When Chinese automaker Geely bought the Swedish car brand Volvo in 2010, the move seemed to validate the predictions of the prophets of easy globalization. In a deal worth $1.8 billion, the storied carmaker of Gothenburg was conveyed into the fold of Chinese industry. Famed for its style, safety, and the lifestyle it represented, Volvo had nevertheless been unable keep its niche and stave off falling sales numbers, and its presence in the Ford lineup was merely transitory.
And so, for the first time in history two years ago, a Chinese company purchased a major European automotive brand, and the motivations behind the acquisition are plain to see: Chinese companies have vast liquidity and a growing market that has been the largest producer and consumer in the word for the past several years, but the market is heavily fractionated and Chinese products lack the level of quality and standards of elegance and functionality offered by those of the industrialized west (and east).
The established carmakers, however, have fallen on hard times and have been made vulnerable. Sales figures are down, balance sheets are in the red, and acquisition by financially stronger Chinese companies seems like an immediate lifeline and a benefit for all parties. Luxury automobile sales in China top 800,000 units per year, 80% of which are sold by Sino-German joint ventures carrying the Audi, Mercedes, and BMW brand name, but last year Volvo only managed to take a 5% slice of the pie.
After the sale was completed, Volvo’s new owners presented a five-year plan that included two new factories and a new HQ in Shanghai, with the aim of capturing 20% of the Chinese luxury auto market by 2017. A new lineup was envisioned, with ten new models specifically for Chinese buyers. The idea was to join the Scandinavian reputation with the low production costs and the strength of the market in China, but the plan has been scaled back and currently Volvo is present only through a joint venture with Chang’An and Ford.
For the Swedish company, China remains an export market. Its ambitions have been curtailed, and CEO Stefan Jacoby’s words are revealing: “We are still considered a foreign brand in China.” Beijing has asked Volvo to form a joint venture, mandated by the laws governing the Chinese automotive industry. The requests will likely be more firm regarding the requirement for a China-only model and a model powered by alternative energy.
Volvo finds itself in a sort of catch-22. It is a Chinese company with a Swedish identity. To fulfill the driving purpose behind its acquisition, it will need to seduce Chinese drivers through a joint venture, and will be forced to adhere to the obligations set forth by Beijing. To do so, Volvo may find itself forming a bizarre joint venture with itself, by way of a Swedish company.
Volvo’s fortunes in China highlight the problems of a partnership that was touted as the prime example of free markets, showing instead that brand national identity can still make the difference, even in the face of globalization and the intense competition between Chinese automakers, mostly state-owned with the exception of Geely, and their lobbies.