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Does Geely’s Investment in Volvo Signal a Shift in China’s Auto Strategy?

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Geely Holding Group reported record sales and a doubling of yearly profit on March 22, 2017, thanks in part to their ramp up of Chinese Volvo production. Volvo, which Geely purchased from Ford in 2010, is the only major European or American automotive brand with full Chinese ownership. This ownership structure uniquely positions Geely to capitalize on exporting premium Chinese-made automobiles in the future.

A Uniquely Chinese Company

Volvo can take advantage of a low cost labor force more easily than other European or American automakers. The assets of Fisker, Saab, and Hummer were all purchased by Chinese firms during the recession but the brands have remained dormant. The Malaysian firm Proton has owned the British sports car maker Lotus since 1996 but Lotus remains a niche player with low annual sales. India’s Tata, which purchased Jaguar Land Rover in 2008, has begun producing a handful of Jaguar and Land Rover models in India but the majority of production remains in England. Other global brands have plants around the world but a national interest in keeping their home labor forces employed that dissuades them from shifting a significant portion of their production to a low-wage country like China. This contrasts with Volvo, which now jointly manufactures nearly every new model that is produced in Europe in China.

Geely stands to the sidelines in terms of active management decisions for Volvo but funds research and development in Sweden. Volvo, which has suffered from dated and slow selling models in recent years, is poised for a comeback with new models like the S90 sedan and XC90 SUV aimed squarely at the latest European and Asian competitors.

However, much of the financial benefit from Volvo’s return will not reach Sweden, as production facilities are shifting to China. Starting in 2016, Geely began exporting a Chinese-made S60 sedan to the US – the first mass produced Chinese vehicle to reach American soil. Although the Chinese S60 was introduced in the middle of the current generation’s model cycle and is an expensive, range-topping trim, its introduction is nonetheless significant. Geely is leading the way in testing foreigners’ willingness to accept a vehicle that has been designed and engineered in the West but manufactured in China.

Increased Chinese Production Protects Against Market Volatility

Geely’s mastery of skilled Chinese manufacturing will act as a hedge against a volatile Chinese automobile market, which has boomed for years but is at risk for a downturn thanks to easy access to credit. Other domestic threats come from sound public transportation options and abundant delivery services in increasingly overcrowded cities. But since Volvo does not have to contend with a European or American headquarters like other foreign brands with major Chinese production capacities, Geely can transfer Volvo’s vehicle production to China when economic conditions at home or abroad warrant it.

Cash-flush Chinese companies will likely try to copy Geely’s long-term investment strategy with Volvo: strongly align brands with their countries of origin but shift production to China. This move enables car companies to take advantage of China’s strong demand for foreign-branded vehicles and avoid hefty import duties in the near term. In the long term, the owners will also gain experience in producing high quality, premium automobiles that risk to destabilize the manufacturing prowess that has differentiated developed countries in places like Western Europe or North America for decades.

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