Geely Eyes Risky New Luxury Route 吉利欲走有风险的豪华车路线

By newsdoug on March 11, 2012

Some odd plans discussed by car maker Geely (HKEx: 175) last month with regards to its Sweden-based Volvo unit are starting to make a bit more sense now, following a new agreement that appears to mark a major shift in direction for Geely’s plans to tap domestic demand for luxury autos. The new deal announced late on Friday will see Geely use Volvo technology to develop a new car brand just for China, which an executive later said will be a luxury brand. (company announcement; English article) This deal comes just a month after Geely said it would form a joint venture with Volvo to form a new brand for the China market, a move that looked strange since 1) Geely already owned Volvo and thus a joint venture seemed unnecessary; and 2) both Geely and Volvo already enjoy their own strong brands, making the creation of a new brand also seem unnecessary. (previous post) When Geely purchased Volvo a couple of years ago, Geely founder Li Shufu detailed big plans to build 2 major new factories to build Volvos in China, aiming to position it as a luxury name despite Volvo’s decidedly middle-range reputation in the rest of the world. Volvo managers reportedly strongly opposed the luxury image, setting the stage for what looked like an internal battle for the soul of the Swedish car maker that had fallen on hard times when Geely purchased it from Ford (NYSE: F) in 2010. This latest deal announcement looks like the 2 sides have reached a compromise that will allow Geely to use Volvo’s superior technology to develop a new luxury brand, while leaving the actual Volvo name intact as a solid mid-tier brand. As a result of this compromise, I would expect the 2 big new factories now being built by Geely to focus equally on manufacturing both Volvos and the new luxury brand, and I wouldn’t be surprised if many of the new models from this new brand look very similar to or are even identical with Volvo models. In fact, US car makers have used this approach in the past, importing cars from Japanese companies and then selling them under their own brand. If this is the approach that Geely and Volvo will take, then it actually looks quite interesting, allowing the pair to develop a new luxury brand that they could potentially export to the rest of the world. Of course, the big risk is that developing a new brand is very costly and can take years, and right now Geely is buried very deeply in debt from the original Volvo deal and may not have the cash needed for such a campaign. Then there’s the very real chance that Chinese buyers may never accept this new luxury brand when it comes. At the end of the day, I like this initiative but would say it faces some major obstacles and probably stands just a 50 percent chance of success. If it fails, it could easily end up bankrupting both Geely and Volvo.

Bottom line: Geely’s new plan to co-develop a new luxury brand using Volvo technology stands a 50 percent chance of success, but could leave Geely bankrupt if it fails.

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