Burgess COMMENTARY

Peter Burgess

Automotive ... With the unveiling of Volvo's new small-vehicle platform, Geely and its Swedish subsidiary are set for rapid growth.

In 2010, Zhejiang Geely Holding bought Sweden's Volvo Cars, thus becoming the first Chinese car company to swallow an established international marque. After what now look like teething problems, Volvo's performance has rewarded Geely's remarkably hands-off approach towards it. In 2015 global sales rose by 8% to 503,127 units, a record for the Swedish brand and an acceleration compared with the previous year. That continued into 2016, with global sales up nearly 12% year on year in January-April.

Chart showing annual revenues and profits for Volvo Cars

With this burst of speed, Volvo's aim of global sales of 800,000 units now looks within reach. More ambitious is Volvo's goal of selling at least 1m electrified vehicles by 2025. Meanwhile, Geely itself had a stellar 2015, with global sales of 509,863 units, an increase of 22% year-on-year. This was 13% higher than its sales target of 450,000 units, and was particularly impressive given the sharp slowdown in its Chinese home market. The boost has encouraged Geely to set a new target of 600,000 units for 2016.

Nevertheless, with total sales of only a little over 1m a year, the Geely-Volvo group remains a minnow among global auto groups, which will present challenges as it tries to scale up. Fortunately the group's finances look increasingly strong. In 2015, Volvo reported a 19% increase in net sales, to SKr164bn (US$20bn). Net profit rose eightfold to SKr4.3bn. Geely Automobile Holdings saw revenue rise by 39% to Rmb30.1bn (US$4.6bn), while net profit increased by 58% to Rmb2.3bn. Emboldened, in May 2016 Zhejiang Geely Holding Group Co issued its first green bond, raising US$400m.

Market position

Geely, like compatriot Chery, is unusual in that it did not grow out of a Chinese state corporation. The company was built from scratch by entrepreneur Li Shu Fu, who founded it in 1986 as a refrigerator parts manufacturer. Unlike most other major Chinese automakers, it has no joint ventures with large international companies in China, and has thus had to rely on its independent car-making expertise.

Geely's first model, the Haoqing, was produced in 1996. Such early vehicles were low-price, and low-quality. Since then, however, quality has improved, and Geely has developed medium- and high-end vehicles under the Emgrand marque, while the main Geely brand remains focused on small compact hatchbacks and sedans.

In its domestic market, Geely is now the second-largest wholly Chinese marque, although sales fall well short of foreign brands such as General Motors (US) and Volkswagen (Germany). Geely has nearly 1,000 dealerships in China—a network that was recently streamlined in a costly restructuring. Geely has also tried to develop its international sales through organic growth, establishing hundreds of sales and service outlets overseas. These have undershot expectations, however, and the company has not tried to introduce its own brand into the European and North American markets.

International acquisition has proven a more successful strategy. Geely owns the UK's iconic London Taxi Co (formally Manganese-Bronze). Having taken an initial 20% stake in 2006, it began producing the famous TX4 London taxis at its Shanghai factory. In early 2013, when the UK firm sought bankruptcy protection, Geely took full ownership and restarted its Coventry plant; in March 2015 it was announced that Geely would invest £250m (US$393) to build an all-new factory there, with the intention of raising production from 2,000 cars a year to a remarkable 36,000, in the hope of exporting four-fifths of these.

In 2009, Geely acquired Australia's DSI, a leading supplier of automatic gearboxes to companies including Ford Motor Co (US) and SsangYong (Korea), for US$40m. However, by far Geely's biggest coup came in 2010, when it paid US$1.3bn in cash, plus a US$200m note, to buy Volvo from Ford. After a disappointing period during the early days of Geely ownership, Volvo is now going from strength to strength, helped partly by its penetration of the Chinese market, which accounts for 16% of sales.

Volvo's operations are now split mainly between Sweden and China. Sweden houses the head office and design centre, as well as a production plant and two component plants. China has two production factories and two component plants, as well as its own head office and design operation for the Chinese market. In addition, Volvo has a production plant in Belgium, an assembly facility in Malaysia, a design centre in the US, a research and development (R&D) base in Denmark, and sales operations in 37 countries worldwide. Altogether, Volvo now has 28,000 employees, while Geely has 18,000.

