An inorganic approach to globalization en


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An inorganic approach to globalization en

  1. 1. Perspective Bill Russo Tao Ke Edward Tse An Inorganic Approach to Globalization The Marriage of Geely and Volvo
  2. 2. Contact Information Beijing Bill Russo Senior Advisor +86-10-6563-8300 Shanghai/Beijing Edward Tse Senior Partner +86-21-2327-9800 +86-10-6563-8300 Tao Ke Principal +86-21-2327-9800 Booz & Company
  3. 3. EXECUTIVE In The Path to Globalization of China’s Automotive Industry, we described the motivation and steps to be taken SUMMARY for China’s automotive companies to go global. Zhejiang Geely Automotive Group’s $1.8 billion acquisition of Volvo from Ford represents the most ambitious action to date for a Chinese vehicle manufacturer to accelerate the process of transforming into a global automotive player. By announcing the sale of the Volvo car brand, Ford has nearly completed the process of shedding its portfolio of loss-making brands that previously comprised its Premier Automotive Group. In doing so, Ford fulfills its objective of sharpening its focus down to its core mass-market brands. This represents a clear and sound strategy for Ford to focus its management attention and investments in the area of the business it understands best. But how does this deal benefit Volvo and its new suitor, Geely? Booz & Company 1
  4. 4. RATIonAlE The roots of the deal require understanding of the how Geely’s Specifically, Li recognizes the importance of technology and the foR ThE Chairman Li Shufu views the auto capability of developing technology ACqUISITIon of business. Founded in 1986, as a manufacturer of refrigerators, Geely to an automotive company. He also has grown in his appreciation for VolVo in the early 1990’s expanded into how multi-national companies must motorcycle parts and eventually be capable of self-development of motorcycles and scooters. After technologies of the products they sell. rapidly expanding volume and scale, Geely began producing automobiles China and its car companies believe in 1998. that the country that produces and consumes the most automobiles Admittedly, Chairman Li’s initial must be competitive on the world view of automobiles was previously stage. However, leaders like Li Shufu quite simplistic. His initial view of understand that selling cars in China a car was essentially “a sofa with 4 is not the same as in developed wheels”. However, Li has quickly countries. Selling affordably priced become an expert in the car business cars to the vast number of entry-level and increasingly demonstrates an Chinese consumers is a significant understanding of what needs to step away from the goal of selling be done to become a competitive Chinese-branded cars to experienced car company. He has already consumers in mature markets. become quite critical of his initial understanding of the complexities of Geely’s acquisition of Volvo is the automobile and the ingredients intended to accelerate the process of behind building global brands. achieving this goal. 2 Booz & Company
  5. 5. GEElY’S The industrial revolution started late in China, and is happening 2. Use this opportunity to promote the corporate Geely name world- AppRoACh To on a much shorter time schedule. wide InTEGRATIon Chinese car companies are trying to achieve what took many decades for 3. Learn to manage a high-end car Japanese and Korean companies in brand: essential skills for a global a much shorter time frame. Geely car company. will take the approach of “standing next to partners and learning from Geely describes itself as the “poor boy them”. They must find companies to from the countryside”, while Volvo associate with and transfer knowledge is the “rich girl from the city”. Geely from them. Their recent partnership believes that for the marriage to be with Manganese Bronze to produce successful, certain commitments must London Taxi parts and vehicles, be made. Geely therefore strives to along with the acquisition of preserve Volvo’s: Australian gearbox maker Drivetrain 1. Brand Equity Systems International were examples of this approach. 2. Culture However, just taking pieces is not 3. Manufacturing and R&D in sufficient. The approach Geely is Europe (to preserve “European- taking in the acquisition of Volvo is ness”) to study the entire “eco-system” and integrate this into Geely’s 4. Relationships with Suppliers and global strategy. Distributors Geely is based in Zhejiang province, 5. Management Team (use Volvo which is a haven for export-oriented management to run Volvo, similar companies. Chairman Li is adapting in approach to Hong Kong this mindset to into Geely’s strategy: integration: “One Country, a fundamental belief that a viable Two Systems”) business must eventually become global and achieve the capability to 6. Relationship with Labor Union sell its products around the world. Geely’s approach can be summarized: 1. Learn the Volvo “eco-system” and get in the global game Booz & Company 3
