Geely to Face Burden after Buying Volvo

On December 23 I wondered:" Is today the acquisition day for Chinese automakers?" After BAIC bought assets of Saab, reports said that Geely Automobile would finish its acquisition project of Volvo.

As usual Ford was the first one to release the news. This time Ford further identified the status of Geely Automobile. Ford announced that both sides had already reached a consensus on some of the details, which meant that all the major obstacles related to the sale of Volvo had been removed. It is expected that Geely will sign a trade agreement with Ford in the first quarter of 2010 and complete the acquisition in the second quarter.

If Geely would not retreat and Ford would not suddenly go back, the acquisition deal of Volvo will be definitely completed. A few months ago, Ford just announced that Geely Automobile Group would become a preferred bidder for Volvo. Although the deal has suffered from a toss in 2009, the success can be called as a happy event. However, I still have some concerns that whether Geely has the ability to absorb the acquisition project.

What is Volvo? Volvo is actually a money-losing automaker and the annual loss may total a dozen billion yuan. According to the date released by Ford Motor, Volvo's pre-tax loss in the second quarter of 2009 reached 231 million U.S. dollars. The loss totaled 120 million dollars over the same period in 2008. Why did Volvo suffer from such a huge loss? There are some causes including high labor cost and the bad performance of production and sales.

Can we solve those problems after Geely takes over Volvo? I think that will be a little difficult. Now Geely intends to produce Volvo cars in China. According to various sources, the plant may be built in the Beijing Economic-Technological Development Area in Yizhuang. However, will the new plant solve many problems?

While BAIC acquired the intellectual property rights from Saab, Geely bought some burden from Volvo. How will Geely deal with Volvo's factories and workers in Europe? Will Geely spend the fortune which was produced by low-cost labor to shoulder the huge loss of Volvo?

I think we should not focus on the issue of acquisition price. We have to pay more attention to Geely's ability of absorbing the acquisition deal. Geely has to tackle a quite tough task. Geely is faced with a digestive problem. Even if the purchase price is less than the 1.9 billion U.S. dollars, Geely still has to deal with the difficulties. The first glance at Volvo may be impressive. However, the reality may be tough.

Perhaps we can see the outcome of the acquisition deal two years later. If possible, Geely Automobile Group may try to give up. If Ford insists to sell Volvo, why not ask for a lower price? Geely should follow the practice in the deal of purchasing DSI-the Australian automatic transmission producer. Geely can turn the acquisition of staff and facility into optional trade. (Translator: Qinghua/ Hanxin)

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