SPECIAL REPORT-Saving Volvo:Geely buys brand and management test

Thu Jul 22, 2010 10:18pm EDT

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UNTANGLING FORD-VOLVO

One of the toughest struggles in the negotiations was just how interwoven Volvo had become with the wider Ford Motor Group including safety and in-car-entertainment equipment. Volvo shared engine platforms and parts with Ford brands, while it relied on hardware and electronic-architecture work done at Ford.

"Ford and Volvo are, to this day, still very intermeshed," says Cox at Rothschild.

Leaks in October highlighted disagreements over patents and intellectual property rights that threatened to kill the deal. In the end, the takeover terms gave Geely some of the technology. Ford got to keep other bits, but has to license some of it to Geely for use in its own operations. That should allow Geely to improve the quality of its own cars, and grow sales.

As the talks progressed, the Geely team faced a huge public relations task to convince Swedish and Chinese stakeholders the deal made sense and wouldn't end up like other failed Chinese M&A ventures.

Volvo's powerful unions worried factory jobs might take a fast boat to China.

"We didn't know what Geely was, or at least I didn't," said Maria Akterius, who leads a team of about 40 at Volvo's factory in Torslanda, on the outskirts of Volvo's Gothenburg headquarters.

"I have to say, I was a bit worried back then because my thoughts were like, 'Now the company will move to China and I'll be left without a job.' That was my first reaction."

The Swedish media also played up concerns production might move to China, given the huge disparity in labour costs. That in turn put pressure on the Swedish government.

Li played a key role in selling the deal to the unions.

"When they (union officials at a Volvo plant in Belgium) asked me to tell them in three words why I want to buy Volvo, I said 'I love you'," Li told Shanghai TV after the deal was signed. "I had studied Volvo for many years and know it so well." The union didn't show its affection for the deal until just before the 10,000-page deal was signed in March, and only after receiving reassurances about job security.

Like Volvo's European plants, Geely's state-of-the-art factory in the port city of Ningbo, just across Hangzhou Bay from Shanghai, is highly automated. Unlike Volvo, its shops are not unionised. And despite the recent wave of labour unrest in China's factories, particularly those with some foreign ownership, the workers seem proud of their indigenous enterprise.

"I feel lucky to work for a company like Geely," said one young man, who gave his surname as Wang, during a recent visit to Geely's Ningbo plant. "It's been growing very fast and I feel I have a future here."

Geely plans to build a Volvo plant in China that would nearly double its annual global production, and aims to sell 150,000 Volvo cars in China annually by 2015. It has yet to pick a site for the plant, but Shanghai is a likely candidate.

That appears to be a major selling point in getting Chinese regulatory approval.

NOTHING IN THE WAY

Two agencies have the power to veto the sale, the Ministry of Commerce and the National Reform and Development Commission (NDRC), China's powerful state planner, whose approval would be required for any major new investments by Geely.

Auto analysts say China's approval is almost certain and nothing seems to stand in the way of Geely and Ford concluding the takeover in the third quarter, the stated closing date for the deal.

But the road after that looks no less rocky than the journey to bring the deal to fruition. Opinions are divided on Geely's turnaround strategy for Volvo based on achieving greater economies of scale, not to mention its lack of experience managing a foreign firm.

"I have been through a lot of mergers and acquisitions in my career and they are difficult, even in the same culture," said Scott Laprise, an analyst at CLSA bank.

"You are dealing with limitations, especially manufacturing outside the country. Your management experience is only within China and now you are going to expand outside the country."

Geely has said Volvo is already moving back toward the black as the global recession recedes.

"We need to see how it will be managed," said John Russell, CEO of London Taxi Co, which is part-owned by Geely. "Obviously there is a bigger opportunity for Volvo in China ... Volvo has potential in its current form and I think Geely wants to see that grow and see Volvo achieve its potential in the world."

China's main problems with overseas M&A owe more to lack of homework and preparation than any other intrinsic problems, said Wang Dazong, president of BAIC, a rival bidder for Volvo, which acquired rights to some car designs from GM's Saab last year.

"Any company can fail," Wang said. "What you need to do in advance is a thorough analysis and after acquisition really focus on integration ... You need to ask yourself, 'Why are you doing it? What do you want?' and also have a clear strategic objective."

Li has maintained throughout that Geely must keep Volvo as a separate Western premier brand -- and grow that brand -- for the turnaround to succeed.

"Volvo's biggest problem is that its scale is too small," Li told reporters in China after flying back from Sweden following the signing ceremony. "Profits can only be realised after the scale is expanded to bring down per-unit costs."

"Geely and Volvo will be brothers, not father and son."

($1=.6567 Pound) (Additional reporting by Quentin Webb in London, Michael Wei and Jean Yoon in Beijing; writing by Doug Young; Editing by Bill Tarrant)

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