Geely and Volvo: aberration or the future?

By: Dr Peter Wells, Monday, March 29, 2010,

Tags: Corporate Finance, Ford Motor Company, Mergers and Acquisitions, OEM Strategy, Purchasing.

AutomotiveWorld.com

The announcement that Geely has finally agreed terms with Ford Motor Company over the sale of Volvo Cars will be taken by some to mark a significant moment in the history of the global automotive industry. With a reported deal price of US$2bn, the transaction is the largest such move to date by a Chinese OEM, and at least for Volvo workers around the world, must come as some relief after the business was put up for sale in 2008.

On the other hand, many industry observers and financial analysts expect that the inexorable trend towards consolidation will, in a few years, result in just five major global players dominating the entire sector. If that is the case, the Geely-Volvo deal is but a sideshow, virtually an irrelevance in the grander scheme of things.

A judicious re-ordering of global assets, of the type practiced by Renault-Nissan or being attempted by Fiat-Chrysler, may in fact be the template for the future

To be sure, Geely will have much to gain from this acquisition. Quite apart from the still-underexploited depth in the Volvo brand, Geely will also gain access to the famed Volvo expertise in vehicle safety system design and testing capabilities, as well as an entry route to important non-Chinese markets where Volvo has a presence.

Much depends of course on how Volvo is disentangled from Ford, particularly in terms of back-office functions in purchasing, logistics, distribution and marketing. Much also depends upon what Geely decides to do with respect to a relatively expensive manufacturing footprint. Equally, there can be little doubt that Volvo has opportunities as a brand in China - and Ford did much under their stewardship to retain brand integrity.

Still, the sale of the brand by Ford raises interesting questions about the future of consolidation in the industry. The break up of the Ford group, as with that of GM and the earlier separation of Daimler from Chrysler, can all be taken as indicative of the diseconomies of multi-brand groups…yet VW group appears to go from strength to strength while adding more brands to the portfolio. By the same token, many looked to the 'purity' of the Toyota approach, without a vast brand portfolio, as the template for success in the sector…yet recent events have severely tarnished that managerial structure too.

Rather than being a sideshow, perhaps the Geely-Volvo deal is indeed indicative of the kind of restructuring that will be increasingly prevalent in the next ten years or so

So, the Geely-Volvo deal does little to enhance the consolidators' perspective on the automotive industry. Indeed, if anything it runs counter to that school of thought. A judicious re-ordering of global assets, of the type practiced by Renault-Nissan or being attempted by Fiat-Chrysler, may in fact be the template for the future.

Rather than being a sideshow, perhaps the Geely-Volvo deal is indeed indicative of the kind of restructuring that will be increasingly prevalent in the next ten years or so, as increasingly capital-rich OEMs from China and perhaps India emerge as aggressive participants in a new world ordering. This is unlikely to result very quickly in just five dominant OEMs with a holding of perhaps 30 brands, not least because the mega-deals required to create such entities are so complex as to defy managerial competence. Expect more turbulence.

Dr Peter Wells is a Reader at Cardiff Business School, where he is a Co-Director of the Centre for Automotive Industry Research and leads the automotive industry research programme within BRASS, also in Cardiff University. Dr Wells is also a director of AutomotiveWorld.com's sister website AWPresenter.com. He can be contacted on wellspe@cardiff.ac.uk.

The opinions expressed here are those of the author and do not necessarily reflect the positions of Automotive World Ltd.

Published on Monday, March 29, 2010