  6. 6. STRATEGIC fIT While the viability of Volvo’s global business may be challenging in the There will be very little conflict with Geely’s brands, therefore very little near-term, Geely believes: brand tension among the parents. 1. Volvo is a small percentage of In addition, Ford very likely did not Ford’s overall business, and is leverage low-cost global sourcing not core to Ford’s global strategy. to achieve a more competitive cost Volvo is simply not a priority structure for Volvo. Geely will seek to to Ford. achieve sourcing efficiencies and cost benefits through further localization 2. In contrast, Volvo will be core to in China. Geely’s global strategy and will be therefore more highly valued. Geely will likely use Volvo to challenge Audi’s position as 3. Ford has not placed sufficient the “government official’s car”. emphasis on Volvo in the emerging While Volvo and Geely should growth markets—especially China. have their own strategies as well as management, core business Volvo today suffers from a lack of processes (such as Sourcing and scale across their product portfolio. Product Development) can be shared. Volumes are evenly distributed across However technology sharing will the portfolio, which creates a cost likely require legal/IP clearance. The structure disadvantage versus other partners will also need to align key global players. By having a number Volvo and Geely strategies including of low-volume products burdens how to address New Energy/Low Volvo with high investment with Carbon initiatives. limited scale, which is problematic for a brand trying to compete While marrying Volvo appears to internationally. be quite ambitious for a “poor boy from the countryside” with Geely believes there is significant only a little more than a decade of upside potential for Volvo in the automotive experience, the industrial China market. Simply put, it is logic appears to be quite pragmatic believed that If BMW and Mercedes- and sound. With proper attention Benz can sell over 50,000 cars and to the process of post-acquisition Audi can sell over 100,000 cars, integration, Geely can indeed use the then Volvo has the opportunity to Volvo acquisition to accelerate the grow significantly as a European process of transforming itself into a luxury brand in China. To achieve global automotive player. this, Volvo must be understood in China as a European brand, not just a Scandinavian brand. 4 Booz & Company
  7. 7. ShARInG It is a marriage of two automotive companies with very dissimilar Taxi vehicles. On March 17, 2010 Geely announced plans to become the ThE SAME backgrounds and histories. The majority shareholder of Manganese BEd, hAVInG Chinese describe partners with different agendas as “sharing the Bronze. In May 2009, Geely acquired the Australian gearbox maker dIffEREnT same bed, but having different Drivetrain Systems International. dREAMS dreams”. The sound industrial logic for this deal only provides the Geely is clearly using an “inorganic” foundation. Building a successful approach to accelerate its partnership between Volvo and Geely development and to improve its will require a solid plan for post- ability to compete in the China auto acquisition integration. market. The learning applied here could also accelerate its emergence It should be noted that the Volvo as a global automotive player. acquisition is not Geely’s first cross- However, it is well known that border deal. In 2006, Geely partnered cross-border deals rarely deliver on with Manganese Bronze to produce their initial promise. components for and assemble London Booz & Company 5
  8. 8. lESSonS We are witnessing a historic period in the development of the global Even the more successful partnerships have had mixed results: by all lEARnEd automotive industry. The global measures, the Ford alliance with fRoM fAIlEd financial crisis has dramatically weakened the “triad” markets Mazda has been a very good example of a successful cross-border alliance. AUToMoTIVE (Western Europe, North America Ford benefited from access to Mazda’s MARRIAGES and Japan), and has highlighted the resilience of the emerging markets, fuel-efficient technologies and platforms, and both sides benefited led by China. The resultant economic from a shared global production “imbalance” creates opportunities and distribution footprint. However, for structural realignment of the Ford recently made the decision to industry as assets shift to the higher liquidate its shares in Mazda in order growth markets. to raise much-needed cash. Clearly there is a need, on the part of One of the most famous cases was the European and North American the failed 9-year marriage of Daimler- vehicle manufacturers and suppliers, Benz and Chrysler. Announced to to find additional sources of funding the world in 1998 as a $38 billion in order to keep their operations “merger of equals”, the deal was going, while the rapid growth of ultimately dissolved in 2007. China’s auto market in recent years The causes of failure for the has provided Chinese companies with DaimlerChrysler marriage are more capacity to invest. However, noteworthy: there are real challenges in making 1. Strategic Mis-Alignment: While cross-border deals work. each company had a sound rationale for partnership, there For example, SAIC’s recent was a lack of alignment between acquisition of Ssangyong was the architects of the deal and the fraught with difficulty. The two organizations they led. Juergen companies had “different dreams” Schrempp was seeking to build in terms of what they wanted out scale and elevate the prominence of a partnership, and they were not of the automotive business in successful. SAIC was: unable to the Daimler-Benz portfolio of secure concessions from Ssangyong’s companies. Bob Eaton was seeking labor union to lower costs, unwilling to expand Chrysler’s global reach to inject billons of RMB incremental beyond its core North American capital to fund the business, and market. While on the surface unable to manage the loss of it appeared compatible, this leadership at Ssangyong. Ultimately, vision lacked sufficient top-down SAIC decided to dissolve the deal. direction needed to build a globally 6 Booz & Company
