GEELY’s ACQUISITION of VOLVO

1. Introduction to the Case
This Case is about * The Automotive Industry of China * The acquisition of “Volvo” by “Geely” (a Chinese firm) * Geely is an automotive company in China, which was engaged in producing non-luxury cars for its local market in the country since 1998. * Li Shufu was the founder of the company, who was basically a poet and has a philosophical attitude towards life. * The time of the case is year 2010.

2. Situational Analysis
Li Shufu was born in China in 1963, the son of a small business owner. He started the business from making photographs of tourists, then he shifted to making refrigerators and refrigerator parts, and from there he diversified again to motorcycle production business. At the age of 35, in 1998, he started the business of producing cars. The name “Geely” came to him in a dream.

Geely was a privately owned firm, which was involved in producing non-luxury cars for its local market of China. For the acquisition of Volvo, Li obtained financing from state-owned banks and governments in China and this acquisition made Geely able to enter in the new market of luxury cars by following a “related diversification” strategy.

Now Geely is heading towards lowering the costs and making Volvo more profitable in the industry and following a growth strategy in its business

3. DEEP LIST Analysis i. Demographics
Volvo was a Swedish company; Geely was planning to produce luxury cars at Volvo plants and offering these cars to local Chinese, who desire to drive these luxury cars. This strategy enabled the Geely to target a new market segment in the country. ii. Ecological
Producing and providing good quality luxury cars to the society for its use. Success of this acquisition settled a good example for potential foreign investers.

iii. Economical
There was great potential in the Chinese markets for luxury cars, as last year of 2009 shows that more than 7 million luxury cars were produced in the country and yet the vehicle penetration was much less than 50 vehicles per 1000 people, compared with 750 vehicles per 1000 people in other G8 nations. Analysts pointed to very high profit margins in China in the luxury car market, which both BMW and Daimler enjoyed as a result of their new sales success in China. In the 1st quarter of 2010, BMW sales in China more than doubled compared with the first quarter of 2009.

iv. Political
Government of China was determined to develop an automotive industry in the country and was providing every type of assistant to the government-owned firms for the creation of joint ventures in this regard. Government was also encouraging private investors to invest in this field. Although some barriers were established by Swedish government but those were also not so difficult to follow.

v. Legal
There were no legal hurdles, established by the government or other agencies, found in the environment. So, it was very easy to commence an automotive business in the country. vi. Informational
It helped Geely to get the knowledge about an internationally established business of Volvo and its different channels.

vii. Social
These luxury cars will help Geely in changing the lifestyles of the people of China. Local production of parts that will be used in the assembly process of these cars at Volvo plant will also provide employment to local people.

viii. Technological
This acquisition will help Geely to transfer the luxury car technology to Chinese nation, which also will include the research and development work by Volvo in this field. By producing parts of these cars at local level will also help to make local people familiar with the latest technologies of luxury car manufacturing.

4. Key Trends in the Environment
Overall environment for manufacturing luxury cars for Chinese market was remarkably ideal, as the government of China was fully determined to ensure the adoption of latest technologies in its automotive industry. The government was taking all the necessary measures in this regard. There was also a huge potential in the market to absorb these luxury cars enormously. Network channels of Volvo were already established and the production costs could also be lowered by making parts in China which ultimately cause to maximize the profit margins.

5. Industry Analysis (5-Forces Model)
To understand the competitive environment of Geely, we compared different characteristics of the company with its industry characteristics on a “5-forces rating scale” determined by Michael E. Porter, which is as follows:

1-Bargaining Power of Buyer. Determinants | Defining Question | Assess the power of Buyers Circle one of the following.1 = low, 5 = high, or N/A if it doesn’t apply to your industry. | Concentration | Are buyer fragmented or highly concentrated ( i.e. do a few monopolize the market?) If they are few and concentrated, then buyer bargaining power is typically high. | 1 2 3 4 5 N/A | Product Cost versus Total Purchases | Does your product buyer’s purchase represent a significant fraction of the buyer’s cost? If so, buyer bargaining power is typically high. | 1 2 3 4 5 N/A | Product Differentiation | Is the buyers product or service a commodity? Is there branding critical to success? Is there any actual versus a perceived difference? If the product are standard or undifferentiated, buyers typically have high bargaining power | 1 2 3 4 5 N/A | Switching Costs | Are Switching cost low or high? If buyers face few switching costs, their bargaining power is typically high. | 1 2 3 4 5 N/A | Profits | Do buyers earn low profits? If so they are typically more likely to bargain hard | 1 2 3 4 5 N/A | Backward Integration | Can they make what you make themselves? Is there a threat of backward integration? If so the threat is typically high | 1 2 3 4 5 N/A | Impact on Quality/Performance | Is the product you offer important to the quality of the buyer’s product or services? If not buyer power is typically high | 1 2 3 4 5 N/A | Buyers Information | Does the buyer have complete information on the product he may purchase? If so buyer power is typically high | 1 2 3 4 5 N/A |

