Volvo's Transformation under Geely: No Smooth Ride in the US?
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Case Code: BSTR494 Case Length: 20 Pages Period: 2010-2015 Pub Date: 2016 Teaching Note: Available |
Price: Rs.600 Organization: Zhejiang Geely Holding Group, Volvo Car Corporation Industry: Automobiles Countries: China, the US Themes: Overseas Mergers & Acquisitions, Turnaround |
Abstract Case Intro 1 Case Intro 2 Excerpts
Introduction
In January 2016, soon after posting record unit sales, Volvo Car Corporation (Volvo), the Swedish-run luxury car brand owned by Chinese multinational automotive company, Zhejiang Geely Holding Group (Geely), announced that it was gearing up to become a major international player. The company reported that for the year 2015, it had sold 503,127 cars. This was the highest in its 89-year-old history and represented an increase of 8 percent compared to 2014. According to Volvo, the sales data marked the end of the first stage of the company's recovery which began after it emerged from a loss-making period in 2013. Commenting on the sales, Håkan Samuelsson (Samuelsson), chief executive, Volvo, said, "I am delighted to report that 2015 was a year of record sales. Now, with a successful 2015 behind us, Volvo is about to enter the second phase of its global transformation. Once completed, Volvo will have ceased being a minor automotive player and taken its position as a truly global premium car company. More records will tumble in coming years."
Geely was founded in 1986 by founder and entrepreneur, Li Shufu (Li), as a refrigerator parts company. In 1997, the company entered the Chinese automobile industry. Geely under Li created a market for affordable cars. Much of the company’s success was attributable to its selling inexpensive sedans in China and other developing markets. But Li's ambition of entering China’s luxury market came true in 2010 when Geely acquired Volvo from American automaker, Ford Motor Company (Ford). The US financial crisis forced Ford to sell the Volvo brand in a bid to focus on its core business. The crisis among the US automakers coincided with the boom in China’s auto market. Sensing this as an opportunity to enter the luxury car market in China, Geely decided to acquire Volvo. Subsequently in 2010, the company acquired Volvo from Ford for US$ 1.8 billion.
The deal gave Geely access to Volvo's internationally-recognized brand name, technical know-how, and reputation, which was lacking at the company, while Volvo got access to the world's largest auto market – China – with Geely's connections, expertise, and established sales network in the Chinese auto market. Analysts felt that before Geely could realize the synergies from the deal, it would have to undertake the Herculean task of turning around the loss-making Volvo. For the financial year ended 2009, Volvo's pre-tax losses stood at US$ 934 million. Hence, Li devised a turnaround plan under which he planned to make Volvo profitable by expanding its sales in China to nearly 1 million vehicles a year, setting up a low-cost manufacturing plant in China with an annual capacity of 300,000 vehicles a year banking on China’s inexpensive labor and market potential, and producing more cars out of Volvo's existing European factories. In addition to this, Geely’s Hong Kong listed unit, Geely Automobile Holdings Ltd., planned to add two or more luxurious car brands in a bid to boost Volvo's global sales. Industry analysts raised doubts over Geely’s ability to turnaround the loss making Volvo as the ailing brand had a very niche market. Moreover, they pointed out that Geely had had no experience in selling luxury car brands and was known for manufacturing cheap cars with a short history, questionable quality, and poor safety while Volvo had a long history of being recognized as a premium luxury car brand in Europe and its association with quality and consumers’ safety. Some critics also pointed out that several Chinese companies had a relatively poor record integrating their foreign acquisitions and Geely could also face issues related to cross-cultural management....
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