March 29,2010

Advice to Li Shufu: Don't Try to Free Ride Geely on Volvo Too Soon

By Scott Zhou, Shanghai

"Auto madman" Li Shufu, founder and chairman of privately-owned Chinese passenger auto maker Geely, based in Zhejiang Province, has finally cut the deal to buy Swedish auto icon Volvo from Ford for US$1.8 billion. This, the biggest acquisition of an international auto brand by a Chinese home-grown entrepreneur, is being likened to a Chinese peasant migrant bringing to bride a European movie star.


The honeymoon does not look to last long, and challenges are sure to arise. China's efforts so far to acquire international brands has met with little success. State owned Shanghai Automotive Industry Corporation's buying control of South Korea's Ssangyong proved a debacle, and Lenovo's failure to manage the IBM PC brand it acquired has born out that hitching a ride on a big foreign brand towards an international identity is fraught with difficulties for those new to the territory of international management and marketing, absorbing technologies, support from unions, and cultural integration.


Li Shufu is a paranoid car maker from a farmer family dreaming of building a luxury brand. We get his understanding of car making from his "four wheels and two sofas" statement, but his car business in China has grown weed-like from nowhere, driven by his determination to sell the world's "cheapest car." Geely's series of cars sell well to the emerging middle class in second and third tier inland cities, for bottom prices but poor quality. To Li Shufu, making and selling high quality cars so far has been a pipe dream. Volvo's headquarters, its R&D team, and its overseas factory workers cannot be looking with optimism at their new owners. It may take a long journey for Li Shufu to understand brand premium.


The key, of course, is the maintenance of the brand image. This marriage brings a great deal of uncertainty to the brand. Li Shufu needs to persuade Volvo's loyalists and potential drivers that he and his team are capable of cherishing all values from this particular image: cutting-edge R&D, especially in safety technology, luxury design, and driving experience. Being very European, certainly not Chinese.


Geely, along with two other home grown car makers Chery and BYD, has been infamously successful at copycatting the look of international brands for the home market. Besides slight differences in the heat dissipation grid, fog lamps, tail lamps, and the door mechanism, Geely's GE is almost a ringer for a Rolls-Royce. Its logo even rips off the Rolls winged goddess, with only a slight difference in her gesture. Geely was audacious enough to exhibit its GE at the Shanghai Auto show last year. Meanwhile, Chery's high-end car is very similar to a particular Bentley, while BYD has snatched the body design of a Toyota.


Although poaching some tech talents out of Detroit has helped it a bit down the road, so far Geely still has no high-end car branding, marketing, or sales experience. For Geely, Volvo has to be about brand. In China, Volvo compares with Benz and BMW in reputation.


If Geely intends, however, to "free ride" its own brand on the Volvo vehicle, it may be inviting disaster. Will Li and company be able to manage such an iconic international brand? Chinese experience paints a grim picture. Lenovo failed to expand its share in the international PC market, and the development of its own products has come under the shadow of the IBM brand-whenever its R&D staff has tried to improve Thinkpad it has been blamed for damaging its quality. The most successful Chinese entrepreneurs have yet to figure out if acquiring a well established international brand is better than going with one that is home- and organically grown.


Domestically, Li Shufu plans to set up a plant in China, and has already been encouraged by the governments of Beijing, Shanghai, and Guanghzou to produce 300,000 Volvos a year. Popping out Geelys, however, is so different from producing and selling Volvos that mixing them together may well destroy the value of either or both.


Li Shufu's other dream, using Volvo to push the expansion of Geely into international markets, is also extremely risky. At present, putting Geely and Volvo together would trash Volvo but do nothing for Geely.


Li Shufu will be very smart to be exceedingly patient, patient enough to spend the years to learn and absorb Volvo systems and technology. Its R&D system alone could help Geely leapfrog in improving its own cars. Although the deal restricts technology transfer, 100% control of Volvo will help Geely acquire know-how in a convenient and reasonable way.


Volvo has devoted 83 years to safety and eco-friendliness, and its image and assets could be of the greatest value to Geely. If the acquisition can help Geely smooth and shorten its learning curve, Geely will be able to compete with international brands at home and, in the not too distant future, overseas. 


Geely needs, though, to be as careful as it knows how, and keep in mind SAIC's South Korean failure. SAIC's plan to develop an SUV with Ssangyong was derailed by a labor union law suit over "stealing" technology. If the Scandinavian union culture is as belligerent as the Korean, that will be trouble. But the workers they represent are now Geely's employees, and whatever else they are, they are definitely different from Geely's cheap workers in the small town in Zhejiang province.


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