Case Study

Geely-Volvo Case

Question 1. Why did Ford want to sell Volvo Cars? Why would Geely like to buy it?
Reasons why for decided to sell Volvo

If we look at the context of the sale of Volvo we find that at that time the automotive
industry was in a crisis. This was just after the global financial crisis. And like many
companies at that time Ford was struggling to keep up their performance in such a
scenario. Also Ford failed in its attempt to build its Premiere Auto Group. This also led to a
large drain of cash and management time. So then one of the reasons why Ford sold Volvo
was because they needed to improve their financial situation.
An insight can be obtained by looking at the performance of the Volvo brand under the
ownership of Ford. Volvo had not shown profit since 2005. Which means that the sales
were lesser than expected and the brand image had diluted.
Another possible reason why Ford decided to sell Volvo was that it did not see it becoming
a part of its future strategy. After that period Ford decided to strengthen its core American
market and let go of the companies belonging to the Premiere Auto Group i.e. Ashton
Martin and Jaguar Land Rover.

Reasons why Geely bought Volvo

Mr. Li's business philosophy is also important in this context. As clearly mentioned in WSJ
article given in the readings His method in all his businesses over the years has been to
cut costs dramatically, increase production in a hurry and dominate an industry. When the
formula exhausts its usefulness, or when new competitors crowd in, it is time to move
along to the next thing. By 2007, Geely had begun to lose some momentum. Other
companies had begun to enter the same market space. The other problem was image.
Affluent and sophisticated buyers rejected Geely for the same reasons that their poorer
compatriots inland liked the brand: price. It's not a stretch to imagine that Mr. Li took this
as a sign that it was time for Geely to move on to the Next Big Thing. And then Volvo
happened to be for sale.
Li Shufu, is intent on becoming a serious global competitor by expanding into western
markets. And this acquisition could also pave the way for Geely to start marketing its own
products around the world. Geely has started to push its own Chinese car brands in Asia
and the Middle East, and entertains hopes of entering the American market over the next
few years.
Geely's plan includes using the Swedish nameplate to produce luxury brands in China -which passed the United States last year to become the world's biggest auto market -while maintaining its operations in Europe to supply the international market. This is
another way for Geely to expand its market in China.

Question 2. What is the strategy of Geely behind its acquisition of Volvo Cars?
Please look at the developments of both companies after 2010, especially in the
aspects of target markets/ global market expansion, manufacturing, technology
(R&D), brand management, product lines, etc.
The notable developments are as follows

The Board of Directors at Volvo Car Corporation has decided, pending approval of Chinese
authorities, to invest in a new plant in the city of Chengdu and continue investigations for
a plant also in Daqing.
Shanghai will serve as Volvo Car China headquarters and centre for product development,
design and sourcing. Among other priorities, Volvo Car China will also support Volvo
Corporation R&D in Sweden regarding the development of electric vehicles and hybrids.
The Geely Chairman added that Mr Stefan Jacoby will succeed Stephen Odell as Volvo Cars'
President and Chief Executive, taking up his role on 16th August, 2010.
Hans Oscarsson, deputy Chief Financial Officer, will become acting CFO of Volvo Cars,
replacing Stuart Rowley. Mr Odell and Mr Rowley are moving to leadership roles at Ford of
Europe.
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Volvo Car Group, the premium car maker, has reported an operating profit of SEK1,660m
for the first half of 2015, compared to SEK968m* for the same period in 2014.
Geely Holding, majority owner of Volvo Car Corporation (Volvo Cars) and Geely, will
establish a Research and Development Centre in Gothenburg, Sweden. The Centre will
develop a new modular architecture and set of components for future C-segment cars,
addressing the needs of both Volvo Cars and Geely

Based on the above developments and the understanding of this case, the strategy of Geely
can be summarised as follows

Using the Swedish nameplate to produce and sell luxury brands in China while maintaining
its operations in Europe to supply the international market. With time the cars produced in
China might be used to supply international markets other than the ones which are fulfilled
by the existing European sites.
The focus will be on strengthening the current position of Volvo in the existing markets. As
for Geely, any technological benefits possible from the acquisition and combined research
centre will be taken an implemented.
Geely also wants to push its own products around the world. It has started to enter
markets in Asia and the Middle East. Along with improving its vehicles by taking inputs
from Volvos manufacturing techniques.
In terms of operations: the brand of Volvo will not be diluted and the current
manufacturing sites in Europe will be kept as they are. But new manufacturing sites will be
set up to cater to the demand in China and other important markets.

