Green light for Geely and Chinese autos

Sometimes, even the most intelligent mechanisms of globalization trip up. A machine’s lubrication can be hindered by sand to the point of blocking the motor of profits. This is what’s happening to the Chinese company, Geely, proprietor of the Swedish company, Volvo. Its recent assault on the US market seems to be its last, the umpteenth attempt for an astute and forward-looking organization, on paper. In 2007, when the Gothenburg company was surrendered to Ford, it seemed like a typical financial operation between two big companies from the industrialized world. In any case, three years later in the middle of an international crisis, Volvo was acquired (for $1.8 billion) by a dynamic and unknown company from an emerging country, Geely, based in the Chinese province of Zhejiang. It was the symbolic confirmation of an epochal passage. Since 2008, China has been the biggest car producer globally, a record that goes beyond statistics because the automobile industry has always been the synthesis of a country’s industrial supremacy. From that time, with almost 20 million autos produced each year, China has never returned the primacy to the US. The Volvo acquisition went further; it certified China’s economic force and confirmed the advantages a globalized world posed for businesses. In fact, Geely could combine certain advantageous assets: the productive capacities of Volvo’s skilled workers, its reputation design and safety, the low cost of production factors in China, the consequent possibilities for export, and the possibility of selling in an internal market without duties.

Geely has only announce now that it will attempt to export a medium-dimension Volvo produced in China toward the US, after years of disappointing income statements and especially because the US market has continued to purchase Volvos produced in European establishments. Evidently, consumers—notoriously demanding when it comes to expensive cars—have continued to favor the quality normally associated with traditional producer countries. The intention to ask Washington for the authorization to build a Geely manufacturing facility in the US was also announced. It would be the completion of an ingenious operation that has encountered many obstacles. Some can be credited to the Chinese company, others to the country’s production characteristics. The marriage of interests between Sweden and China was not painless. The attempt to mechanically transport competencies was hindered by financial and labor union tensions. The tradition and management remained essentially in Gothenburg while ownership was formally in Chinese hands. A grey area still exists in delineating the responsibility among top management. Furthermore, the Chinese government only authorized the construction of a plant in China after three years of investigations, suggesting that Geely’s private management disturbed the oligopoly of state-owned enterprises. Finally, the forms of Swedish models were altered. An “L” was added to the S60’s name because the wheelbase was extended to blandish Chinese customers. They need to exhibit their statuses with longer vehicles, leaving the driving to a chauffer and staying comfortably in the back seat. Illuminated hubcaps and more visible rims were added in contrast to the sobriety of traditional models. Competition in the Chinese luxury vehicle market has remained very high. To prove that it’s not disregarding quality, Geely continues to import more than half of the mechanical parts used in the manufacture of Volvos produced in Chengdu, compared to 20% imported by German competitors like BMW, Mercedes, and Audi. It’s a compromise between cost reductions and maintaining Geely’s image. The results have vacillated. Beyond the redefinition of quality, strong limits on the Chinese automobile industry exist in the background. National brands are laboring to affirm themselves, and the lion’s share of generalized growth comes from joint ventures with big foreign producers. The Chinese industry is still very fragmented. Large and small factories exist in practically all Chinese provinces due to protectionism, bureaucracy, and power games. Economies of scale are almost nonexistent; the creation of new models is still deficient, and competition with luxury brands is marginal. Essentially, China has yet to take leadership and acquire the ability to catch up with international leaders. For decades, the emphasis was placed on agreements to secure technology, the defense of profitable positions, and on quantitative growth. Before, both Japan and South Korea could be taken as examples. America’s evolution followed Tokyo’s path first and then Seoul’s. Their cars conquered markets with low costs but growing quantities to the point of becoming unbeatable in certain segments. China is still very far from these horizons: its cars are still low quality, it can’t affirm national brands, and it’s still beholden to big international players for technology. Geely’s foray in the US is late and uncertain, and in any case far from Volvo’s initial strategy. The path is littered with defects that have emerged in China, gifted to incessant production without the capacity to generate innovations that have characterized an industry like Ford and Toyota.