Will Geely's Volvo Deal Give China a Shot at Being a Global Automaker?

Holding Group's Lack of Brand Recognition, Small Sales Force Are Among Challenges It Must Overcome to Revive Brand

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SHANGHAI (AdAge.com) -- Zhejiang Geely Holding Group's deal to buy Volvo from Ford Motor Co. gives China a shot at being a global automaker -- if Geely is up to the marketing challenge of fixing Volvo.

Geely Chairman Li Shufu
Geely Chairman Li Shufu Credit: AP
Some industry observers fear that instead of reviving Volvo, Geely's low brand-recognition both inside and outside China will tarnish the classic Swedish car brand. A global Interbrand survey conducted last year to evaluate the brand awareness of Chinese companies showed just 5% of respondents were familiar with Geely. By comparison, rival Chinese car brand Chery had 13% awareness outside China.

"Of all the local car companies, Geely is probably one of the healthiest. They've got a decent product but access to Volvo's technology will help them," said Bryce Whitwam, general manager at Wunderman, which handles digital marketing for Ford in China.

So will Volvo's knowledge about how to run a distribution network, Geely's biggest weakness, Mr. Whitwam said. "They don't have a dealer network in China. Instead, they sell cars through middlemen."

The company faces other challenges in its bid to become a global player. Geely's sales and workforce are a fraction of the size of Volvo's, and the Chinese carmaker has little experience building and selling premium automobiles. Geely cars generally sell for $6,000 to $16,000, compared with sticker prices up to $100,000 in China for a new Volvo.

Geely even trails most local rivals in sales with a market share of just 2.6%, compared with 5.1% for BYD and 4.8% for Chery, according to J.D. Power & Associates.

New to branding
Like all privately owned Chinese carmakers, Geely is a relative newcomer to branding. It has poor distribution and lacks the buzz of up-and-coming carmaker BYD Auto, producer of the world's first mass-produced, plug-in hybrid vehicle and partly financed by U.S. investor Warren Buffet.

But Geely does have the backing of the Chinese government, which failed to support the recent attempt of Tengzhong, a Chinese machinery maker, to buy General Motors' gas-guzzling Hummer brand.

Geely also believes it can count on strong sales in its home market. China raced past the U.S. to become the world's top auto market last year, with sales surging 46% to a record 13.6 million units. Car sales are still climbing this year.

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"China, the largest car market in the world, will become Volvo's second home market. Volvo will be uniquely positioned as a world-leading premium brand, tapping into the opportunities in the fast-growing China market," said Geely Chairman Li Shufu at a press conference to announce the deal.

Supporters say Volvo's reputation is likely to survive under new management.

Mr. Li "knows how important brand value is to an automaker," said Yang Jian, managing editor of Automotive News China, a publication of Crain Communications. "He knows how hard it is to build a brand. In fact, it was Mr. Li's deep appreciation of Volvo's high brand value that prompted his company's bid. He will do all he can to avoid associating Volvo with Geely's existing brands."

Mr. Li has promised to maintain Volvo Cars' existing plants, research-and-development centers, dealership networks and labor agreements. Geely also pledged to let an independent management team based in Gothenburg, Sweden, run the brand.

"The Chinese company is well-placed to leverage the domestic market to revive Volvo," Mr. Yang said. "Cost-cutting alone cannot return Volvo to profitability and restore the position it used to enjoy on the global market. The brand needs a big market with a strong appetite for its products to boost sales."

Mr. Li is already planning to build a factory in Beijing to make 300,000 Volvo cars a year for China. Sales may get an extra boost from Beijing's plan to support domestic brands and replace Volkswagen AG's Audi A6 as Chinese state officials' car of choice.

Government support of the deal was crucial for Volvo, and not only to secure financing. The acquisition, a shortcut for Geely to become a multinational marketer overnight rather than through organic growth and brand-building, fits China's ambition to become an international player in every major industry.

A few Chinese brands "have continued relentlessly on their march towards the global market. Some leading brands, such as Geely, Lenovo Group and Tsingtao, have made significant progress by setting up overseas plants and making acquisitions," said Jonathan Chajet, Interbrand's managing director, China.

Geely has also brought in experienced managers. The former CEO of Fiat Powertrain Technologies in China, Freeman Shen, joined Geely in late 2008 as VP for the company's overseas business. Mr. Shen, who worked for U.S. and European companies for many years, is the second "sea turtle," as mainland Chinese who work or study overseas are called when they return home, to take a high-level position at Geely. The first, a former Daimler Chrysler exec, is Geely's VP-research and development.

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