Volvo

Volvo paves the way for production in China

March 22, 2012: 9:09 AM ET

The Chinese-owned auto maker is still considered foreign in the People's Republic, but it's working on making China its "second home market."

By Doron Levin, contributor

FORTUNE -- Eighteen months after a Chinese consortium led by Zheijiang Geely Holdings Group Co. bought Sweden's Volvo Cars, the venture is finally securing key agreements that will allow it to build vehicles in the People's Republic.

This week the venture also hired a new pitchman, Chinese-American basketball sensation Jeremy Lin.

Despite Volvo's Chinese owners, The People's Republic of China determines it to be a foreign company. Because Volvo is based in Gothenburg, Sweden, it is subject to complex rules requiring it to have a local partner for production in China.  Ford Motor Co. sold Volvo to the consortium in August, 2010 for $1.8 billion.

Stefan Jacoby, president and CEO of Volvo, told Reuters this week the company intended to make China "our second home market," after Sweden. Jacoby, formerly the head of Volkswagen in the U.S., has said he eventually plans to use 90 percent Chinese-made parts in Volvos.

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The new agreement will allow Geely to use Volvo technology for Geely cars in China. Jacoby, a hard-driving German executive, says his goal is for Volvo one day to account for a fifth of the world's luxury car market, which is currently dominated by BMW, Audi, Mercedes, and Lexus.

In a second remarkable development, the companies Monday signed Lin, the 23-year-old New York Knicks basketball star and son of Taiwanese immigrants, to help market Volvo globally. NBA basketball star Yao Ming, who hails from the People's Republic, recently retired, leaving Chinese basketball fans bereft of a connection to the sport.

Volvo, steeped in Swedish heritage, has long been a premium automotive brand with a strong presence in the U.S. and around the world.  Now under the Geely umbrella it is poised to gain share in the People's Republic, especially if the company can navigate regulations and manufacture cars there under the Volvo brand.

Li Shufu, chairman of Geely, takes pains to assert that he intends to preserve the Volvo's Swedish flavor.  "Geely is Geely.  Volvo is Volvo," has become his mantra when asked about the possible blurring of Volvo's distinctive character.

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Michelle Krebs, an analyst for Edmunds.com, said Volvo must "simplify" its product lineup in the U.S. to three core models, down from the current nine.  "And everyone touts safety these days.  That used to identify Volvo.  The company now has to think what it wants to stand for."

To ensure a smooth expansion in China, Geely must also secure its intellectual property rights, covering older Volvo technology, some of which may have been developed by Ford and still belong to the Dearborn, Michigan-based company.

Peter Horbury, who was Volvo's design chief,  recently was transferred to Geely's operations to oversee the creation of a third brand for the company in China, one that incorporates older Volvo technology. Replacing Horbury as head of Volvo design is Thomas Ingenlath, a former Volkswagen designer.

Other Chinese automakers have tested the reception of home-grown models in Detroit and other foreign auto shows. The response has been lukewarm, at best. The Geely venture represents another approach that could allow China to sell its cars worldwide.  Geely-Volvo is considering new plants in Chengdu, Sichuan, Daqing and Heilongjiang.  Export of Volvos from China may follow.

Yet China also has grown into the single largest automotive market in the world, with millions of consumers striving to afford personal transportation. Now the country has a Harvard-educated basketball star to help consumers understand why their next automotive purchase should be a Volvo.

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