Result: __as the automotive industry of China is at its growth stage and is newly established, specifically for luxury cars, so, the buyer doesn’t have enough knowledge about the physical product and they also contain a strong power to bargain. This show, the companies in the business can maximize their profit margins significantly in this scenario.
2-Bargaining power of suppliers. Determinants | Defining Question | Assess the power of Buyers Circle one of the following.1 = low, 5 = high, or N/A if it doesn’t apply to your industry. | Concentration | Are you supplier are fragmented or highly concentrated? (do a few monopolize the market)? If an industry is dominated by a few companies, the suppliers are typically powerful. | 1 2 3 4 5 N/A | Presences of Substitute inputs | Are there any substitutes for your supplier products? If not suppliers are typically powerful. | 1 2 3 4 5 N/A | Importance Relative to Customer. | Is your industry an important customer the supplier group? If not suppliers are typically powerful | 1 2 3 4 5 N/A | Impact on Quality/Performance | Is your supplier product essential to the quality or performance of your business? If so suppliers are typically powerful | 1 2 3 4 5 N/A | Product Differentiation | Is the suppliers product or service a commodity? Is branding critical for success? Is there an actual versus a perceived difference? Suppliers with differentiated products typically have more bargaining power then suppliers selling commodities. | 1 2 3 4 5 N/A | Switching Costs | How costly is it for you to switch from suppliers product? If switching costs are high, suppliers are typically more powerful. | 1 2 3 4 5 N/A | Forward Integration | Can the supplier produce the product you make? Is there a threat of forward integration? If so, suppliers are typically powerful | 1 2 3 4 5 N/A |

Result: ___as there is not information available in the case, so we can’t rate our suppliers here.
3-Intensity of Rivalry Determinants | Defining Question | Assess the power of Buyers, Circle one of the following.1 = low, 5 = high, or N/A if it doesn’t apply to your industry. | Industry growth | How slowly or quickly is the industry growing? If it is a slow growth industry, there is likely to be more intense fights among rivals for market share. | 1 2 3 4 5 N/A | Fixed Cost | Does your business have a high fixed cost? If so, rivals will typically be tempted to cut prices to ensure sales, thus posing a significant threat | 1 2 3 4 5 N/A | Intermittent Overcapacity | How frequently is there a problem of excess capacity in your industry? Are there periods when there is excess capacity? Overcapacity often leads to price cutting. If so, there is typically a threat. | 1 2 3 4 5 N/A | Product Differentiation | Is your product or service a commodity? Typically the closer the product is to being a commodity the fiercer the intensity of rivalry. | 1 2 3 4 5 N/A | Brand Identity | Is branding critical for your Rival’s success? Is there actual vs. perceived difference? Brand identification by buyer reduces the threat of rivals. | 1 2 3 4 5 N/A | Switching Costs | How costly is it for your buyer to switch between providers? Low switching costs typically increase rivalry. When a customer can freely switch from one product o another, companies must struggle to capture and retain customers. | 1 2 3 4 5 N/A | Concentration and balance | Are there a large number of firms of equal size and power, all chasing after the same customer? If so rivalry is typically intense | 1 2 3 4 5 N/A | Diversity of competitors | Are there competitors with different strategies and frame of reference? When competitors are diverse it is more difficult to establish the rules of game, so the threat from competitors is greater. | 1 2 3 4 5 N/A | Corporate Stakes | How high are the rival’s corporate stakes? What do rivals stand to lose (e.g. profits, decision-making power)? Strategic stakes are high when several firms in an industry take great risks to expand, diversify and gain market position. The intensity and volatility of the rivalry increases when firms select alternative strategies that may sacrifice short-term profitability. | 1 2 3 4 5 N/A | Exit Barriers | Are exit barriers low or high? High exit barriers make it costly to abandon a product. E.g. when an organization has specialized assets that cannot be easily sold off. | 1 2 3 4 5 N/A |

