Geelys Acquisition of Volvo: Can Geely Compete in the Global Car Market - Case Study Example

Geely’s acquisition of Volvo: Can Geely compete in the global car market? Contents Contents 2 Introduction 3 Discussion 4 Advantages expected from the acquisition 4 The Geely Volvo Acquisition and Competitive Advantage of Geely in the global automobile market 5 Conclusion 10 References 11 Introduction There has been a rapid growth in Chinese automobile industry over the past two decades. In 1990s it used to produce less than 2 million vehicles while it in 2008 it produced about 9.5 million vehicles. Such massive increase in production volume has placed China in front in comparison to other established automobile industries like Germany, United States, France and Korea. One of the main factors for this growth of China is the production of passenger cars which is around 65 % of all vehicle production. In 2009, the sales achieved from January to October was 10 million vehicles while in 2010 it reached 13 million which is rise of 36 percent from the previous year inspite of the market downturn. With rise in disposable incomes along with low per capita ownership of private car which amounts to 4.5 % as compared to 40% in developed economies, it is quite evident that there are huge growth opportunities for China and hence will continue to be a fast growing automobile manufacturers in the world. Geely Holding Group is a privately owned Chinese automobile manufacturing company which is founded in 1986. The company is based on the province of Hangzhou in China. Their core competency lies in manufacturing of motorcycles, automobiles, and other components like transmissions and engines. Before the acquisition, main sales of Geely came from Chinese market with around 75 % of its sales coming from Chinese mainland in 2008 while the rest exported to other countries. This report will take a look at the acquisition of Volvo by Geely. Discussion Advantages expected from the acquisition The major break for Geely came in December 2008 when it heard the announcement of Ford in buying Volvo. Inspite of facing restructuring and cost – cutting measure Volvo still remained unprofitable in 2005. In 2008 Volvo suffered a loss of $ 1.45 billion. Geely saw this as an opportunity and decided to acquire Volvo. In 2010 Geely acquired Volvo which shook up the automobile industry. It was the first time when an unknown Chinese firm had fully acquired a premium European brand. During the same year, Gelly acquired Ford for $ 1.3 billion in cash and $ 200 million in notes (Perkowski, 2013, p. 1). The acquisition of Volvo made Geely closer to achieving the vision of selling two thirds of their cars in foreign countries since the acquisition gave them a valuable gateway for lucrative western markets like Europe and United States of America. As USA is one of the biggest markets for Volvo, it enabled Geely to use the established distribution and dealership network for selling their cars in America (Waldmeir, 2013, p. 1). For supporting growth outside of China, Geely planned for construction of more production facilities, as far as 15 by 2015. It designated Mexico as a strategic location for its ambition in America. Further the purchase of Volvo made Geely an international brand. Prior to it, Geely was not a world renowned brand and thus with Volvo under its wings, Geely used the brand equity of Volvo and tried to imprint the same positive conceptions which consumers had in Volvo cars (Knapman, 2010, p. 1). Geely also gained the technological know hoe and expertise from Volvo which provided an excellent platform for Geely to improve their product line-up and boost the image of their cars in both domestic and foreign market (Nicholson, 2010, p. 1). The Geely Volvo Acquisition and Competitive Advantage of Geely in the global automobile market The acquisition of Volvo by Geely would help the company to gain a high degree of competitive advantage over other automobile manufacturers in the Chinese market as well as the global automobile market. Geely was earlier hugely benefited by the joint venture formed with Manganese Bronze Holding and the acquisition of DSI Private Limited. These mergers and acquisitions were helpful in increasing the competency of the company in terms of capital operations and business negotiations. The international presence of Volvo and the high level of awareness associated with the brand are likely to improve the competitiveness of Geely among the global automobile manufacturers. The major motives behind the acquisition of Volvo by Geely are to improve the competitiveness on a global platform, accessing the superior technologies and manufacturing capabilities of Volvo, gaining hold over the industrialized markets, acquiring the knowledge resources and management resources that are unique resources of Volvo. The acquisition of the Swedish car manufacturing company Volvo by the Chinese automobile manufacturing company Geely is a critical international acquisition driven by the trend of globalization. The acquisition marks the increasing power of the Chinese companies in the global business world. This acquisition is the largest overseas acquisition done by a Chinese domestic company and it reflects the motive of China to expand into the global markets. The resource based theories, the global strategies used by the company and