Ford Finalises Terms of Volvo Sale to Geely

Ford has settled what it describes as "substantial commercial terms" with Chinese carmaker Zhejiang Geely Holding Group Co. over the sale of its Swedish premium passenger car brand Volvo. With the commercial framework of the deal agreed the two companies can now work towards finalizing a binding commercial agreement, which Ford is expecting will be signed in the first quarter of 2010. However, this agreement is just another stage in a highly complex process. As we have seen this year with the failure of the Opel/Magna and Saab/Koenigsegg deals, until a final contract is signed nothing is assured due to the highly complex nature of these deals. According to the Wall Street Journal (WSJ) a Volvo spokesperson said concluding commercial terms was "just one step in the process" and that "there's still a long way to go."

One way in which the deal could be held up is the complex way it is being financed. Geely is planning to finance its US$2-billion bid for Volvo through a combination of cash, commercial loans and small investors, according to sources. It may take some time to agree and co-ordinate such a disparate grouping of funding channels and Geely also needs regulatory approval from the Chinese government from the deal, although this should prove a relative formality. However, the precise timescales for agreeing funding and regulatory clearance are unclear and past experience would suggest finalising the legal and commercial details of the deal could drag on. Ford is planning to retain links with Geely following the sale, although it will not retain an equity stake in the company. The nature of selling off vehicle platform technology and powertrains means that Ford and Geely will have to maintain close ties. This is likely to result in a joint purchasing strategy on some components and models and the legal and commercial administration of the Ford platform and powertrain technology contained in Volvo vehicles. The terms of the sale will represent a huge financial writedown for Ford, which acquired Volvo for US$6.5 million in 1999.

In previous statements Geely has said it would retain Volvo's current management as it gears up to revive the brand under its ownership. In November, a Geely source told The Wall Street Journal Geely had developed a turnaround plan that would aim to sell nearly one million vehicles a year, up sharply from about 400,000 vehicles Volvo sold each year in recent years.

Outlook and Implications

If the deal is completed for Geely to acquire the assets of Volvo it would signify perhaps the most important acquisition by a Chinese OEM of a foreign vehicle brand. Perhaps the most important issue of any sale of a vehicle company to a Chinese OEM is that of intellectual property ownership and administration. Geely released a statement in November which said that the two parties had come to an agreement over how it would be administered (see China: 30 November 2009: Geely Outlines Agreement with Ford over Intellectual Property).

Geely will be getting its hands on some advanced platform and powertrain technology and a relatively young and well respected model range, although it appears that all ownership rights will be retained by Volvo and subsequently Ford. The latter will be keen to retain full control over its IP as Volvo has access to some of the core components of Ford's global vehicle technology programme. For example, the new D2-segment S60 is a vital model for Volvo as it needs a competitive model in this hard-fought market segment to complete alongside the likes of the Volkswagen (VW) Passat and the BMW 3-Series. The model is based on the current Ford Mondeo, which is a state-of-the-art mid-sized car platform, while the current S40 and C30 share the same underpinnings as the current Ford Focus. It is probably likely that the deal will contain some kind of licensing element in which Geely will have to pay Ford for the use of these platforms, but they still represent vehicle technology far in advance of what most Chinese passenger car OEMs can boast.

The planned sale of Volvo is the final dismantling of the Premier Automotive Group (PAG) which was the brainchild of former Ford CEO Jac Nasser. His strategy was to bundle Ford's premium brands into a group which could generate substantial R&D cost savings and economies of scale, while acting as a platform to challenge the German premium OEMs. However, the disparate nature of these brands meant there was little in the way of practical savings to be made over and above them being controlled by the same management group which was led by former BMW executive Wolfgang Reitzle. In addition, some of Ford's plans for these brands simply did not come to strategic fruition. For example, Ford targeted sales of nearly one million units for Volvo, but the company has consistently struggled to exceed 400,000 units a year. The Volvo sale will follow the sales of Aston Martin to a consortium led by David Richards, while Jaguar Land Rover was sold to the Tata Group last year. This completes the strategy of current Ford chief executive Alan Mullaly who has been intent on streamlining the company to focus on promoting the Ford brand worldwide.

Geely has already stated that it will retain all of Volvo’s manufacturing and research facilities along with its dealership network and pre-existing agreements with labour unions, although this element of the deal depends on improvement in the global economic outlook and a corresponding improvement in Volvo sales (see Sweden: 20 November 2009: Geely Will Keep Volvo Production in Sweden). The automakers added that they have not set any specific timeline to conclude an agreement. However, despite this pledge it appears likely that Geely will look to build a new plant in its home city of Tianjin. Geely sources have also said that it plans to establish a Volvo research and development (R&D) centre in China to help Volvo speed up product development and cut R&D costs significantly. However, Geely must be careful to retain its traditional brand values, which are entwined with its identity as a Swedish carmaker, with safety and technology being a key component of its brand DNA. It remains to be seen whether Geely's projections of one million sales are realistic. IHS Global Insight does not see Volvo's global sales exceeding 500,000 units before 2017.