China Goes West: The Globalization of Chinese Brands

In the following excerpt from Joel Backaler’s book “China Goes West: Everything You Need to Know About Chinese Companies Going Global,” the chairman of China’s largest domestic automaker discusses how his company bought out Sweden’s Volvo:

“We are like a poor farm boy pursuing a famous movie star,” said Li Shufu, Chairman of Chinese automaker Geely. Li was comparing Sweden’s Volvo to a famous movie star being pursued by his lesser-known Chinese firm, Geely, during its 2010 acquisition. But Li was not always a prominent business figure in the global automobile industry. He began his entrepreneurial endeavors in 1982 at age 19 when he bought a camera with his high school graduation money and began a small-scale photography business, taking photos of tourists for a small fee. This operation later evolved into a photography studio where he also sold handmade camera accessories. His real-world “postgraduate studies” in entrepreneurship continued in 1984 when he invested his earnings from the photography business to open a refrigerator parts company. At first he produced parts for other factories, but eventually he founded his own refrigerator company.

In 1993, on a visit to a state-owned motorcycle factory, Li saw a new opportunity. With the expertise in manufacturing he had gained through his refrigerator company, he told the owner that he would like to become their exclusive manufacturer of motorcycle tire rims. The factory boss was taken back by Li’s brazenness, and laughed that a state-owned factory of their size could never rely on such a small firm with no proven track record in the motorcycle industry. Similar to his earlier experience producing refrigerators, Li returned home determined not only to build motorcycle parts, but to build complete motorcycles. However, with no industry experience, his friends and family had little faith in his ability to succeed. It wasn’t until Li bought a small state-owned motorcycle company that he finally acquired the necessary technology to produce his motorcycles—and he did so quite successfully. What began as a career running a photography studio switched to managing a burgeoning refrigerator company, and then transformed into creating a motorcycle company—but Li’s most lucrative investment decision had yet to occur.

In the 1980s and 1990s, international automakers such as Volkswagen, General Motors, Honda and Nissan entered the Chinese auto market through government-brokered joint ventures and alliances in exchange for limited access to their valuable intellectual property. By the early 2000s their investment began to pay off and China’s automotive market was booming. By 2009, China surpassed the US as the world’s largest auto market. Previously, Chinese consumers considered buying a house their one major lifetime purchase, but car ownership was quickly becoming a newly desired “second essential.” Li Shufu saw a great opportunity in China’s auto industry, as most cars produced by international automakers were too expensive for typical Chinese consumers. He wanted to build cars that were more affordable for the average middle-class Chinese consumer. Always eager to take on a new challenge, Li famously said that a car is simply “four wheels and three sofas—how hard could it be to produce?” With that mindset, Li created Geely—which means “lucky” in Mandarin—and quickly built it into a successful Chinese car company based in Hangzhou, the capital of Zhejiang province. Li would not settle for Geely being an average Chinese car company. He wanted to acquire the world-class technology and achieve the brand recognition of an established global player, and he knew the way to do that was to acquire a premium automotive brand.

Ever the ambitious visionary, Li had his sights set on Volvo early. Through Li’s research, he had learned Volvo was never a strategic brand for its American owner, Ford Motors. This is because Ford has been and remains primarily a mass-market car company; as a premium brand, Volvo was out-of-reach for many of Ford’s target consumers. As early as 2002, Li began contacting Ford, to try to convince them to take his intention to buy Volvo seriously. He sent letters to Ford’s senior management and networked with them at auto shows, but without success. Li took his first trip to Ford’s headquarters in Detroit to visit its Chief Financial Officer in 2007, but he did not receive a warm welcome. Instead, Li was met with concerns about his ability to raise sufficient capital for a deal, and was reminded of the fact that Geely was a relative unknown in the West. At the time of his first visit Volvo was not nearly as troubled as it was about to become, but Li had his heart set on acquiring the Volvo brand from Ford at all costs.It wasn’t until the 2008 global financial crisis occurred that Ford’s leadership finally became receptive to Li’s proposition. Li began to rack up miles on overseas flights to Detroit and Gothenburg, Sweden, where Volvo was based. To appease Volvo’s senior management, Li committed early on to ensure Volvo’s headquarters stayed in Sweden and its leadership team remained intact. Geely’s acquisition of Volvo would keep 16,000 local employees at their jobs. Back in China, Li communicated with regulatory authorities to make them aware of the potential acquisition and procedural obstacles before they arose later on to impede the deal’s progress. Li effectively painted the picture of a win-win situation for all parties involved in the acquisition. In fact, many of Li’s fellow Chinese automotive executives believe that one of the greatest talents he brings to the table is public relations.

Li also wooed the Swedish leadership team of Volvo by emphasizing the vast untapped potential of the Chinese auto market. He argued that while the US, Germany, and France had all been major markets for Volvo in the past, they were highly competitive and increasingly saturated. China was not only the world’s largest auto market; it also had tremendous growth potential given China’s historical absence of car ownership. There were 62 million automobiles on China’s roads in 2009, which some projected would grow to reach 200 million by 2020. By selling China as the world’s largest automobile market, Li helped paint a path of opportunity for future growth, and a chance to make Volvo profitable in China. Li also underscored the potential for selling Volvo’s European premium brand to China’s growing population of luxury consumers. With Li offering the localized know-how to navigate the intricacies of doing business in China, Volvo’s management saw how they could benefit from the acquisition by Geely.

In August 2010, the farm boy from Hangzhou, China, officially acquired the movie star from Gothenburg, Sweden, for $1.5 billion. By 2013, China became Volvo’s most profitable market, where it produced 42,000 automobiles. Doug Speck, Senior Vice-President of Sales and Marketing for Volvo told the Financial Times in a 2013 interview: “We expect a significant bump-up from localization.” Management expects annual sales to increase to 200,000 by 2015 after the Chinese government officially recognizes Volvo as a local firm through Geely’s ownership in 2014. Li Shufu fulfilled his commitment to open new markets for Volvo, while acquiring a global luxury car brand to help boost Geely’s international image.

Excerpted from China Goes West: Everything You Need to Know About Chinese Companies Going Global by Joel Backaler. Copyright © 2014 by Joel Backaler. Excerpted by permission of Palgrave Macmillan, a divsion of St Martin’s Press LLC. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.

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About the Author

Joel Backaler ([email protected])  is author of China Goes West: Everything You Need to Know About Chinese Companies Going Global (Palgrave Macmillan, May 2014). He is an Associate Vice President at Frontier Strategy Group, a Forbes columnist, and a member of the National Committee on United States–China Relations. Follow him on Twitter @JoelBackaler. [/box]

(Photos by Palgrave Macmillan and China Goes West)