It wasn’t long ago that Volvo Cars, the Gothenburg-based Swedish automaker, seemed like it was destined to the same fate as its junkyard-bound Swedish competitor, SAAB.
Volvo is thriving today. It delivered 500,000 vehicles in 2015, the most in all of its history, and its earnings tripled and operating margins doubled compared to the previous year.
The automaker’s turnaround is paying off for its Chinese parent Zhejiang Geely Holding Group, whose 2010 bargain-bin acquisition of Volvo was seen as a longshot at the time.
Volvo, a niche player in the auto industry, saw its sales crater during the global financial crisis. The mounting losses became a drag on parent Ford Motor Company. In 2009, General Motors and Chrysler both needed a bailout from the U.S. government, and Volvo was seen by Ford—itself on the verge of a liquidity crisis—as an underperforming asset to dispose of.
China’s Zhejiang Geely Holdings bought Volvo in 2010 for $1.5 billion in cash and debt from Ford, a coup for the Chinese company. The deal was the first 100 percent acquisition by any Chinese automaker of a foreign rival.
Lost amid more dramatic headlines during the financial crisis, Volvo’s sale was barely talked about by the Western press. With the entire auto industry suffering at the time, it was not obvious—or even probable—that Geely could save Volvo.
Some analysts even expected Geely to simply absorb Volvo’s technology and liquidate the rest.
Huge Gamble
When most Chinese firms look to acquire assets abroad, they typically go for an established player within an industry, a springboard from which to launch their products in a foreign market, or a quick win in a strategically important sector.
Geely’s Volvo acquisition was a rare breed for a Chinese company. At the time, the automobile industry was experiencing double-digit sales declines due to increasing gas prices and a global recession. General Motors shuttered Pontiac and Saturn and sold off SAAB. Both GM and Chrysler entered into government-sponsored bankruptcy reorganization. Given the backdrop, purchasing Volvo was a huge gamble with small probability of success.
Turning around Volvo required money, luck, and several doses of innovation.
Geely announced that it would run the company independently by providing capital and keeping its management team in Sweden. It committed $11 billion for Volvo to develop models, new technologies, and build assembly plants in Sweden and China.
With a fresh infusion of capital, Volvo became something of an innovator in a stodgy industry.
As a small player, Volvo has to do more with less. It became a pioneer in developing modular car platforms.
Volvo’s XC90 SUV—the first developed under Geely ownership—sits on what Volvo terms as its Scalable Product Architecture (SPA). Unlike most automakers that develop new underpinnings for each model, the modular platform allows Volvo to share most major components across different sized models to cut costs and increase efficiency. Volvo’s flexibility extends even to its electrical system, which allows the automaker to swap in newer technology more easily in the future.
“For a relatively small operation like Volvo, production-line flexibility is an especially large boon,” a report in Car and Driver said.
“The company notes that everything from the S60 on up can be produced on the same line. In theory, that means an SPA V60 T6 could roll off the line right after an S60 T6, which could be followed by an XC90 T8 plug-in.” That type of flexibility is rare in the automotive industry where changing the tooling is an expensive and time-consuming process.
In another unconventional decision, Volvo announced that it would only use 4-cylinder engines (or smaller, as a 3-cylinder engine is under development) going forward. That strategy is unheard of in the luxury automobile market where brawny but fuel-thirsty engines are a selling point. The Swedish automaker’s decision is rooted in its philosophy of keeping emissions low and striving for efficiency without sacrificing much power. Today, the XC90 SUV is the only luxury mid-size SUV to utilize a turbocharged 4-cylinder engine, which is usually reserved for small economy cars.
The XC90 was released last year with positive reviews. Critics extoled its fuel economy, exterior design, and quality of materials. That vehicle’s success is a main reason Volvo delivered more than 500,000 vehicles in the first time in its history. Operating profit rose to 6.6 billion kronor ($780 million) last year.
Last week, Volvo announced February sales increased 15 percent from 2015 to 34,551 deliveries. The United States and Europe were drivers for growth with 31 and 21 percent increases, respectively. Volvo expects 2016 to reach another milestone for vehicles sold, following the introduction of a new S90 luxury sedan.
Recent Expansion
The magnitude of Geely’s initial gamble on Volvo needs to be understood in the context of Geely’s own position in the Chinese auto market.
Geely is not a major automaker in China. It is the 17th most popular passenger car brand in China as of 2014, according to ChinaAutoWeb. With less than 500,000 vehicles sold annually, Geely accounts for less than 3 percent of the domestic market share. It’s dwarfed by state-owned behemoths SAIC Motor, FAW Group, Dongfeng, and Chang'an, which sell millions of vehicles per year.
Li Shufu founded the company in the 1986 to build refrigerators. It became an automaker in 1997 when Li wanted to produce a cheap car for the masses. Geely’s first model was an imitation of another Chinese domestic car produced by Tianjin Xiali, and was so uninspiring that no dealer would sell it.
Geely faces a disadvantage against most competitors. As it isn’t state-owned, Geely does not benefit from free technology transfer from joint ventures China forces foreign automakers to form in order to sell cars domestically.
The company received help from a partnership with South Korea’s Daewoo in the early 2000s, and has since embarked on a quest to acquire technology by buying firms directly. To date Geely’s acquisitions include Volvo, the Australian auto transmission supplier Drivetrain Systems International, and Emerald Automotive, an electric vehicle startup which will help develop a hybrid-electric powertrain for Geely.
Geely’s recent expansion also increases its debt burden. As of June 2015, Geely’s holding company held more than 100 billion yuan in debt on its balance sheet, with a debt-to-assets ratio of more than 70 percent, among the highest in the industry.
The chance that Volvo ends up as an expensive folly for Geely is now remote. Volvo plans seven new model launches by 2019, and expects to export small quantities of Chinese-built Volvo S90 sedan to the United States later this year.
If China-made Volvo cars can pass the test of quality, safety, and security, Geely has a chance to become the first Chinese automaker—and an unlikely one at that—to gain traction in the U.S. market.
