April 23, 2013 6:12 am

Geely grapples with the Volvo gears

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Chairman of Zhejiang Geely Holding Group Li Shufu (L), Swedish Minister for Enterprise and Energy Maud Olofsson (2nd L), a Volvo S60 car (2nd R) and CEO of Volvo Cars Corp Stephen ODell (R) stand during a press conference in the Volvo Hall at the Volvo plant headquarters in Torslanda, Gothenburg©AFP

The Chinese owner of Volvo does not mince words when it comes to something as vital as the interior of his cars.

Li Shufu, founder and chairman of Geely, the Chinese private carmaker that bought the struggling Swedish marque in 2010, recently told Swedish television that the inside of a Volvo “feels too Scandinavian”.

Volvo staff say the comments were taken out of context. But Geely staff make it clear that, whatever Mr Li actually said, he certainly thinks that not only the brand but also its current management is too Swedish.

Mr Li does not speak Swedish – or English for that matter – and Volvo’s management does not speak Chinese. As a result, one Geely senior employee says diplomatically, “it is easy to have cultural misunderstandings”.

Volvo’s plans to produce in China were even delayed because Chinese regulators treat the company as foreign, meaning it required special approval to set up a new factory.

All of this might matter most to Geely’s bankers and shareholders, but its acquisition of Volvo is not just a corporate matter. Analysts see it as a test case for the globalisation of the Chinese car sector - and Chinese brands as a whole.

Geely needs to make the Volvo acquisition work, car analysts say, for the sake of its balance sheet. Volvo needs to make the marriage work or it could cease to exist as a brand.

But with many Chinese companies on the acquisition trail – from state-owned Bright Foods, which recently bought Weetabix, to Fosun, a private conglomerate that bought a stake in Club Med – China Inc needs to figure out how to make these foreign brands work around the world. Geely could be blazing a trail on how to handle culture clash.

On the sidelines of the Shanghai Auto Show last weekend, Doug Speck, senior vice-president of Volvo sales and marketing, told the Financial Times the notion of clashing cultures was largely a figment of the media’s imagination.

“Day to day there is a lot more dialogue taking place,” Mr Speck says. “[Geely] is used to moving really fast but [Volvo] isn’t an organisation historically that moves as fast. Mr Li is forcing us to examine whether there are ways to move quicker.”

He argues that there are fewer culture clashes because Volvo and Geely are under the same ownership umbrella, rather than in the kind of joint venture common in China where the partners are separately owned.

But one senior Geely employee says that although China is helping Volvo’s profitability – even before the company begins cheaper local production later this year – senior executives know little about the country.

“China is already our most profitable market . . . but Volvo as a company’s knowledge about China is still not strong,” he says.

That knowledge will no doubt grow as Volvo starts production later this year in the south-western province of Sichuan, which just suffered a magnitude 7 earthquake.

One Geely employee says the group expects Volvo to sell 100,000 cars in China next year, 20 to 30 per cent of them produced locally, avoiding heavy Chinese import taxes. Volvo’s goal is to sell 200,000 in China by 2015. That compares with reported sales in China last year of 42,000, down 11 per cent on 2011.

Volvo says the 2012 figure was distorted - because of the way dealer incentives were structured, many dealers reported sales in 2011 that actually took place in 2012. Volvo now says sales rose in 2012 rather than falling, and has changed its dealer incentive programme.

Mr Speck says that sales this year are going strong with volume in the first quarter rising 27 per cent year on year. That compares with 17 per cent for the overall light vehicle market in China and 4 per cent for the premium car segment.

“We expect a significant bump-up, from localisation, but not this year,” says Mr Speck, who says Volvo’s more understated version of a luxury car can exploit a change in Chinese tastes. “There is an evolving trend of luxury consumers who aren’t all about ostentation.”

Auto analysts say that Mr Li could be proven right in the end. Becoming a bit less Swedish could be the key to Volvo’s performance in China, where the most successful premium brands all have highly localised models.

“In Sweden, there is a long dark winter so people like light interiors. But in Chinese culture, dark colours are viewed as more luxurious,” says one Geely employee.

If Volvo does sell 100,000 cars next year in China, chances are a lot of them may no longer have upholstery that looks more at home in a snowstorm.

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