Question 3-A. What challenges did Geely face in the M&A?

Labour Unions: Volvo's unions opposed the deal throughout much of the process over
concerns that their jobs would be moved to China. This was one of the major hurdles for
the success of this acquisition.
Cultural Resistance:
o Volvo, a Swedish brand with over 80 years history which rooted in Nordic culture.
Geely, a barely known brand which only has developed for 13 years will face a
struggle integrating the two corporate cultures. Swedish trade union are known as
the worlds toughest workers, whether Geely will be able to cope with this aspect
was expected to be a hurdle in its path.
o The very fact that organisations from different parts of the world have their unique
cultural characteristics become a source of fear for the employees. The concern is
that the change in the environment might not be conducive to the working style
that they have grown accustomed to.
Management Difference: Volvo has been a top brand in global automobile industry, But
Geely targeted in low end market. How to minimize the divergence in management
principle would be a challenge for Geely?
Branding Issues: Two kinds of issue tend to dominate: a total lack of awareness of a
Chinese brand may lead to fear of the unknown. A brand may be a household name in
China and alien elsewhere. Nobody in Sweden had heard of Geely before the companys
acquisition of Volvo. Even if the brand is known, the perception of Chinese products is
often as cheap or low quality. The negative perception of Made in China is still strong.
In the context of an M&A deal, customers of the target company often become concerned
that their product or service may be affected as a result of the acquisition. In some cases,
this results in significant loss of customers. The association between poor quality products
or services with Chinese companies can also create additional anxiety among employees
of the target company.
Political resistance: Chinas political roots and unprecedented growth has politicians across
the globe concerned about remaining competitive and protecting local industries against
workforce relocation. Chinese companies can sometimes be seen as innovative; this is
often countered with the argument that the advanced technology used is suspected to
have been stolen from foreign firms

Employee resistance: Drivers of this anxiety, as our study indicates, are beliefs that if a
Chinese company were to acquire their company, job security is less likely or at least
uncertain.

Question 3-B. What did Geely (Chairman Mr. Li) and Volvo Cars did to resolve these
barriers and challenges? What suggestions can you give to Geely (Chairman Mr. Li)
and Volvo Cars to achieve better integration and synergy?

Volvo will be Volvo and Geely will be Geely Strategy: This plan for keeping the original
identity of Volvo has succeeded in maintaining its brand image and soothing over the
differences with the labour unions.
For better integration a shared R&D facility has also been setup in Gothenburg. This caters
to the technological integration issues that might occur.
A separate Volvo plant in China: For strengthening the market expansion in China separate
plants have been planned to cater to the local demand and Geely is not involved. This
preserves the original brand positioning of both brands and helps Geely to reap the
benefits of this joint venture while targeting 2 different customer segments at the same
time.
The new management was selected from within Volvo this also helped to smooth the
transition. Appointing people new to Volvo would have been accepted by Volvo employees
easily and there could have been integration issues.
Geely Chairman Li Shufu personally visited Volvos headquarters and had open discussions
with representatives of the unions. Mr. Li also provided a written promise that he would not
lay-off employees and that he would ensure their welfare.
To provide further reassurance of Geelys capabilities, Mr. Li invited Swedish media and
Volvo union representatives to visit Geelys headquarters in China.

Suggestions: There are 3 main aspects which should be focused upon as mentioned below

Resolving power and people issues: People have some doubts and fears when even such
an acquisition takes place. These have to be addressed in the beginning by providing
assurances from the management to ensure credibility. Geely is already proceeding in the
right direction and should continue to do so in the future.
Monitoring the progress by using an integration team: An integration team comprising of
carefully selected local champions has to be built to cater to all types of integration issues
that the employees might face.
Keep momentum in the business progress of both companies: Nothing helps more than
improving performance. If this aspect of the business suffers then it gives rise to doubt
among the employees about their future and on the other hand an increase in
performance generates confidence. This is especially important in the initial phase of the
acquisition.

