This was not meant to happen. Sweden, model nation of the pragmatic European left, home to a heavily socialized economic system and world-beating brands, was supposed to be the ideal that worked. The government did not let citizens fall into poverty, nor did its policies cripple domestic firms’ international competiveness. Indeed, many European politicians openly preferred the "Swedish model" to the Anglo-American one as the template for the new Europe.
But today, the famous "Swedish" brand – quality, reliability and design for a moderate price – is about to be tied to "Made in China," which to many consumers represents exactly the opposite.
Highest in the headlines is Volvo. Sweden’s flagship car brand was renowned more for its crash safety tests than its looks: "They’re boxy but they’re good," a famous fictional ad campaign for Volvo from the 1990 movie Crazy People, was rewritten in the popular imagination as "boxy but safe." Being known for safety doesn’t hurt, though, and boxy turbo-powered Volvo station wagons became the vehicle of choice for upper-middle-class suburban mothers in the West.
Volvo’s likely new owner is the parent of a former refrigerator parts manufacturer that until recently was producing sedans "with the crash rating of a unicycle," as one acerbic online auto blogger put it.
Zhejiang Geely Holding Group issued a joint statement with Ford Motor – Volvo’s current owner – on December 23 confirming that "all substantive details" of the sale had been settled. This came after a year of speculation, rumor and denials, yet neither Volvo nor Sweden ever had much choice in the matter.
Sweden’s car industry accounts for 15% of national exports and, with some 700 companies and suppliers, employs about 140,000 people in a country of just nine million. Reviving Volvo is crucial for the Swedish economy, said Klaus Paur, TNS China’s automotive director for North Asia.
Suitors for the company were limited to Geely and two investor consortiums. The Chinese company, at least, had an existing brand and distribution network, although the lack of more qualified buyers only added to the sting.
"If Volvo is dying like Saab is dying, it has an important political and psychological impact in Sweden," Paur said.
Indeed, it appears that Saab has already died: General Motors (GM) has decided not to accept any of the current bids for the brand, despite expressions of interest from Luxembourg-based Genii, Formula One mogul Bernie Ecclestone, Dutch luxury carmaker Spyker and a group of Swedish investors.
No one knows why GM decided to simultaneously begin winding down the brand while entertaining bids, but Paur believes that the company finally decided to kill Saab to stop the hemorrhage of revenues from ongoing operations.
Another Chinese company, Beijing Automotive Industry Corp (BAIC), has moved in to gather some of the debris created by the breakup of the brand. BAIC was a minority partner in a consortium led by Swedish sports car maker Koenigsegg that tried to buy Saab in its entirety. When talks broke down in November, BAIC agreed to purchase portions of Saab’s core technologies for deployment in the Chinese market. The firm has acquired the rights to three vehicle platforms – including the intellectual property for the 9-5 and 9-3 sedans – for US$200 million.
"I think for Beijing Automotive, its overall strategy was similar in the sense that it was seeing a high growth in the Chinese auto market, and wanted a partnership with an existing brand," said Eddie Chen, chief China representative for the Invest in Sweden Agency.
The deal is a compromise on many fronts. It will help BAIC build better cars, but it won’t provide them any of the cachet (such as it was) associated with the Saab brand. It will also help GM’s balance sheet, but it won’t do anything for Saab’s 3,400 Swedish employees.
The Swedish government, which estimated the net domestic employment impact of the closure at around 8,000 jobs, has already announced plans for a US$77 million relief package for the affected region in the southwest of the country.
Denial, anger, acceptance
When it comes to Volvo, therefore, while many Swedes are emotionally conflicted, the current attitude seems to be of unhappy acceptance. "Saab and Volvo have been destroyed by GM and Ford," wrote one poster on a Swedish news website. "Can the Chinese do any more damage?"
But there is much skepticism as to whether the young firm can turn around Volvo, which posted a US$1.5 billion loss in 2008. Despite China’s booming car market, the road ahead is strewn with daunting obstacles: Geely’s lack of global management experience and other shortcomings could make it difficult to digest the Swedish brand. This concern prompted significant political resistance to the deal in Sweden.
