Autos & Transportation

Special Report: How the Chinese tycoon driving Volvo plans to tackle Tesla

15 minute read
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Zhejiang Geely Holding Group's Chairman Li Shufu attends Baidu's annual AI developers conference Baidu Create 2019, in Beijing, China July 3, 2019. REUTERS/Yilei Sun/File Photo

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HANGZHOU, China, Sept 2 (Reuters) - "Do you know how big Volvo is?" asked Don Leclair, finance chief at Ford Motor Co.(F.N).

It was 2008, and Leclair was responding to an offer from a little-known Chinese businessman to purchase the Swedish carmaker, which Ford owned.

The businessman, Li Shufu, had a company with less than half Volvo's sales and a flagship model, King Kong, almost unknown outside China. He was politely shown the door of the "Glass House," Ford's iconic headquarters near Detroit, according to two people who were at the meeting. Ford's Leclair did not respond to requests for comment about the episode.

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Fast-forward to 2021 and Li Shufu's company, Zhejiang Geely Holding Group (0175.HK), is one of the biggest-selling automakers in the world's biggest auto market. It controls not only Volvo Cars but also a clutch of global auto brands, and a significant stake in German giant Daimler AG, the maker of Mercedes-Benz. These names are now part of its plans for a revolution in autos.

Geely is preparing Volvo for a listing on the Nasdaq Stockholm exchange as a route towards the future of transportation: One where cars are part of an electrified network of mobility services, driving themselves, connecting to each other and - like cell phones - generating an array of data and new business opportunities.

It's a vision more Silicon Valley than Detroit, where traditional automakers globally are chasing another giant - Tesla Inc (TSLA.O).

Li Shufu and his advisers eventually convinced Ford to part with Volvo in 2010 for $1.8 billion. It was the first in a string of deals, tapping brands such as Lotus, Smart and the London Electric Vehicle Company to form a network that he calls a "bigger circle of friends" across industry segments.

Li Shufu sees them as building blocks to help Geely compete in a future where autos are not vehicles, but "service providers," he told Reuters in his management suite at Geely's headquarters in Hangzhou, eastern China.

In that business model, cars will be available on subscription and offer services such as making payments and in-car apps. They will update their own software, and spawn opportunities in the same way as the mobile operating systems developed by Apple Inc and Google.

"We are trying to create an automotive ecosystem similar to Android," he said.

Li Shufu, 58, recently adopted a foreign first name - Eric - because he liked the sound of it. He has charted a path from a remote fishing village in eastern China through dirty factory floors to the heart of the world's auto industry. His subordinates often still call him Chairman Li.

This account of his evolution into one of the industry's most singular disrupters is based on interviews with Li Shufu himself, other company leaders and advisers as well as rivals and executives at firms in which Geely invested. They reveal an agile opportunist who is making a stream of startup bets - on ventures like flying cars and helicopter taxis - to prepare for the new age of autos.

Besides vehicles, Geely has a Danish bank, a startup that's developing vehicle control software technology and Geespace, a China-based firm which got the green light from Beijing this year to make low-orbit satellites that will be the eyes in the sky for fully autonomous machines. The scale of his investments - spanning Europe, Southeast Asia, China and the United States - is unique among Chinese auto firms.

Asked about his role, some of Li Shufu's rivals said his status as a relative newcomer to the industry gives Geely a potential advantage. He isn't weighed down by a big network of gasoline-related suppliers, for instance, said an engineer at Toyota Motor Corp, who spoke on condition of anonymity: That makes it easier for him to shift to a digital industry.

"Among traditional automakers, Geely has a more sophisticated lens on the future of mobility," said Bill Russo, head of consultancy Automobility Ltd in Shanghai and a former Chrysler executive. "They understand the nature of this model is shifting from a pure-play manufacturer."

But Li Shufu's ambitions face mounting challenges. To realize this vision, executives at several rivals say he needs to upgrade perceptions of his own Chinese-brand cars.

