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Print Edition> Business
UPDATED: April 3, 2010 NO. 14 APRIL 8, 2010
Scandinavian Purchase
China's largest private carmaker Geely buys Volvo


VOLVO'S EVOLUTION: Geely will endeavor to improve Volvo's profit-making capability after the purchase. A Volvo car was on display at the Guangzhou Auto Show in November 2009 (ZHANG YANHUI) 

Ford Motor Co. is handing the keys of its Volvo car unit over to a new owner: Zhejiang Geely Holding Group Co. Ltd. The Chinese automaker inked a deal with Ford on March 28 purchasing the Volvo brand for $1.8 billion and allowing Geely to expand its foothold in Western markets.

The agreement—the biggest overseas purchase of China's auto industry—was signed by Geely Chairman Li Shufu, and Ford Chief Financial Officer Lewis Booth. Li Yizhong, Chinese Minister of Industry and Information Technology, and Swedish Minister for Enterprise and Energy Maud Olofsson were also present at the signing.

The government-backed agreement ends nearly two years of talks between Geely and Ford over Volvo. The landmark deal for the first time puts a Chinese company in charge of a major global car brand and will elevate Geely's profile onto the global auto market.

Li described the deal as "a milestone" for both Geely and Volvo and pledged to maintain Geely Automobile Holdings Ltd.—a subsidiary of Zhejiang Geely—and Volvo as separate subsidiaries at Volvo's headquarters in Gothenburg, Sweden.

The deal

Zhejiang Geely secured Volvo at a price far less than the $6.45 billion Ford paid for the brand in 1999. The Volvo deal will help free the No.2 U.S. automaker of its Volvo obligation and enable it to focus on its core Ford brand.

"We think it's a fair price for a good business," Booth told a news conference at the signing.

Under the deal, Ford will get $1.6 billion in cash and a $200 million note from Geely.

Li said the deal is worth the price because Ford and Volvo spent nearly $10 billion in research on vehicles fueled by new energies in the past decade.

"New energy-powered vehicles are the future of the global auto industry and it's expected that some day soon, Geely Auto will produce only electric hybrids," Li said.

Zhejiang Geely owns 51 percent of Hong Kong-listed Geely Automobile Holdings Ltd. The privately owned parent company made a bid for Volvo, instead of through the publicly traded Geely Auto, a financial move that would otherwise have increased the automaker's debt as it had already invested heavily to expand in the Chinese market.

Geely Auto has already announced an aggressive target of boosting its sales to 2 million vehicles by 2015 from last year's roughly 330,000 units—about the same as Volvo's global output.

China surpassed the United States to become the world's top auto market last year, with sales surging 46 percent to a record 13.6 million units. Domestic carmakers including Geely, BYD and Chery are keen on driving into Western markets, but have so far lacked the brand recognition to do so.

"What Geely lacks is not brand awareness but high brand reputation, and acquiring a well-known brand like Volvo will help elevate global recognition of its Geely products," said Li Yang, an observer of China's auto industry and an editor of the Auto Fan magazine, in an interview with the First Financial Daily newspaper.

"It could be the fastest way for a company like Geely Auto to move up from making affordable family cars for the masses to building respected cars for the affluent," Li said.

The deal is scheduled to close in the third quarter of this year, subject to regulatory approvals. In a statement, Geely said it had secured all the necessary financing to complete the deal, as well as "significant working capital facilities to fund Volvo's ongoing business."

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