact.

For Chinese consumers the emphasis will be on selling the locally produced vehicles. To date, Ford's Volvo sales in China have been lackluster.

In 2009, the company made and sold barely 15,000 units of the Volvo S40 and S80, according to sales data provided by Ford.

In part, said John Bonnell, a senior director with automotive consultant J.D. Powers, that may reflect Ford's recent focus on other challenges, such as surviving a deep slump in U.S. car sales.

Volvo also occupies an awkward corner of the Chinese market. As a European brand, Volvo is positioned as a luxury brand. Indeed, the imported S80 sells at a price comparable to some Mercedes and BMW models. But Chinese consumers put Volvo in a different category.

"Volvo definitely doesn't have the prestige of BMW or Mercedes," said Bonnell. "And safety doesn't sell that well in China. If buyers are looking at European cars, they're looking for ... something they can show off to their friends."

Geely does have an opportunity, according to Bonnell: to reposition Volvo as a near-premium car to compete with respected Japanese brands such as Toyota and Honda.

To get there, Geely will have some convincing to do, however.

Victor Sun, a lawyer in China, recently upgraded his Volkswagen Passat to a Volvo for just under 400,000 yuan.

"I wanted my car to be classy, understated and of good value," he said. "Once it becomes a more locally sourced vehicle, it might take some exclusiveness away. I'd also need to re-assess its quality."

($1=6.827 Yuan)

(Additional reporting by Fang Yan in SHANGHAI, Michael Wei in BEIJING and Wei Gu in HONG KONG; Editing by Lincoln Feast)

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