The Volvo revolution

Geely's Volvo takeover may parachute China into the auto big league, reports Sarah Arnott

Geely's $1.8bn (£1.2bn) acquisition of Volvo at the weekend is not only the culmination of nearly a year of negotiations between the Chinese car maker and Ford, Volvo's parent company. Nor is it only the final piece in Ford's plan to sell off its luxury European brands. The takeover is also a sign of the coming of age of the Chinese motor industry.

China is already the world's biggest market for cars, booming by 46 per cent to 13.6 million last year, and overtaking the US. But China's industry is still at an early stage, with more than 100 companies, the majority producing on a small scale, and no real export presence. China's car makers are starting to eye up the global market, but they lack the scale, the technology and the brand recognition to do so. Geely – which is China's largest private car maker – is one of the select few chosen by Beijing to spearhead a major consolidation. And the Volvo deal is its method.

For Geely's $1.8bn – the majority of which is cash – the company is not just buying the Volvo brand. It also is buying the technology, the know-how and the global dealership network. And it is giving China its first ever foothold in the luxury car market.

The deal is a smart move that, if successful, could catapult Geely 10 years ahead of its Chinese rivals, and ultimately put it on a competitive footing with the major Western companies that dominate the global market. "Looking back from 20 years hence this could be seen as the historic moment when the Chinese industry changed from being just a big one to being a very significant one," Garel Rhys, from Cardiff Business School, said. "With Volvo, Geely is parachuting itself into the global premier league."

There have been several similar attempts at deals since the global recession knocked the stuffing out of the world's car industry (see box). But none have gone ahead. And when two Chinese companies – Shanghai Automotive Industry Corporation and Nanjing Automobile Group – took over and dismembered MG Rover in 2005, the British company was already on its knees and did not continue to sell mass-market cars in the West.

No such fate awaits Volvo. Geely says the company will continue to be operated separately – retaining its head office in Gothenburg, its two factories in Sweden and one in Belgium, and keeping on its management team. What the loss-making Swedish icon will gain is entry into the vast Chinese market.

After peak sales of 458,000 in 2007, Volvo sold just 335,000 cars last year. Li Shufu, the charismatic, rags-to-riches founder of Geely, plans to double its sales to 600,000 by 2015. In a metaphor which sits rather incongruously with a brand famous for ultra-safe "Swedish tanks", Mr Li likens Volvo to a caged tiger. "We need to liberate this tiger," he said when he signed the deal at the weekend. He is not only keen to protect Volvo's existing European capability, he is also planning a factory in Beijing to help to service growing Chinese demand. "We want to stabilise and enhance the traditional markets in Europe and North America, and at the same time develop the other Volvo business in emerging markets, including China," Mr Li said.

But the real impact will be what Volvo can do for Geely. Mr Li was hugely ambitious, even before the Volvo deal. He wants Geely to be selling 2 million vehicles annually by 2015, up from 330,000 last year. The Swedish group may be loss-making – £32m in the red in the last quarter of 2009. And it may produce roughly the same number of units as Geely. But it still dwarfs its new owner, with revenues more than five times as high and double the number of staff.

Geely's website proclaims proudly: "Let Geely cars go to the whole world". With Volvo's help, it might just come true – transforming the company from an obscurity barely known outside China except for accusations of "copying" by major Western marques – most famously Rolls-Royce.

If the tie-up can be made to work, it will change Geely beyond recognition and signal a shift in the Chinese industry. China may have the world's biggest market. But most of its cars are produced in joint ventures with major Western car makers, and joint ventures give the Chinese partner limited access to technology. Without top-rate technology, China will struggle to develop its own models for the global market.

Volvo gives Geely a fast track – to technology with a world reputation for safety, and to a global dealership network which could ultimately be tapped to sell Geely-branded models. It also brings with it a massive fund of expertise in dealing with export markets. The leg-up from Volvo could take as much as a decade off Geely's development cycle, according to Professor Rhys. "Other Chinese car companies are looking at 20 years before they can break into Western markets with their own product," he said. "But with Volvo helping Geely could be doing it within the next 10."

At this stage, there are no other Chinese takeovers obviously in the pipeline (although experts tip both Isuzu and Subaru as possible future targets). But Geely's Volvo deal will not be the last of its kind. Marc Summers, a director of automotive research at KPMG, said: "In 12 months' time, if Geely is successful, there will be more deals like this, and also others in the supply chain."

Takeaway menu: China's quest for a car company

Geely's $1.8bn takeover of Volvo is the first successful bid by a Chinese company for a fully functioning, mainstream Western car maker – but there have been several attempts.

Saab: Geely was rumoured to be interested in Saab, but no formal approach was ever made. Beijing Automotive Industry (BAIC), however, did get involved – first taking a stake in Koenigsegg and then throwing its weight behind a consortium of Swedish investors. Neither bid was successful.

Opel/Vauxhall: BAIC put in a late bid for Opel/Vauxhall, GM's European business. But it was never a front- runner and when the deal finally collapsed the preferred bidder was Canada's Magna International, backed by Russia's Sberbank.

Hummer: Sichuan Tengzhong Heavy Industrial Machines tried to buy Hummer from GM, but withdrew its bid last month when the Chinese government refused approval on environmental grounds. Hummer will now close.

*MG Rover:The deal that did go through was SAIC and Nanjing Automobile Group's takeover of MG Rover in 2005. But the situation was vastly different from Geely/Volvo. MG Rover was already on its knees. SAIC bought the intellectual property, Nanjing the right to dismantle the Longbridge plant and ship it to China. Only a tiny number of MG sports cars are still sold outside China.

Manganese bronze: Geely also plans to up its 23 per cent stake in the London taxi maker Manganese Bronze to 51 per cent in the company's upcoming £15m shares placing.