Question 4. How has Volvo Cars performed as a business since the M&A in 2010?

Brand positioning: Volvo is also seeking to return to its roots by emphasising the safety
features of its vehicles.
New product launch: Volvos launch of the XC90, a large SUV designed to compete with the
BMW X5 and Audi Q7, is being hailed by Volvo executives as part of a rebirth of the
company since it was sold by Ford to Chinas Geely in 2010.

Financial Performance:

Volvo has had its financial ups and downs since the Geely takeover. The global economy
has been unstable, which has been reflected in the performance of every global carmaker.
But their recent performance has been much better.
The operating margin has reduced due to some non-recurring expenses from the last few
years. And is quite low when compared to its competitors. Volvo is also considering jobs
cuts to improve this statistic.
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Figure 1: Volvo Net Sales

Figure 2: Volvo Operating Margin

The R&D expenditure has increased considerably over the years. This is another reason
for the low operating margin as shown above.
Self-Financing Ratio is defined as Cash-flow from operating activities divided by net
investments in fixed assets and leasing assets. This shows to what extent the additions
to fixed assets and investments are financed from funds internally generated by the
company. The initial decline can be explained by the increased investments (mainly
R&D & new plant set-up) made in order to revive Volvo and strengthen its market
position. The recent increase in the ratio is definitely a positive indication.

Figure 3: Research and development expenses

Financing ratio

Figure 4: Self

Overall Volvo's performance has been far better than analysts expected and Volvo now under
the ownership of Geely is considered to be moving in the right direction.
Current events:

Volvo posted a 71 per cent rise in first-half operating profit compared with 2015. This was
driven by sales of higher-margin products and the effects of a strong US dollar versus the
krone.
Volvo Cars posted a 4.6 per cent increase in retail sales for the month of July 2015, selling
38,128 cars globally. Europe as well as the US market were key drivers of growth. Both
regions reported significant increases based on sales of the new Volvo XC90.
Volvo Car UK is celebrating its best sales performance in 20 years, proof of the desirability
of its cars and demand for Volvos new in-house Drive-E powertrains with class leading
emissions and performance.
Volvo is forecasting a big profit rise this year as a new sport utility vehicle and rebounding
sales in Europe and the US offset a slowdown in China, the Swedish carmakers biggest
market.
But Volvos margins remain stubbornly low, partly by virtue of the sums it is investing in
new products and the production restructure. The operating margin was 2.2 per cent in the
first half up from 1.4 per cent last year but weak in comparison to the German premium
carmakers, which achieve operating margins of roughly 10 per cent.
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Question 5. Right after the M&A, the Geely side felt that the Volvo brand was "too
Scandinavian" (not global enough). Geely executives wanted flashy, eye-catching
cars for the Chinese market. Geely wanted Volvo to become a bit less Swedish in
the China market. In Sweden, because of a long dark winter, people like light
interiors. But in Chinese culture, dark colours are viewed as more luxurious. The
Volvo side wanted to stick to its understated roots, modern Scandinavian design,
and core values. If you are the executives of Geely or Volvo, how would you solve
these differences?
It has been observed that brands that cater their products according to the local requirements
have better chances of succeeding in comparison to 1 product for all strategy. Volvo will have
to find a way to create different variants for catering to both Scandinavian and Chinese
markets. In terms of operations they might have to adopt a mass customisation strategy. This
would mean that the cars will have identical parts under the hood but their designs would be
slightly different. This strategy of mass customisation might be expensive but in the long for
sustainable growth it just might be necessary.

References
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Devolving Volvo: Economic Times

China's Geely completes Volvo buy: Thompson Reuters
Volvo Annual Report 2014
Volvo upbeat as first-half profits rise 71%: Financial Times
Chinas Foreign Investment Analysis: Savonia University Of Applied Sciences