Result: __there is intense competition found in the industry because there are some other giant size companies (e-g- Mercedes, BMW, Daimler, etc) are also offering their luxury cars to the market.
4-Threat of New Entrants. Determinants | Defining Question | Assess the power of Buyers. Circle one of the following.1 = low, 5 = high, or N/A if it doesn’t apply to your industry. | Economies of Scale and experience | Does successful entry require that companies have significant economies of scale or experience? Barriers to entry are typically high when an aspiring company must cut costs in order to compete in a large-scale and/or experienced market. | 1 2 3 4 5 N/A | Product Differentiation | Do new entrants need to differentiate by spending heavily on advertising, customer services or product differences to overcome existing customer loyalty? Product differentiation is typically a barrier to entry. | 1 2 3 4 5 N/A | Brand Identity | Do new companies need to spend heavily on brand identification to gain customers loyalty? Brand identification is typically a barrier to entry | 1 2 3 4 5 N/A | Switching Costs | Does the buyer have to pay to switch from one supplier’s product to another? High switching costs are typically a barrier to entry. | 1 2 3 4 5 N/A | Capital Required | Does the new company need to invest large financial resources (relative to market size) in order to compete? Huge capital requirements are typically a barrier to entry | 1 2 3 4 5 N/A | Access to Distribution | Do the new comers have access to distribution channel for product or services? Difficult access can typically be a high barrier to entry. | 1 2 3 4 5 N/A | Cost advantage | Established companies have cost advantages over new rivals because they may have already obtained proprietary product technology, access to raw materials, favorable locations and government subsidies. In addition, established company may have passed a learning or experience curve. Such costs advantages are typically a barrier to entry for a new entrant. | 1 2 3 4 5 N/A | Government policies | Government policies, such as antitrust regulations, can help to preserve or limit competition. Such policies can typically create a barrier to entry | 1 2 3 4 5 N/A | Expected Retaliation | New entrants may decide not to enter a new market if existing firms are likely to retaliate. Established firms may have a history of retaliating, resources to fight back, a strong commitment to the industry, and illiquid assets employed in the industry. Also, if the industry is growing slowly, they may retaliate against new players who would threaten sales growth. | 1 2 3 4 5 N/A |
Result: __according to the information given in the case, government is encouraging the new entrants and customers are welcoming to the new producers of the luxury cars.

5-Threat of Substitution Determinants | Defining Question | Assess the power of BuyersCircle one of the following.1 = low, 5 = high, or N/A if it doesn’t apply to your industry. | Price performance | Does the substitute offer a better price or performance? A substitute product or service is a threat to competition when it offers a higher performance at a given price or the same performance at a lower price. | 1 2 3 4 5 N/A | Switching Cost | Is it costly for buyer to switch to the substitute product? When buyers must pay more to switch to a substitute the threat of substitutes is low. | 1 2 3 4 5 N/A |

Result: __the information given in the case shows that the other brands (luxury cars) are expensive than Volvo vehicles, so, switching to substitute is low. 6. Identification of Key Opportunities & Threats a. Opportunities * Technology transfer * Improvement in Geely’s current operations * Entering in luxury car business (new market) * Potential in the market * Selling current brands to the world through Volvo dealership * Opening new plants in China * China’s takeover of Western high-tech firms through foreign direct investment b. Threats * Ford’s failure to run Volvo successfully * Greater intensity of competition * Imitation of technology * Reduction in production volume at Swedish plant * Quality of Chinese production can harm also the image of Volvo * Li’s extremely optimistic approach c. EFE Matrix Sr. | OPPORTUNITIES | Weight | Rating | Weighted Score | 1 | Technology transfer | .15 | 4 | .60 | 2 | Improvement in Geely’s current operations | .10 | 2 | .20 | 3 | Entering in luxury car business (new market) | .10 | 4 | .40 | 4 | Potential in the market | .10 | 4 | .40 | 5 | Selling current brands to the world through Volvo dealership | .05 | 2 | .10 | 6 | Opening new plants in China | .05 | 3 | .15 | 7 | China’s takeover of Western high-tech firms through foreign direct investment | .05 | 1 | .05 | | THREATS | | | | 1 | Ford’s failure to run Volvo successfully | .10 | 2 | .20 | 2 | Greater intensity of competition | .10 | 1 | .10 | 3 | Imitation of technology | .05 | 1 | .05 | 4 | Reduction in production volume at Swedish plant | .05 | 2 | .10 | 5 | Quality of Chinese production can harm also the image of Volvo | .05 | 1 | .05 | | Li’s extremely optimistic approach | .05 | 1 | .05 | | | 1.00 | | 2.45 |

This matrix shows that Geely is currently below the average of 2.5.

7. Strategic Intent
Geely’s main objective was to make the Volvo profitable and this approach was taken by them as a “challenge”. As Li was quoted as referring to Volvo as a “Tiger” in a zoo and “we need to liberate this “tiger”.

8. Core Competencies of the Firm * Geely was already in the business of Car Manufacturing * Volvo contains a worldwide established network channel * Government of China was significantly focusing on developing automotive industry * Low costs of manufacturing in China

9. Key Issues in the Case * Foreign Acquisition as a private firm * Making Volvo profitable * Intense competition in the industry