"Geely's biggest challenge is its name, in part because of its past as a low-cost, entry car brand," said an executive at Honda Motor Co. "How does Geely go from that to become an Apple-like brand? All legacy automakers struggle with that, but that is particularly a tall challenge for Geely."

And Li Shufu is moving in an increasingly tense global climate.

His strategy of building diverse alliances around the world has been made possible by the past 15 years of relative openness to technology-sharing and marketing collaboration. Now superpower rivalry between the United States and China has led to a bitter trade war, and Washington and its allies are blocking the expansion of major Chinese tech companies.

The Chinese entrepreneur is undeterred, and says his foreign investments are a map of opportunity.

"All roads might lead to Rome," Li Shufu said. "But the question is which is the right road and which road leads to Rome fastest?"

Like many other businesses in China, Geely appears keen to keep in lockstep with the pronouncements of President Xi Jinping, who has increasingly called for the need to promote what he calls "common prosperity." In June, ahead of the ruling Chinese Communist Party's 100th anniversary, Geely issued a press release announcing the "Geely Common Prosperity Initiative" to help employees in the city of Ningbo where the company has multiple facilities.

Li Shufu has been a member of some political bodies in China. He was previously a member of the Chinese People's Political Consultative Conference, a top political advisory body. And he was a delegate in March this year to the National People's Congress, China's largely rubber-stamp parliament.

"SOFAS ON WHEELS"

The third of four brothers born to farmers in a fishing village called Luqiao, Li Shufu's business is rooted in the entrepreneurial boom of the mid-1980s led by the economic reforms of China's then leader, Deng Xiaoping. Li Shufu pivoted to wheels from photography via fridges, and was producing vehicles before he had the necessary paperwork.

Opportunity first knocked when he went for a high-school graduation photo in the early 1980s. Seeing the line of his peers outside the village studio snake around the block, he pestered the photographer for an apprenticeship.

Then, Li Shufu said, he borrowed 120 yuan - about $70 at the time, or five times the average monthly rural income in his province - from his father. He bought a Chinese Seagull camera, jumped on a bicycle and established the first mobile studio in his village, charging 0.48 yuan per portrait.

With money flowing in, he said he experimented with salvaging appliances and melting the components to extract metals, started making fridge components and in 1986, at age 23, registered the company that became Geely.

His village has now been absorbed by the city of Taizhou. Mom-and-pop machine shops in an area stretching down to Wenzhou diversified from trades such as repairing fishing boats to making cigarette lighters, belt buckles, and eventually motorbike and car components.

In the early 1990s, Li Shufu looked at a mangled motorbike brought into his factory, saw how simple it was mechanically and decided to make bikes, according to his official biographer at Geely.

Soon he was dreaming of cars. He dismantled existing models to see how they worked, and quietly built a car plant and made some primitive prototypes, the biographer told Reuters.

The first model, the Geely Haoqing, was finished in 1997. It was a disaster. His engineers had not water-proofed it and torrents gushed into the cabin when it was tested for leaks.

To progress in an industry tightly controlled by the state, Li Shufu needed Communist Party support.

In 1999 - the year Tesla chief Elon Musk sold his online publishing startup - Li Shufu persuaded an up-and-coming Communist Party official to give him the licence to manufacture cars in China officially, by saying they were not that complicated to produce - they were really just "two sofas with four wheels," he said.

His factory wouldn't cost the state anything, he recalled telling the official: "At least give me a chance to fail."

Reuters could not verify that account, but by the following year, the waterproofed Haoqing was rolled out to showrooms in large numbers.

CHANGE OF PLAN

Geely was soon selling a few hundred thousand rough-and-ready cars a year - models with bumpers that tended to sag after a few years - but Li Shufu had his sights on the global market.

Geely displayed one of its models in the lobby of the Cobo exhibition hall in downtown Detroit at the 2006 auto show, with a view to setting up a plant and sales network in the United States. In March 2007 a group of potential U.S. backers gathered at Geely's headquarters in China to discuss how to help set up a U.S. factory.

