SINGAPORE (June 4): On Feb 23, Daimler announced in a filing that Zhejiang Geely Holding Group had acquired a 9.7% stake in Daimler for €7.3 billion ($11.4 billion). With this stake, Geely becomes the single-largest shareholder of Daimler, whose most famous marque is Mercedes-Benz. Geely also owns another well-known European brand — Volvo — and former British brand Lotus (see Chart 1).
In just 20 years, Geely has transformed from a little-known Chinese company to one of the most recognised names in the automobile sector. Geely is already one of the largest producers of electric vehicles (EVs), ahead of Tesla, and is snapping at the heels of the likes of Renault-Nissan-Mitsubishi and BYD Corp.
Geely became a global name when it acquired Volvo in 2014. In 2017, it took a 49.9% stake in Proton, Malaysia’s national car, and became a well-known brand in Malaysia. Geely injected RM170 million of cash into Proton and also RM290 million worth of the Geely Boyue SUV platform. The Boyue SUV is China’s top-selling sport utility vehicle and the platform will be used to build Proton’s first SUV in Malaysia.
Yet, what is Geely’s business model? How can it own a mass-produced value-for-money carmaker such as Proton as well as acquire a considerable stake in Daimler? On the surface, Geely and Mercedes could not be more different in their product line-up and brand representation.
Geely started off as a manufacturer of refrigerators. Subsequently, it diversified into motorcycle production. The transition to car production was a natural progression. Li Shufu, Geely’s founder, is largely credited with the brand’s rise and fame. Li personifies the Chinese dream. Born into a peasant family, he is on Forbes’ list of top 10 richest Chinese; and he is a leading proponent of EVs and China’s electric mobility push.
Geely-Volvo tie-up a success
In 2010, Volvo was owned by Ford Motor Co, which weathered the global financial crisis without taking financial assistance from TARP, or the Troubled Asset Relief Program, or declaring bankruptcy. Still, Ford had financial challenges that were exacerbated by the US’ unsuccessful car subsidy programme.
The US subsidy programme consisted of a subsidy of up to US$7,000 per car for US consumers to trade in their fuel-guzzling vehicles for more fuel-efficient ones. This backfired, as US carmakers were unable — at the time — to compete with the fuel-saving vehicles produced by Toyota Motor Corp and Honda Motor Co. This subsidy programme resulted in foreign marques gaining market share at the expense of Ford, General Motors Co and Chrysler.
So, Ford divested a few brands — Jaguar Land Rover to India’s Tata Group, and Volvo to Geely, which acquired it for US$1.8 billion.
Geely’s Li was the highest bidder for Volvo. At the time, industry experts had little faith in Volvo’s turnaround. For one thing, Geely’s sales were lower than Volvo’s. The market was also concerned about financing.
In a rather lengthy op-ed titled “Devolving Volvo”, The Economist expressed scepticism. “Although Volvo represents only a small part of Ford’s output, swallowing it will be a big challenge for Geely: [In 2009] it sold just 330,000 cars — most of them in China — which is about the same as Volvo sold worldwide. Unlike most big Chinese carmakers, Geely is privately owned and, in recent weeks there had been some doubts about whether it would get the financing needed for the purchase. However, those doubts were dispelled when Chinese state banks (and hence, it is assumed, the government in Beijing) said they would back it,” it stated in May 2010.
Other concerns were voiced. Most cross-border takeovers of carmakers have been disappointments. These include Daimler and Chrysler, BMW and Rover, and, of course, Jaguar and Land Rover.
On the other hand, under Geely, Volvo could gain access to China’s car market and EV market — potentially the largest in the world — market watchers suggested. And it has.
Fast forward to 2018 and IPO talk
Eight years on, the Geely-Volvo partnership has flourished. Both Geely and Volvo achieved record sales in 2017. Volvo sold half a million vehicles worldwide and registered 20% growth in China, which is also its biggest market.
The success is attributed to two things Li offered to Volvo and its Swedish management: full autonomy to preserve as well as develop their technical excellence, and access to Chinese financing.
Through extensive R&D, Volvo retained its brand image as the world’s safest car and enhanced its designs to put its cars on a par with those produced by the German trio, Audi, BMW and Mercedes-Benz.
Volvo’s XC90, its flagship SUV, holds the record for zero fatality rate in 16 years. Volvo CEO Håkan Samuelsson gave Geely credit for its success. He said in a Forbes interview that Geely essentially made the company more Swedish than before. Geely also helped contribute to lower manufacturing costs with Volvo’s Chinese plant, and Volvo has access to Chinese banks.
In terms of production quality, Robin Page, vice-president of Volvo design, has indicated that although the degree of automation in its China plant is less than that in German carmakers’ factories, Chinese labour laws have enabled adjustments to be refined, resulting in an improved, superior product.
The Geely-Volvo relationship is symbiotic as well. Geely has benefited from Volvo’s engineering expertise. As at end-FY2017, Geely’s car sales had more than tripled, compared with the pre-Volvo era.
