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."

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.

Ford Motor Nearing A Deal To Sell Volvo To Geely

Reuters

Ford Motor Co (F.N) said on Wednesday it is nearing an agreement to sell its Volvo Swedish cars unit to China's Geely in a deal that underscores China's arrival as a major force in the global auto industry.

The deal, which Ford said it expects to sign in the first quarter and close in the second quarter of 2010, would be the largest acquisition of an auto brand by a Chinese company.

It comes at the end of a year that has seen China overtake the United States as the world's biggest auto market in a reversal of fortune that would have been unthinkable only a few years ago.

Traditional Ford rival General Motors Co, meanwhile, is moving to abandon its own Swedish brand, Saab, after selling some assets to another Chinese automaker, Beijing Automotive Industry Holding Corp or BAIC, for $200 million.

Geely Automobile Holdings Ltd is China's largest private automaker. Its charismatic founder, Li Shu Fu, sometimes likened to Henry Ford, has shown global ambitions for Geely, which means "lucky" in Chinese.

As U.S. automakers have faced deepening distress over the past two years, Chinese automakers have had preliminary talks about buying a range of assets, but those deals have been small in scope and difficult to close until now.

SIGNAL TO CHINESE GOVERNMENT

Dearborn, Michigan-based Ford Motor said it had agreed on all substantial terms in a deal to sell Volvo to China's Zhejiang Geely Holding Group, parent of Geely Auto.

The unusual update on negotiations from Ford and Geely was seen as a signal to China's government, which must approve the sale. Such approval is needed for Geely to be able to borrow $1 billion or more from Chinese banks.

"While some work still remains to be completed before signing ... Ford and Geely anticipate that a definitive sale agreement will be signed in the first quarter of 2010," Ford said in a statement on Wednesday.

The value of the deal has been estimated at $1.8 billion -- far short of the $6.45 billion Ford paid for Volvo in 1999.

But for Ford, closing the sale would give it cash at a time when it is looking to repay debt faster, as the No. 2 U.S. automaker strives to return to profitability by 2011.

Should Ford close on Volvo's sale as expected, it will have succeeded in divesting all three of its luxury brands. It sold Jaguar and Land Rover to India's Tata Motors Ltd in 2008 and sold British-based Aston Martin in 2007.

Shares in Ford topped $10 on Wednesday for the first time since 2005. The stock has more than tripled since the start of the year as Ford has gained market share and steered clear of the government-directed bankruptcies that remade Chrysler Group LLC and GM.

In contrast with Ford, GM has struggled to unload brands in the downturn. A deal to sell Saturn collapsed, GM pulled plans to sell Opel, its sale of Hummer has been delayed, and Saab would shut without an eleventh-hour deal.

BAIC, China's fifth-largest automaker, bought rights to older Saab models from GM. It said on Wednesday that it would launch an aggressive campaign to develop its brand both at home and overseas based on the deal.

The rest of Saab faces closure unless a last-gasp offer by Dutch-listed luxury car maker Spyker Cars NV is accepted by GM, which said last week it would begin winding down the brand it has controlled for 20 years.

BAIC, which does not have its own car brand, said the acquisition of Saab tooling has cut four to five years from its vehicle development plans.

AGGRESSIVE GOAL

BAIC plans to immediately start integrating Saab technology into its vehicles, with an aim to sell 100,000 vehicles based on its own development in 2011.

Tan Kunyuan, an analyst at Changjiang Securities, said that target for BAIC would be aggressive. "It will take at least a year for the market to recognize the brand, and BAIC probably would need to modify the appearance of Saab cars to fit with Chinese market demand."

The Beijing-based automaker is in a production partnership with Daimler AG and Hyundai Motor Co, with most of their joint output for sale in the domestic market.

BAIC's Saab acquisition includes the intellectual property for Saab's 9-5 and 9-3 sedans and some equipment to make them.

The rise of China's auto market and the collapse in the U.S. market have both been more dramatic than analysts and industry planners had expected.

Auto sales in China, including commercial sales, have more than doubled since 2005, rising near 13 million units this year from 5.76 million just four years ago.

By contrast, the U.S. market has plunged from 16.95 million vehicles in 2005 to near 10.4 million this year.