Corporate strategy

Closer co-operation between Geely and its Swedish subsidiary will be a central feature of the next phase of the company's development. In 2013, Geely decided to base its future around Volvo's core competences: safety, fuel economy and low emissions. In addition, Volvo is using Geely to gain greater access to the Chinese market, while Geely is using Volvo to underpin its long-term aim of expanding in international markets, including Europe.

Chart showing annual revenues and profits for Geely Automotive Holdings

In line with this, Geely has sanctioned more than US$10bn of investment in Volvo's engine development and next-generation safety technologies. Previously reliant on a mix of its own and Ford's engines, in 2014 Volvo launched its Drive-E engine family, incorporating petrol and diesel-powered versions. The family has since expanded to include plug-in hybrid electric technology. Collision avoidance and passenger protection technologies, meanwhile, are intended to underpin the brand's reputation for safety as well as prepare for the rollout of autonomous vehicles.

Volvo has also moved away from its partial reliance on Ford platforms. Helped by the establishment of a Volvo and Geely joint venture (JV) R&D centre in Europe in 2013, the company has been developing two in-house platforms that will enable it scale up production flexibly, while allowing for both conventional fuel and electric drivetrains.

The first, the SPA (scalable product architecture) platform, already underpins the 90 series and may well be used for future generations of the 60 series. Its smaller equivalent, the CMA (compact modular architecture) platform, was unveiled in May 2016 when Volvo displayed prototypes for the new XC40 and the second generation V40. Offering the same plug-and-play flexibility as the SPA, it will be used for both Volvo and Geely models, with the ability to switch components and drivetrains as needed.

The XC40, due for release in 2017, marks Volvo's entry into the premium compact SUV market, pitting the carmaker against the popular Audi Q3, BMW X1 and the Mercedes-Benz GLA. It will therefore sit below Volvo's best-selling model XC60, and its fastest-growing XC90. As smaller and cheaper vehicles, both it and the new V40, targeted for a 2019 launch, should underpin Volvo's efforts to scale up sales and move towards being a mass-premium carmaker.

Based on these platforms, Volvo intends to renew its entire product line-up over the next three years. In 2018 it will open its fifth production plant, in South Carolina, to underpin a sharp rise in sales in the Americas. In the Europe, Middle East and Africa (EMEA) region, which accounts for a third of global sales, it will hope to benefit from a continued market recovery as well as its own restored image. In Asia-Pacific, meanwhile, it will explore new opportunities in places like Sri Lanka, Myanmar and Vietnam, while deepening its presence in the Chinese market.

As for China's Geely, its push into international markets has been bumpy, not helped by the fact that it has focused on the slumping Russian market and other volatile emerging regions. After a booming year in 2013, exports have slipped back sharply, offset by good growth in Geely's home market. Nevertheless, the carmaker still has international ambitions and is upgrading its vehicles to rich-country standards. In mid-2015 its Emgrand X7 SUV gained five stars in the European NCAP safety tests. The CMA rollout should help with further improvements.

What to watch for

The unveiling of the XC40 and V40 concepts marked a step change in Volvo's strategy – not only does it move the carmaker into the mass-premium segment, but it also underlines hopes of leapfrogging rivals in terms of new technologies. The new models will be core to Volvo's low-emissions drive, particularly its ambitious electric car goals. While the XC40 will be powered by a hybrid drivetrain, the second generation V40 is being billed as a fully electric car with a range of 217 miles. Superconnected, the new models will also bolster Volvo's development of autonomous vehicles. In 2017, the carmaker hopes to get customers to use 100 self-driving cars on Sweden's roads, under a public-private initiative to test the technology in the real world.

These strategies are mirrored by those of Geely's itself. In November 2015 the carmaker had launched its first pure electric vehicle, the Emgrand EV, which is based on the best-selling Emgrand series. At the same time, the company launched its Blue Geely initiative, focused on new energy vehicles (NEVs). This includes a target that would see NEVs making up 90% of Geely's auto sales by 2020, of which 65% will be hybrids and 35% pure electric. Even the London Taxi Co is planning its first fully electric cab by 2017. Meanwhile, Geely's research will focus on hydrogen fuel cells and metal fuel cells, lightweight material technologies, and intelligent and connected systems.

Source: Industry Briefing