Li Shufu announced he had changed course.

"He basically said, 'I have a new plan,'" said one of those present, who spoke on condition of anonymity. "'We wonder if Volvo might be for sale?'"

There was an awkward silence. Li Shufu, who declined to comment on this version of events, told the investors it would take too long to engineer vehicles to meet U.S. safety and emissions regulations, the person said. Buying a brand like Volvo - renowned for its safety and reliability - would be a quicker way to acquire technology and become an established name.

Volvo initially wasn't for sale - Li Shufu was rebuffed by Ford's Don Leclair at their meeting. But as the global financial crisis hit U.S. carmakers, Ford turned to preserving its core business, and parted with Volvo. "We elected to sell a storied brand to a great new owner," a spokesperson said.

By 2010, Geely had mustered the funds for the deal. Most came as subsidised low-interest loans from the Chinese cities of Chengdu, Daqing and the Jiading district of Shanghai, the company said. Geely went on to build Volvo factories in the first two cities and a Volvo technology centre in the third.

Other auto firms, including Tesla and Ford, also received aid, in the form of billions of dollars in low-interest loans that year under the U.S. Advanced Technology Vehicles Manufacturing Loan Program, a bailout following the global financial crisis.

Meanwhile, China's car market had boomed. And Volvo, which was running at a loss when Li Shufu took over, was in the black. Geely and Volvo executives said they made Volvo profitable chiefly by beefing up its presence in China, sharing components and suppliers and developing common platforms.

A DISADVANTAGE

The year that Geely bought Volvo, Tesla became the first American car company to sell its shares to the public since Ford in 1956. Based in Palo Alto, Tesla had a two-seater electric sports car, which Musk called "a freaking technology velociraptor," saying it was ready to revolutionise the way Americans buy and drive cars.

Li Shufu also saw the need to go electric. Geely and Volvo set up a joint technology centre in Gothenburg, Sweden, in 2013 and developed hybrid and electric vehicle ventures Lynk & Co. and Polestar a few years later. Earlier this year, it launched Zeekr in China, a new electric car brand.

But Li Shufu and his lieutenant Daniel Li, the Chief Executive of Geely Holding, faced another obstacle.

The likes of Tesla - backed by venture capital hungry for the next big thing - could command high valuations without delivering profits, making it easy for them to raise capital. Geely was at a disadvantage, the Geely executives said, partly because its investor base of pension funds and investment funds is tasked with taking lower risks to achieve steady returns.

Tesla did not respond to requests for comment for this story. It made a full-year profit for the first time last year. But its market value has surged from $34 billion in 2016 to a peak of $834 billion in January.

Since 2011, Geely's Hong Kong listed business - a subsidiary of Geely Holding Group - has reported net profits every year, averaging 5.19 billion yuan or $800 million at today's rates. Its market value is about $35 billion.

The way forward, Li Shufu decided, was to combine resources with legacy carmakers, known in the industry as original equipment makers (OEMs).

"If traditional OEMs ... didn't invest in new technologies and trends, we would die. But if each OEM simply made huge investments by itself, we would also not survive," Geely Holding Chief Executive Daniel Li told Reuters. "We have to make those investments in a smarter and more collaborative way."

That thinking was behind yet another gamble by Li Shufu.

"CIRCLE OF FRIENDS"

He identified Daimler AG, a firm with roots dating back to the world's first gasoline car in 1886, as a key candidate for his "circle of friends." But the Geely boss knew that if he knocked on Daimler's front door he would not be taken seriously, two Geely sources said.

So, starting in October 2017, Geely began discreetly building a stake in Daimler, as Reuters has previously reported.

Using Hong Kong shell companies called Tenaciou3, Miroku and Fujikiro, as well as derivatives, bank financing and carefully structured share options, Geely stayed in the shadows until the following February. Then it stunned the auto world by announcing it was Daimler's biggest shareholder, with a 9.69% stake that cost roughly $9 billion.