Even so, it appears that Geely at least negotiated well. Although the sale price won’t be disclosed until a definitive agreement has been reached – probably in the first quarter of 2010 – reports suggest it Geely will pay around US$2 billion for Volvo, far less than the US$6.45 billion Ford handed over when it bought the company in 1999. Geely is seeking at least US$1 billion in loans from Chinese banks to cover the cost of the acquisition. Bank of China, China Construction Bank and Export-Import Bank of China have already agreed to extend credit.
Paur of TNS puts Geely’s interest in Volvo in simple terms: It is all about getting access to international technology and international markets. Daniel Dai, vice president of international business at Geely, confirmed this, noting that the Volvo deal will allow much faster global expansion than would otherwise have been possible.
"If you want to be an international auto player, but do not have a significant sales network, it doesn’t work," Dai said. "Setting up a global network takes time and a lot of money, and it involves a lot of risk. Through this acquisition, we have a shortcut."
Dai is not the only optimist. Some see the deal as being of benefit to both companies, if they can pull it off. For one, China’s car market is alluring. Auto sales hit 13 million in 2009, up over 40% year-on-year, as China overtook the US to become the world’s largest car market for the first time. Geely netted a profit of US$82 million in the first six months, up 110% year-on-year.
If only Volvo had done so well. In 2009, the company sold just 22,405 cars in China – and management pitches this as a success. "We were very successful in China last year, and it is now the number-five market for Volvo," said Maria Bohlin, director of media relations at Volvo.
This is perhaps best seen as an indication of how badly Volvo was performing elsewhere than of its strength in China, where the likes of Volkswagen rule the luxury motor market. The hope is that Geely can use its local expertise to turn things around. "We are confident that we can help Volvo sell cars more here through better cost controls, using some of our advanced auto technology and through our better knowledge of Chinese auto culture," said Dai.
But is Geely taking too much of a risk? Having built its domestic reputation on bargain models like the Free Cruiser and Geely King Kong, the firm is now trying to enter the medium-to-high end of the market. The recently launched Shanghai Englon, Emgrand and Gleagle brands will require investment and precious management attention.
"They have to build these brands, which takes time and money, and now they’re acquiring Volvo," said Paur of TNS. "It is extremely ambitious."
Recognizing the management challenge, Geely has said it intends to retain Volvo’s current management structure, including an "independent management" at its Gothenburg headquarters. For what it’s worth, Ford has also said it will continue to "cooperate" with Volvo, although it has no plans to hold on to a stake in the Swedish company.
A smooth integration of the two organizations’ management structures could mean the difference between success and failure, according to John Bonnell, senior director of automotive consultant JD Power Asia Pacific Forecasting.
"I think it would behoove the Chinese to embrace the Swedish movement and build on their international experience," Bonnell said. "The fact that they’ve got distribution, markets and experience around the world is an asset that Geely would want to build on."
Nevertheless, integration poses challenges in the long term. Upper-level management is one thing, but Geely also has to deal with the rank-and-file in Europe. Fifteen thousand of Volvo’s 20,000 employees worldwide are based in Sweden and belong to Swedish trade unions.
Geely spokesman Tim Burt insists that the deal is also not expected to impact current production headcounts in Sweden or Belgium (the other major European manufacturing site). "The current manufacturing footprint will be preserved, augmented potentially by additional vehicle assembly in China," he said, repeating assurances given to labor representatives in both countries.
Many acquisitions are justified on the basis of cost savings and synergies, but on paper at least, Geely has appears to have committed to maintaining a loosely integrated yet very expensive operation.
Whether this commitment is ultimately honored or not, Geely has made no such promises to Volvo’s Swedish suppliers. "If Volvo and Saab are no longer operating, this clearly has a big impact on small and mid-sized local suppliers," Paur said. Any withdrawal of orders would have a minimal impact on the global auto parts industry, he added, but it would have a devastating effect on Sweden, given the scale of local sourcing.
Of course, none of this will matter much if Geely can resuscitate Volvo. But some analysts argue that the very association with Geely has severely weakened the Swedish brand’s image. JD Power’s Bonnell expects Volvo’s luxury European appeal to take a hit in both China and the West.
"I think any brand-conscious buyer who’s going to buy a European vehicle would hesitate," Bonnell said. "My friends who own a Volvo in China have said they would sell it. In their mind, the brand would hold less status, less face."