Porter’s five forces model are the main theories on which the competitive advantages of Geely can be evaluated. The acquisition would certainly help Geely to get the access to the major resources and capabilities of Volvo. The technologies used by Volvo are renowned across the world. Geely can successfully access the technological and production capabilities and resources existing in Volvo. It would have been difficult for Geely to replicate the high end technologies used by Volvo because of the high expenses associated with the process. The acquisition enabled Geely to use the safety designs and other robust technologies used by Volvo. The competency of Volvo in the distribution channels of industrial marketing can also be accessed by Geely. While Geely is a domestic company with its hold over the Chinese market, Volvo is famous for its hold over the international automobile market. The acquisition certainly would help Geely in gaining an international exposure and coverage which would help in improving the competitiveness of Geely on a global platform. Due to the acquisition Geely would be in a position to access the physical, managerial and organizational capabilities existing in Volvo. The global strategies of Geely in the internationalization process can be developed on the basis of the conceptual model which indicates three levels of competitive advantage for a company. These include national differences, scale of economies and scope of economies (Schilie and Yip, 2000, pp.343-354). The global strategies of a company are based on the responses of the company to the external drivers of international markets. Both the internal and external factors related to the success of a company must be studied in this respect. The global strategies of Geely are based on the scope of economies in which Geely focuses on improving its brand awareness and its capabilities on an international scale through the acquisition of Volvo. Geely expects to be one of the earliest movers into the Western markets among the Chinese companies and expects a large part of its sales and profits to be generated from this move. The internal factors like the organizational capabilities, management, international experience and structure have been the major drivers of the acquisition. The acquisition helped the company to improve its efficiency in these domains thereby creating increased competitive advantage for the business in the international automobile segment. The Porter’s five forces model helps to analyse the long term profitability on the global automobile industry and how Geely can influence the industry competition in a favourable way (Porter, 2008, p.144). The extent to which the Geely Volvo acquisition has helped Geely to gain competitive advantage in the global automobile market can be analysed with the help of Porter’s five forces model as explained below. (Source: Reiner, Demeter, Poiger and Jenei, 2008, p.918) Bargaining power of Buyers: The bargaining power of buyers was high for Geely in the global market. The customers have the option to choose from the offerings of a number of domestic and international players in the automobile segment. This is likely to decrease after the acquisition because Geely would emerge with new capabilities, product innovation and technologies which would enable it to produce better cars thereby ensuring an increased level of competitiveness (Danneels, 2002, p.168). The bargaining power of the consumers in the local as well as the global automobile industry would be lowered as a result of the acquisition. Bargaining power of suppliers: The main suppliers for the automobile manufacturing companies are the suppliers of spare parts for automobiles. The role of the suppliers in the automobile industry is variable and complex in nature (Victor and Weidong, 2000, pp.653-654). The bargaining power of the suppliers would also be lowered to some extent. This is because the acquisition will help Geely to access the established network of suppliers of Volvo. Volvo has an extended base of suppliers across the world which can be leveraged by Geely after the acquisition. Threat of new entrants: The threat of new entrants in the international automobile market is high with many domestic companies like Cherry, Changang, and Donfeng etc. looking for expansion into the international markets. The main reasons which can reduce the entry barriers of the automobile segment in China are the accelerating growth of demand for automobiles in the domestic as well as global markets, the high level of Foreign Direct Investments inflow into the Chinese economy and the opening up of the Chinese economy (Eitman, Stonehill and Moffett, 2010, p.210). The Geely Volvo acquisition will help Geely to have the advantages of an early mover into the international automobile market. This would help to ensure the competitive advantage of Geely in comparison to other domestic car manufactures. Threat of substitutes: The substitutes for the Geely Volvo acquisition company are the other automobile manufacturers which operate on an international platform. The threat of substitutes was high for Geely because of its relatively less experience in the international markets as well as due to the capabilities of the company in manufacturing high quality and high technology cars that would be able to compete with the international players in