In early May, news swirled that Geely might be seeking a listing for Volvo in Sweden and Hong Kong. Geely is said to have selected Citigroup, Goldman Sachs and Morgan Stanley to advise on a potential public listing that could value the Swedish carmaker between US$16 billion and US$30 billion. Whatever the valuation, it is way above the US$1.8 billion that Li paid. If Volvo is listed, the proceeds will be used to fund Geely’s transition to producing only EVs.
To put the IPO in perspective, Hong Kong-listed Geely has a market cap of around US$26 billion currently.
How does Geely stand against other Chinese automakers?
On the home front, Geely is the fastest-growing company among the top domestic car brands. While it trails SAIC Motor Corp in terms of market cap and vehicle sales, Geely has a higher profit margin at 11.8% compared with SAIC’s 4%; moreover, Geely’s sales are growing at a faster clip. Its five-year compound annual growth rate is 31%, while SAIC’s is 10.4%.
SAIC manufactures and sells Volkswagen and General Motor cars in China. Geely has a range of marques, both domestic and foreign, in its portfolio. These include Volvo, Proton and Lynk & Co. Moreover, Geely is still the biggest car seller in terms of domestic brands. In terms of financial leverage, Geely was in a net-cash position as at March 31. SAIC had a gearing of 17.6% as at March 31 and little overseas sales contribution (see Table 1).
Most Chinese brands still do not quite appeal to global consumers. However, Geely is a lot closer to the global market because of Volvo. Now, with Daimler, it could be increasingly visible on the global scene.
Leveraging the technology of its acquired brands, Geely has developed and launched its own high-end brand, Lynk & Co. It reportedly sold 6,000 units within three minutes of its launch and was dubbed the fastest-selling car in the world. In short, Geely’s competitive advantage is the ability to integrate foreign technology and design with local manufacturing expertise.
China’s car industry is fragmented. The top 10 makers have only 56% of market share. Although Geely is ranked fifth, with a 5.6% market share, it is the only Chinese company with a homegrown brand in the top five (see Table 2). SAIC and FAW Car Co sell Volkswagen and General Motors branded cars. They are part of joint ventures, as foreign carmakers are only allowed to own a 50% stake in a car venture in China.
In April, the National Development and Reform Commission announced that China will scrap foreign ownership limits on new energy vehicle (NEV) manufacturers in 2018, followed by commercial vehicle makers in 2020 and passenger vehicle companies in 2022. This could add uncertainty for local carmakers with substantial sales contribution from foreign marques, particularly if their foreign partners choose to part ways with them. Perhaps that is why Geely is planning to get Volvo listed.
The future of cars
The vehicle industry is undergoing two major phases: electrification and connectivity. China has already leapfrogged the US to become the largest EV market in the world, with strong government backing to curb air pollution (see Chart 2). The Chinese government provides subsidies of up to US$15,000 per EV. It is also implementing policies such as cutting production of pollution-heavy vehicles and building charging stations across its national highways.
China’s NEV production is set to grow at just under 30% annually to 2022, according to Autofacts. Market research done by McKinsey also indicates that the Chinese consumer has more than 75 EV choices, the highest in the world.
In terms of 2017 EV global sales volume, Geely ranked fourth, with only two EV models. This year, it plans to introduce two new EV models. The Renault-Nissan-Mitsubishi joint venture was ranked No 1 in terms of number of cars sold, owing to its best-selling Nissan Leaf model. The hatchback has sold 300,000 units since it was first marketed in 2011. In second place is BYD Corp, which has four EV models. BAIC Group is ranked third, with six EV models (see Chart 3).
Geely is working on its “Blue Geely Initiatives”, which target 90% of group sales from NEVs by 2020. The company will introduce hybrid vehicles and pure EVs to its line-up. Volvo has also pledged to sell only EVs from 2019.
In addition to electrification, consumers are increasingly demanding in-car connectivity. Industry analysts reckon software will be as critical as the car engine itself. To stay relevant, Geely’s models are already equipped with large-screen and in-vehicle internet systems, dubbed the “Geely Smart Eco System”.
Buyers of Boyue, Geely’s flagship SUV model, utilise an average monthly data of 960MB in their cars, showing increasing emphasis on smart travel and connectivity. Lynk & Co — branded as the first new mobility brand — features car-sharing facilities via phone apps.
The rest of the world is not standing still. BMW and Great Wall Motor Co have agreed on a joint production of the Mini’s first electric model in China. BYD Co, backed by Warren Buffett, has already sold more electric cars than Tesla. In the meantime, Tencent Holdings has acquired a 5% stake in Tesla, for US$1.8 billion. In addition, Tencent is in stiff competition with Alipay for mobile payments in China.
In the future, automakers who fail to embrace electrification and connectivity may be downgraded to generic OEM providers in the car value chain.
Will the future belong to the US tech giants? Google’s self-driving unit Waymo was road-tested for 352,545 miles (567,366km) in 2017. Apple and Microsoft have also invested more into autonomous driving than some car companies.
For now, Geely appears to be getting a good return on its investment. Whether its strategy of marrying European style, quality and brand with high-quality manufacturing and a large Chinese market is sufficient to keep it ahead remains to be seen. Volvo and Lynk & Co should enable Geely to compete head-on with foreign brands in China; they could even push Geely’s sales above SAIC’s.
Geely has travelled far in the past two decades, but the journey continues.
