By Acquiring Volvo, Geely Has a Record to Break for Chinese Companies

Local Firms Have Not Succeeded in Taking Over Foreign Companies, Warns Yang Jian

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SHANGAHAI (AdAgeChina.com) -- To date, no Chinese company has ever succeeded in reviving a business acquired overseas. It's almost a curse for Chinese companies venturing to go global.

Now that it has signed the definitive agreement with Ford to acquire Volvo, Zhejiang Geely Holding Group has a chance to break the record; for Chinese companies both in and outside the auto sector.

Yang Jian
Yang Jian
When it comes to the poor track record of Chinese companies making overseas acquisitions, it's easy to produce a list. And the companies on the list have one thing in common: they were dragged down by their acquisitions instead of benefiting from them.

In the auto sector, the one company that bought a foreign brand before Geely was Shanghai Automotive Industry Corp. (SAIC), which acquired a controlling stake in the Korean SUV maker Ssangyong Motor Co. for some $500 million in 2004.

Shortly after SAIC took over, a tug of war between SAIC and the labor union of the Korean company ensued and has yet to end. In early 2009, the debt-laden Ssangyong went through an asset restructuring ordered by a Korean court, diluting SAIC's interest in the company to 11 percent from 51 percent. Due to the investment losses mainly caused by Ssangyong, SAIC's net profit in 2008 slumped 85.8 percent on an annual basis.

Apart from Ssangyong, other foreign acquisitions by Chinese companies have taken place mainly in the home appliances sector.

Chinese home appliances maker TCL International acquired the television set manufacturing business of its German competitor Schneider Electronics AG in 2003 for 8.2 million euros. And computer maker Lenovo bought the PC business of IBM for $1.25 billion in 2005. Both companies quickly started bleeding losses after profits they made in their home market were swallowed by the moribund overseas assets they failed to turn around.

Various reasons have been cited in the press and business schools for the failure of these acquisition cases, ranging from a lack of experience of dealing with foreign labor unions to a shallow understanding of sophisticated foreign markets.

Now, Geely, which until now has had virtually no experience in operating in mature markets, is facing the same problems in reviving Volvo.

How much chance does the private Chinese automaker, which made a meager profit of $201.4 million solely on the domestic market in 2009, have in turning around the Swedish company, which suffered a loss of $653 million globally?

Though I would be happy to give it the benefit of doubt, the challenges Geely is now confronted with are hard to exaggerate.

Yang Jian is the managing editor of Automotive News China, a publication of Crain Communications.


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