02 May 2010

Ford-Geely Deal Spells Out Tech Sharing

The Detroit News

Global automakers have been leery of deal-making with China's fledgling carmakers because of the Chinese history of pirating technology and designs, and in 2008, Ford Motor Co. was no exception.

The Dearborn automaker responded coolly that year, when Zhejiang Geely Holding Co. first wrote to Ford with an offer to buy its Swedish carmaker, Volvo.

Privately owned Geely had been making cars for only a decade and already had been sued for trademark infringement by Toyota Motor Corp.

But last month, after a year of talks, Ford and Geely signed a binding agreement for a groundbreaking $1.8 billion deal for Volvo that will serve as a major test of the Chinese auto industry's willingness to respect the rules of global business.

Prior to the Volvo deal, China's automotive acquisitions were limited to troubled companies and castoff assets that were headed for the scrap heap.

But now, Geely is vaulting ahead by acquiring a global carmaker with state-of-the-art technology and vehicle development, as well as other operations that are still deeply intertwined with Ford's.

According to people familiar with the yearlong negotiations, which took place mostly in London, drawing up the intellectual property agreements took up the largest amount of time.

"When they laid them out, they went from one end of a board room table to the other," said an adviser to Geely, who spoke on condition of anonymity.

In addition to clarifying who owned what technology, the agreements detailed the procedures, sanctions and penalties for any breaches.

"I'm very comfortable with the arrangements we have in place, and the arrangements we've made, if we have issues, to resolve them," said Lewis Booth, Ford's chief financial officer and the U.S. automaker's top negotiator.

Splitting up the technology

The accords give Volvo access to any technology that it needs from Ford to produce the vehicles in its business plan covering the next few years.

Volvo may share some of that technology with Geely, but is not allowed to share some of the exclusive Ford technology to which it has temporary access.

Geely will acquire all the technology that Volvo has developed -- primarily safety and environmental technology.

With the acquisition of Volvo, which is expected to close before October, Geely will obtain a research and development operation comprising 3,000 engineers -- about as many as Ford inherited when it bought Volvo in 1999.

Ford, meanwhile, retains access to technologies jointly developed with Volvo, according to people familiar with the accords.

In any industrial transaction of this size, technology agreements are bound to be complex.

But negotiators are particularly wary when dealing with companies from China, which has a poor record of protecting intellectual property, such as patents, copyrights and trademarks.

Although China joined the World Trade Organization in 2001, foreigners working there say the protection of intellectual property remains a concern.

"There's a well-articulated set of intellectual property guidelines and laws, but there hasn't been consistent enforcement of those laws," said Bill Russo, a Beijing-based consultant with Booz & Co.

A December AmCham/Booz survey of business people working for foreign companies in China found that China had made little progress in the past three years in protecting intellectual property.

"Rulings in favor of foreign companies in China are still rare," said Michael Dunne, president of Hong Kong investment and advisory firm Dunne & Co.

Toyota lost its case against Geely in 2003, after a Chinese court concluded that Geely's logo wouldn't be easily confused with Toyota's.

Attorneys with experience in China say it's difficult to win intellectual property suits because the rulings may be subjective.

Increasingly, companies such as Ford are reinforcing their claims by specifying sanctions or penalties incurred in any breach of intellectual property in the sales contract.

In such cases, the courts rule on the basis of contract law, said attorney Justina Zhang at TransAsia Lawyers in Beijing.

Power of a brand

From Geely's standpoint, Volvo's technology wasn't the main reason that Chairman Li Shufu pursued the deal, which was suggested to him by a banker at Rothschild & Sons in 2007.

An adviser to Li, a farmer's son who became one of China's first industrial tycoons, said Li believes Geely's technology will attain world-class standards within a decade.

But it will take at least twice as long, Li believes, to command similar prices on Chinese-branded vehicles. He was eager to obtain a strong brand as well as Volvo's distribution network.

Auto analysts say the Volvo acquisition will help Geely gain expertise in vehicle development -- an area where China's fledgling carmakers are all weak. Geely has only been making cars since 1998, while expertise in vehicle development is built over five-year product cycles.

"It's like you can go to medical school and be a straight-A student, but until you've been a doctor for 10 years, you're not going to be that good at it," Russo said.

But it won't take long for the Chinese to catch up.

"We probably had this discussion about Japan 40 or 50 years ago, and we probably had this discussion about Korea 10 to 20 years ago," Booth said.

"The world is accelerating, and China is accelerating very fast."

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