Ford Sends Volvo to China's Geely for $1.8 Billion

With continued strong growth and highly competitive companies, China has been trying to press into global markets. However, the politics of growth can get difficult -- not to mention the cultural issues.

On Sunday, a pivotal deal got done that highlights China's growing power: Zhejiang Geely Holding announced it has agreed to pay $1.8 billion for Volvo Cars, which is a part of Ford Motor (F). The transaction consists of $1.6 billion in cash and a $200 million note.

As a result, Ford will have some fresh capital to pay down its massive debt load and to focus more on its core operations. Over the past few years, Ford has also sold Aston Martin and Jaguar Land Rover.

Into Another League

Despite the tough recession, Volvo has continued to innovate and maintain its reputation for quality and safety. For example, the company is going to launch the 2011 S60 sedan, which competes with the BMW 3-series and the Infiniti G37. And as China's population gets more affluent, demand will certainly rise for cars like the S60. According to a study from J.D. Power and Associates, the luxury car market spiked 29% in China last year.

But the competitive landscape is fierce, with players like BMW, Lexus, Mercedes and Audi all jostling for market share. Keep in mind that Volvo sold only 22,405 cars in the country in 2009.

However, for Geely's ambitious founder Li Shufu -- who's called China's Henry Ford -- the deal brings tremendous opportunity. He has the goal of selling 200,000 Volvos in China by 2015. To do so, Li plans to build a new plant and find ways to leverage his low-cost business model.

Lingering Questions

Despite the enthusiasm, Geely still faces many challenges. The company is ranked #11 in China and has certainly had difficulties with the Chinese government. In fact, Geely has little experience selling into foreign markets. To help things out, Geely will maintain Volvo's current management as well as its R&D and manufacturing operations. On its face, this makes sense. But then again, Volvo hasn't necessarily been a case study in financial success. Last year, it posted a loss of $934 million.

Other major issues include the tough European unions and the complex sourcing arrangements with Ford (such as with the development of powertrains).

Finally, the history of cross-border deals has been dreadful, as seen with mergers like Daimler-Chrysler and GM-Saab. Ford paid $6.5 billion in Volvo in 1999, and despite extensive efforts, it wasn't able to make the deal work. So, Geely's acquisition of Volvo now won't be likely be as simple as a Sunday drive.

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