August 31,2009

Geely's Lonely Bid for Volvo

By CT Johnson

Continuing the cracking pace of outbound investment in China's automobile industry, Geely Automotive looks poised to win control of carmaker Volvo.  The Swedish financial newspaper Dagens Industri reported Saturday that Ford, Volvo's owner, has received no firm offers for the Swedish carmaker other than the one submitted by Geely.



Ford put Volvo on the market at the end of 2008 in a bid to reduce costs and improve its balance sheet in the face of declining sales world-wide.  As recently as July, the company indicated that several parties were interested in the car maker.  Speculation has centered around two main competitors, a European (possibly Swedish) group and another Chinese auto maker, BAIC.  It now appears that the speculations were just that.


Ford is expected to announce a final bidder in September.  "It is necessary if the deal is to be completed before the turn of the year, which Ford has set as a target," the newspaper reported a source involved in the sales process as saying.  Volvo declined to comment on the report.


Geely has pursued Volvo intensely from the outset.  China's National Development and Reform Commission, which is one of several government agencies with regulatory authority over foreign acquisitions over $100 million, gave Geely the green light to proceed with the purchase.  Geely is apparently the only Chinese automaker to have received such approval this year, although Tenzhong Heavy Industrial Machinery did make a bid for GM's Hummer brand without having received the relevant approvals.


In July, the Wall Street Journal reported that Geely was preparing an eye-popping $2 billion bid for the distressed automaker, in line with Ford's hopes for the sale but far in excess of what industry experts estimate the company will fetch.  Doubts have been cast on this report, however, by the China Car Times, which suggested that a more realistic price of 2 billion yuan, or $300 million, was actually in the offing.  Either sum is far less than the $6.45 billion Ford paid for Volvo in 1999.


While the acquisition of Volvo would do much to bolster the safety and quality reputation of Geely and other Chinese car makers, the bid is not without controversy.  "I am not optimistic about Geely's chances for Volvo. Is a small Chinese company capable of paying such a big sum for Volvo?" asked Zhong Shi, a Beijing-based automotive analyst Beijing.

"Although it will be a shortcut for Geely to foray into Western markets through the acquisition, the Chinese company still faces a series of big challenges," said Jia Xinguang, another analyst.  "Geely has to think over the possible troubles and bottlenecks in management, localization, employment and technology. Is it capable of solving all the questions?" Jia asked.

Whatever the risks to Geely, the Chinese car maker is on course to owning one of the world's most famous automotive brands.  It only remains to be seen what Geely will make of it.

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