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Volvo technology transfer a lifeline for Geely

04/21/2012 | 04:01am US/Eastern

The chairman of Zhejiang Geely Holding Group Co., which acquired Volvo (>> AB Volvo) in 2010, faces a grueling dilemma: Risk diluting the storied Swedish marque by sharing technology with Geely or let the Chinese brand face cutthroat competition alone.

The chairman of Zhejiang Geely Holding Group Co., which acquired Volvo (>> AB Volvo) in 2010, faces a grueling dilemma: Risk diluting the storied Swedish marque by sharing technology with Geely or let the Chinese brand face cutthroat competition alone.

Li Shufu, the chairman of both companies, says plans to develop a China-only "premium" co-brand will avoid direct competition with Volvo cars, but making it work will require a delicate balance.

"What I can say is we need to work hard to keep Geely from dying," the executive said in an interview inside his spacious but spartan office at the company's headquarters in Hangzhou.

"This is not a joke. It is a top priority for us to make sure Geely doesn't fail under those pressures," and meshing the company's mass-market cars with Volvo technology is likely to help that cause, he said.

Zhejiang Geely Holding Group is parent of Hong Kong-listed Geely Automobile Holdings Ltd. (>> Geely Automobile Hol)

Separately, Li said that Geely will likely help raise funds for a portion of the $11-billion investment the Swedish car brand plans to make over the next several years to upgrade products and technology and build up manufacturing capacity in China.

Li said most of the money needed to execute that strategic plan should be "self-financed" by Volvo. But "if necessary, Geely Holdings Group would step in to help."

Li said Geely needs Volvo technology to improve the quality of Geely cars because competition in China's auto market, now the world's biggest by sales volume, has become so fierce that Geely needs an edge.

As part of the envisioned technology sharing, Geely wants Volvo engineers to help improve Geely's engineering capabilities to "lay a solid foundation" to mature as an automaker.

Li's comments follow an announcement in early March by Geely and Volvo that the automakers agreed to discuss specific ways Geely can tap technology that the Swedish arm plans to phase out over the next couple of years.

The move could provide a lift to Geely's design abilities and help the two companies cut costs, but it also creates delicate questions about brand dilution for Volvo.

Despite such concerns, Li said Geely has no choice but to proceed, in part because it is required as part of a 50-50 joint venture that China's central government asked Geely and Volvo to set up in order to allow them to produce Volvo cars in China.

China's government policymakers regard Volvo as a foreign entity despite the fact Geely now wholly owns it and foreign automakers can manufacture cars in China only if they partner with local carmakers.

Still, in borrowing technology from Volvo, Li said Geely will ensure that cars Geely designs, whether for its existing brands or for the new China-only brand it plans to co-develop with Volvo, will not undermine Volvo's more upscale brand image.

"The premium brand will be positioned between Geely and Volvo," Li said. "We want to have advanced technology from Volvo to improve Geely cars, but we realize we need to keep Geely cars positioned as cars for the masses," he added.

"We're trying to find a delicate balancing point for that affordability and good technology."

The sensitivities highlight the difficulties Chinese companies have had in their push to acquire global brands and move up the manufacturing value chain.

Lenovo Group Ltd. struggled to maintain market share for years after its 2005 purchase of International Business Machine Corp.'s IBM personal-computer business. SAIC Motor Corp. purchased roughly half of South Korea's Ssangyong Motor Co. in 2004, but sold all of its stake in 2010 after Ssangyong's business slumped in the wake of the 2008 global financial crisis.

Geely and Volvo also need to proceed carefully with their technology sharing because Ford Motor Co., from which Geely acquired Volvo in 2010, has intellectual-property rights on some Volvo technology, people familiar with the matter have said.

Li said Volvo and Geely are still studying specific ways in which Geely could use Volvo technology to improve its cars and those for the new co-brand. One way, he said, may be to use Volvo's in-car air-filtering-and-control technology.

"Air pollution in China is quite severe," he said, "so we want to have that technology transferred to Geely to improve the in-car air quality of Geely cars to make it more like air you breathe in the forest."

Volvo technology that Geely is seeking includes vehicle underpinnings, engines, and safety technologies, according to Geely and Volvo executives who talked to Reuters.

As part of any envisioned technology sharing, Li said Geely is also trying to tap the talent of Peter Horbury. Horbury is a former Volvo design chief whom the Hangzhou-based automaker last year shifted from Volvo to work in China as a Geely vice president.

Li said Horbury will be responsible for the design of cars for Geely's existing brands, as well as those for the new brand. Geely harbors high expectations for him to bring "dramatic change" to the styling of Geely cars, Li said.

The technology-sharing agreement comes at a perfect time for Geely, Li said.

That's because competition in China for indigenous brands such as Geely has increased thanks to a decision by government policymakers to cancel generous incentives for small, affordable cars that Chinese carmakers specialize in making.

More competitive pressure from affordable cars made by foreign automakers and their joint venture partners makes it difficult for Geely and other Chinese indigenous brands to compete effectively, Li said.

On the funding for Volvo's investment plans, Li said the funds for developing new vehicle underpinnings and engines and for new products have "already been budgeted" and are likely to come from "cash flow" from Volvo's operations. With those new products, Volvo wants to double its global sales to 800,000 vehicles a year by 2020.

For Volvo's planned expansion of manufacturing capacity in China, however, Geely may help raise some of the necessary funds for the Swedish car company, Li said.

The Chinese executive declined to elaborate, but a person close to both companies said Geely is close to completing arrangements for a substantial loan from a Chinese bank for the China portion of Volvo's expansion plan.

Volvo's $11 billion strategic plan, announced in 2011, has been described by Volvo and Geely as an effort to turn the Swedish car maker into a global luxury brand, turn China into a major manufacturing base and market, and to raise annual global sales to 800,000 cars by 2020 -- more than double the 373,000 it sold in 2010.

The companies have said the targeted growth in volume would come chiefly from focusing the planned investment on China: building a new large-scale plant in the western Chinese city of Chengdu and possibly another in the north-eastern city of Daqing, developing larger and more luxurious vehicles, and revamping its lackluster retail network.

(Reporting by Beijing newsroom; Editing by Ken Wills and Matt Driskill)

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