What China’s Volvo Deal Means

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Many people reading this post probably know little about the Chinese carmaker Geely. Perhaps you’ve never heard of the company at all. That’s not surprising, since it has almost zero presence in major car markets (outside of China). But that changed instantly on Sunday when Geely finalized its purchase of Volvo from Ford for $1.8 billion.

That acquisition is a big, big deal for Geely, and for China. It sends up a bright, flashing warning signal to the rest of the global auto industry that China is deadly serious about becoming a significant player in the international car market, and that its companies command the resources and guts to make that goal a reality. The deal also continues a recent pattern of aggressive carmakers in emerging economies taking advantage of their weakened American competitors to buy assets to upgrade and expand their operations. India’s Tata Motors snagged Jaguar and Land Rover from Ford in 2008, while China’s Beijing Auto agreed last year to purchase some technology from GM’s Saab unit. Such transactions represent what may be an important long-term trend in the global car industry – the shift of focus to fast-growth emerging economies, such as China and India, both in terms of production and sales. After all, China surpassed the U.S. as the world’s largest car market last year.

(See the worst cars of all time.)

However, I have some doubts about how much of a difference Geely’s Volvo grab will really make in China’s quest for a globally competitive car industry.

The reasons why Geely wanted Volvo make perfect sense. Geely has had ambitions to expand internationally for several years. (It was the first Chinese automaker to display a car at the Detroit auto show, in 2006.) Buying Volvo is a quick and easy way to do that. The investment of time, money and effort Geely would have required to create a Volvo-like operation overseas on its own would likely have greatly exceeded Volvo’s $1.8 billion price tag. Geely also gets its hands on a well-known brand name and oodles of technology and expertise it can absorb into its operation in China to help the firm compete there and elsewhere. Geely, in fact, is planning to expand Volvo’s output by manufacturing Volvos in China.

(See pictures of the 2010 Detroit Auto Show.)

On the other hand, Volvo-style deals don’t have a promising history. Companies in assorted emerging markets have for many years tried to use the acquisition shortcut to build a global presence, hoping to get a quick fix of brand power, technology and market share. But more often than not, things don’t turn out as planned. Usually the sellers of these operations want to ditch them for good reason – because they’re in some way troubled or dog-eared, and need some hefty restoration work to make them into viable, sustainable businesses. Then the emerging markets firms discover that they don’t possess the expertise to effectively run or benefit from their new, supposedly prized assets. An example of this pattern is the acquisition by Chinese PC giant Lenovo of IBM’s PC unit. Sure, Lenovo got a global sales network and top-notch engineering and management talent it would have otherwise taken years and years to develop independently. But it also inherited a ton of problems with the IBM unit – most notably, its feeble presence in the fast-growing consumer segment of the PC market – which Lenovo’s management team has yet to resolve, five years after the deal was completed.

I’m wondering if Geely is heading down this well-trod and unfortunate road. Volvo, which has factories in Sweden and Belgium, has been losing brand equity and money, and its cars need a major image overhaul. (My mom has driven Volvos for as long as I can remember. Need I say more?) And though Geely has been a big success within the China market, proving itself more than capable of competing against bigger, foreign players, the company’s managers have limited experience operating outside of China. They definitely haven’t managed a corps of Swedes before.

I’m not saying the Volvo deal will turn out badly. Geely will no doubt gain from it. But it’s not a game changer either. Cut-rate acquisitions produce cut-rate results. In my opinion, there are no easy shortcuts for up-and-coming carmakers, no easy way to swerve around the hard, gritty work of building a car people want to buy, and convincing consumers it’s reliable and safe. Volvo is an important step – but just a step – in what will likely be a long haul for Geely and China in the global auto industry.

See pictures of the best-selling cars in China.

See GM’s great hopes for 2010.