the automobile manufacturing industry. But the acquisition would enable the company to have improved access to technology and thus produce high end competitive cars thereby lowering the threat of substituted to a great extent (Child and Rodrigues, 2005, pp.381-410). Competitive rivalry: The global automobile industry is marked by intense competition among the major automobile manufacturers. The threat of competitive rivalry is the major external factor that influences the success of the acquisition and the success of Geely Auto in expanding its business in an international level. The acquisition may help Geely to mitigate the risks of competition to a certain level but the intensity of competition is likely to pose as major threat for Geely in its plans to compete on a global scale (Ghauri and Caterora, 2010, p.54). The Geely Volvo acquisition will help the company to gain sustainable competitive advantage if it can meet the basic challenges associated with the acquisition. These challenges may be in the integration of the cultural aspects, managerial aspects and diffusion of technology and innovation. Geely can benefit from the acquisition if it acknowledges the power of Volvo in the international markets and give some degree of independence to Volvo regarding the managerial and operational decisions. There would be basic cultural differences between Geely and Volvo because Geely is a Chinese local company whereas Volvo is an internationally acclaimed company. Geely should focus on ensuring innovation, brand management, production and distribution in the international countries. Although Geely is the acquiring company in the acquisition, Volvo, with its extensive international experience can help and guide Geely to improve its competiveness in the global market. Conclusion The Chinese domestic companies like Geely Auto are generally restrained in their experience of using the required skills like design, development, testing, building, distributing and marketing to manufacture and market automobiles that meet the international standards in terms of technology, design, safety and quality. Also, the experiences of the domestic companies with respect to the international markets are low. The acquisition of Volvo would help Geely to get extensive coverage and compete in the domestic and international markets. The acquisition certainly helps to strengthen the brand image of Geely in the global markets. The acquisition would also enable Geely to access the high end technologies and resources used by Volvo. This would help Geely to develop the brand in terms of technological and other capabilities, thereby making it equipped to have competitive advantage over other automobile manufacturing companies. The acquisition is expected to have major benefits on the worldwide sales and profitability of Geely. But Geely should focus on evaluating and finding solutions to the major challenges expected to evolve along with the acquisition. Geely can learn from Volvo regarding their international experience, product innovation and maintenance of quality in the production processes. Geely should focus on capitalizing upon the resources, capabilities and international experiences of Volvo to ensure that the acquisition helps to improve the competitiveness of the company in the global automobile manufacturing industry. References Child, J. & Rodrigues, S. B. 2005. The internationalization of Chinese firms: a case for theoretical extension? Management and Organization Review. Vol. 1(3), pp.381–410. Danneels, E. 2002. The Dynamics of Product Innovation and Firm Competences. Strategic Management Journal. Vol. 23(12), pp. 1095-1121. Eitman, D. K., Stonehill, A. I. & Moffett, M. H. 2010. Multinational Business Finance 12th Ed. New York: Pearson Education. Ghauri, P. & Caterora, P. 2010. International Marketing, Third edition. New York: McGraw-Hill Education. Knapman, C. 2010. Geely completes acquisition of Volvo. Available at: http://www.telegraph.co.uk/motoring/news/7922285/Geely-completes-acquisition-of-Volvo.html. [Accessed on: 17 April. 2014]. Nicholson, C.V. 2010. Chinese Carmaker Geely Completes Acquisition of Volvo From Ford. Available at: http://www.nytimes.com/2010/08/03/business/global/03volvo.html?_r=0. [Accessed on: 17 April. 2014]. Perkowski, J. 2013. The Global Auto Forum 2013: Let Volvo Be Volvo. Available at: http://www.forbes.com/sites/jackperkowski/2013/10/23/the-global-auto-forum-2013-let-volvo-be-volvo/. [Accessed on: 17 April. 2014]. Porter, M. E. 2008. On Competition. Boston: Harvard Business School Publishing. Reiner, G., Demeter, K., Poiger, M. & Jenei, I. 2008. The internationalization process in companies located at the borders of emerging and developed countries. International Journal of Operations & Production Management. Vol. 28(10), pp. 918-940. Schilie, E & Yip, G. 2000. Regional follows Global: Strategy mixes in the world automotive industry. European Management Journal. Vol. 18(4), pp.343-354. Victor, F. S. & Weidong, L. 2000. Restructuring and Spatial Change of Chinas Auto Industry under Institutional Reform and Globalization. Annals of the Association of American Geographers. Vol. 90(4), pp. 653-654. Waldmeir, P. 2013. Geely grapples with the Volvo gears. Available at: http://www.ft.com/intl/cms/s/0/bdb705c6-abcf-11e2-8c63-00144feabdc0.html#axzz2zADdOI5y. [Accessed on: 17 April. 2014]. Read More