Case study: How Geely waited for Volvo

The story
Li Shufu, founder of Chinese automotive maker Geely Group, had long wanted his company to buy Volvo, the Swedish carmaker. Volvo would provide the innovation, branding and technology needed to propel Geely in particular and China’s auto industry in general, into global markets.

The financial crisis of 2008, and the big losses suffered by the US auto industry, gave Mr Li an opportunity that was, in his words, like “a world famous movie star marrying a peasant in China”.

The challenge
Apart from the difficulty of getting anyone at Volvo – or Geely – to take the proposal seriously, the deal would be complex, additionally so because it would be international.

In 2007, Mr Li sent a letter to the US headquarters of Ford, Volvo’s owner, that expressed its interest in purchasing Volvo. The letter was ignored.

Early in 2008, Mr Li met a senior Ford executive at the Detroit auto show. Ford was courteous but appeared unimpressed by Geely’s small size.

The initial strategy
Mr Li set up an acquisition team. He invited Rothschild, an investment bank with experience in acquisitions, to help with the deal.

Rothschild was assigned responsibility for the overall co-ordination and the valuation analysis of Volvo’s assets. The acquisition team also included: Freshfield, the law firm, and Deloitte Touche Tohmatsu, the accountants.

Freeman Shen, then vice-president of Fiat China, with experience in European and US companies, also joined the team.

The ongoing strategy. Geely deployed a number of tactics:
● Keep lines of communication open: During the Detroit auto show in 2009, Mr Li visited Ford again. This time, a very senior executive promised that Geely would be notified promptly if the US carmaker decided to sell Volvo. In April 2009, Ford opened its Volvo database to Geely, providing valuable insight for moving ahead with the deal.
In its liaisons, Geely emphasised that, although it was not a big company, it was based in China – potentially the world’s largest auto market. Geely’s lure for Volvo was a promise to help it win in China.
● Keep regulators informed: Geely had submitted a report to the National Development and Reform Commission, which oversees economic and social policymaking in China. It restated the Volvo deal’s importance for China’s auto industry and its confidence that it would be able to turn lossmaking Volvo into a profitable company. In China, perhaps more than anywhere else, it is vital to persuade regulators early on and keep them up to date.
● Make pledges about operations and culture: Geely reassured Ford and Volvo that production would stay in Sweden and Belgium; it promised to respect Volvo’s culture of safety and efficiency; it had to reassure that it could, as the maker of cheap cars, take on a premium brand.
● Keep an eye on intellectual property: Although the acquisition agreement between Geely and Volvo was more or less ready at the end of 2009, negotiations on IP rights lasted almost until the deal was signed in late July 2010.

The results
The marathon negotiation came to an end on August 2 2010, when Ford and Geely signed the final agreement. Geely acquired Volvo for $1.5bn.

The lessons
A strong negotiating team was important – this was apparent when untangling the IP rights between Ford, Volvo and Geely, for instance. In addition, the team’s experience helped convince Volvo and regulators in China and other countries that the deal was good for the car industry overall.

Taking a long view helps. Geely wanted to acquire Volvo long before Ford decided to sell, so it was ready in terms of planning and preparation when the right moment – the financial crisis of 2008 – came along.

Geely showed Volvo how it could gain the carmaker a foothold in China, while also respecting Volvo’s culture.

By informing the Chinese government of its plans early and swiftly, Geely established itself as the frontrunner in the regulators’ eyes.
- Financial Times, 19 Dec 2011