28 March 2010

Geely Inks Deal with Ford Motor for Volvo

The Wall Street Journal

Zhejiang Geely Holding Group signed a binding deal Sunday to buy Sweden's Volvo Cars from Ford Motor Co. for $1.8 billion, in a landmark deal for China's burgeoning car industry that also poses serious challenges for Geely.

Volvo spokesman Per-Ake Froberg confirmed that the agreement was signed between the two auto makers in Gothenburg.

Under the deal, Geely will pay a $200 million note and $1.6 million in cash for Ford's unprofitable Volvo unit. Ford expects the deal to complete in the third quarter, once regulatory matters have been settled.

The U.S. car maker will continue to cooperate with Volvo Cars in several areas after the sale has been completed in order to ensure a smooth transition, but won't retain any ownership in the Volvo Cars business. Ford will continue to supply Volvo Cars with, for differing periods, powertrains, stampings and other vehicle components, and Volvo will also continue to supply Ford with stampings and components for a time.

Geely Chairman Li Shufu said Volvo will retain its Swedish identity and strategic independence. Volvo's management team will continue to be based in Gothenburg. But the Chinese car maker wants Volvo to boost its output, and will use Geely's experience and distribution network in China to help it achieve that aim.

Ford has been trying to sell Volvo since late 2008 to focus its resources on managing its core Ford, Lincoln and Mercury brands. Geely, an independent auto maker that has struggled to upgrade its image in overseas markets, has long coveted a stronger foothold in Europe.

The deal makes Volvo one of the most prominent foreign brands to be purchased by China, and marks the first time a Chinese company has acquired the full operations of a major foreign auto maker.

It also is the biggest step so far in a broader push by China to create a handful of globally competitive auto makers out of an industry that today is largely fragmented. That effort has had mixed success: Beijing Automotive Industry Holding Co. reached an agreement in December to acquire certain assets of General Motors Co.'s Saab unit, but another Chinese company, Sichuan Tengzhong Heavy Industrial Machinery, last month abandoned a planned purchase of GM's Hummer unit after failing to gain Chinese government approval.

Chinese car makers are gaining strength thanks in part to a home market that has boomed as the rest of the world has sputtered. Passenger-vehicle sales in the country rose nearly 50% last year, with total vehicle sales exceeding 13 million, putting China ahead of the U.S. as the world's biggest auto market.

Geely plans to build a new Volvo plant in China capable of producing 300,000 vehicles a year as it looks to draw on China's market potential and inexpensive labor to raise sales and cut costs.

Geely believes Volvo has the potential to sell 200,000 cars a year in China. The company wants to use Volvo's manufacturing capacity fully in Europe to sell 600,000 vehicles there and in North America.

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