Asked where Geely got the cash, a person familiar with the matter said it bought some Daimler shares and used them as collateral for a loan to buy more, a point Reuters couldn't confirm. Li Shufu said in an interview posted on the People's Daily website at the time that Geely had used only "offshore" funds to execute the deal.

The move aroused alarm in Germany, where the government was wary of Chinese firms' interest in domestic champions and their technology. A group of Geely executives led by Li Shufu launched a four-day diplomatic tour to calm the waters.

Meeting Daimler's top brass, government officials and lawmakers in Berlin and Stuttgart, the Geely team said they were seeking synergies, not domination, Daniel Li said. Their interest in Daimler wasn't about economies of scale, they said, but about the pressing need for legacy automakers to form joint ventures and divvy up the cost of developing new technologies.

In some of the meetings, Li Shufu floated his idea of using hundreds of proprietary mini, low-orbit satellites as a more accurate global positioning system for self-driving cars, Daniel Li said.

Daimler and Germany's economy ministry declined to comment on those meetings. Germany has since lowered the threshold for screening purchases of stakes in German firms by non-Europeans; last year it blocked the takeover of a satellite and radar technology company by a state-controlled Chinese missile maker .

Following the trip, Daimler initially offered to let Geely buy its troubled Smart brand of tiny urban cars outright. Li Shufu wanted more.

In September 2018, at a lunch at the Mercedes-Benz museum with Chief Executive Dieter Zetsche, the two agreed to form a 50-50 joint venture to transform Smart into a network of electric urban transporters, two people familiar with the meeting said. Zetsche declined to comment for this article.

Geely and Daimler have since agreed several joint new investments: a premium ride-hailing service in China called StarRides; a super-efficient gasoline engine for hybrid cars; and stakes in German electric flying taxi startup, Volocopter. Geely is also sharing its electric vehicle platform technologies, supply chains and factories with Daimler while using the German brand name and sales network to market new Smart models.

Making cars is only one source of revenue Geely is targeting. Another will be non-traditional vehicle sales such as car subscription services, which will enable car-owners to make money from the loan of their vehicles when they aren't using them, Li Shufu and Daniel Li told Reuters.

As a first step, Geely is already rolling out a subscription model in Europe this year for its hybrid Lynk & Co SUVs. Throw in ride-hailing, battery charge-and-swap services that are already in operation, as well as selling the software to operate electric vehicles, and Geely aims to have an array of alternative revenue streams.

NEW SENSITIVITIES

As Li Shufu ventures into the age of self-driving autos, he also enters more sensitive ground. The still-nascent area is delicate - because passenger safety is not yet assured, and also because the technology crosses over into areas with national security implications.

"You may ask why Volvo and Geely are not aggressively promoting their self-drive technology by now?" Li Shufu said. "If you are to uphold Volvo safety traditions and standards, we can only call it autonomous self-drive technology when people can close their eyes and doze off in a self-drive car with 100% safety guaranteed."

To beef up the slow, inaccurate connectivity and vehicle positioning capability of current cars, Li Shufu wants to use low-orbit satellites: He said the technology should be able to position and navigate a car with a margin of error of a few millimetres.

To be fast enough for safety, the satellite technology would need to be augmented by others including 5G cellular signals, radar and digital cameras, said William Malik, a cybersecurity expert at Trend Micro Inc.

When developing satellite technology, Geely may also face a U.S. ban on the export of space and satellite technology to China. The United States is increasing trade restrictions on Chinese tech businesses.

Geely said it doesn't comment on political issues.

But Li Shufu says he thinks global companies should go ahead and pursue global integration. "We can do business together and maximise synergies within an industry," he said. "That's why I'm all against cutting off ties."

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Additional reporting by Kevin Yao in Beijing and Michael Nienaber in Frankfurt; Edited by David Clarke and Sara Ledwith

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