  9. 9. integrated automotive enterprise. functions that were integrated were 5. Culture Shock: This issue is The target for achieving “synergy” the Financial Services division and often mistakenly attributed to resulting from achievement of a several corporate staffs including differences in language, culture cost-savings target became the Human Resources, IT, and between Germans and Americans. sole objective of the post-merger Corporate Finance. Staff reductions However, this is not the root cause. integration team, and meaningful in these functions accounted The challenge is to achieve a true integration of the core automotive for much of the “Synergy” of understanding of the respective business was never established as a the merger. The core business needs of each partner. This tends concrete target. functions were left unchanged. As to get oversimplified by assuming a result, the complex decisions of that language and culture are 2. Brand Tension: The brands of how to share development costs, the problems. Language and Daimler and Chrysler do not develop new technologies, share cultural misunderstanding creates overlap, however the struggle product platforms, cross-load “resistance” and adds friction over brands cut to the heart of manufacturing plants, and combine among the partners – which makes the merger integration challenge. marketing and sales functions were it difficult to develop a common In many ways, the brands of a completely avoided. As a result, understanding, but this is not the company define the image and the automotive businesses failed most fundamentally challenging aspirations of both its customers to realize any benefits from the issue. If this were the case, it as well as its companies. For this partnership. would be impossible to explain reason, the idea of sharing any why similar problems occur when product, technology, or even 4. Brain drain: It is often stated that companies merge within the resources used in the development the majority of senior leaders of an same country. The most difficult or distribution of the product was acquired company leave within a issue is to establish a common viewed as a risk of compromising two-year period after the merger. understanding of what each partner the value proposition of the brands. While efforts were made to retain wants out of the relationship – and Daimler was concerned that a Chrysler’s top leadership, it became finding a way to work with that. direct association with Chrysler very difficult once it became clear would damage the Mercedes- that this was never actually a Businesses hoping to grow Benz “premium” image. Chrysler “merger of equals”. Starting with “inorganically” would be wise to was concerned that Daimler’s Bob Eaton’s decision to step down learn the lessons from the causes of higher cost structure would make as co-CEO, the leadership “flight” the failed DaimlerChrysler merger. Chrysler’s mass-market brands less at Chrysler accelerated. Within two cost competitive. years, a significant percentage of Chrysler’s top 100 managers had 3. lack of Core Business Integration: left the company. While it may be The “Chrysler Group” difficult to avoid completely, it is essentially became a division critical to plan for the retention within Daimler-Benz, which was of the key leadership, or company renamed “DaimlerChrysler AG” performance and employee morale in November 1998. The only will suffer. Booz & Company 7
  10. 10. lIVInG ThE As a result of the shift of the automotive center of gravity to turn around Volvo’s operations. Geely must address the following issues: dREAM: ThE the east, there is a need to make IMMEdIATE these cross-border marriages work. A Chinese company investing in 1. Strategic Alignment and Governance. Bridging the huge ChAllEnGES foreign assets must understand how gap between Volvo’s traditional to align the interests of the partner European (and some would argue in the transaction with their own, “Scandinavian”) management or they will likely end up owning mode and Geely’s dynamic family assets without the technological business mode. This may be the development know-how that went largest challenge for Li Shufu into creating those assets. in achieving “synergy” among the automotive units. This will It all should start with a be particularly challenging as comprehensive risk-assessment Chairman Li has committed and plan for post-acquisition to keep independence of Volvo integration. The key elements of this operations. plan were noted in the article The Path to Globalization of China’s 2. Cost Structure. Since Volvo Automotive Industry. maintains their current business structure, processes and supply Beyond this, Geely must overcome base, it is impossible for Geely several other challenges in order to to realize the highest benefits of 8 Booz & Company
  11. 11. About the Authors Edward Tse is Booz & Company’s senior partner and chairman for Greater China, specializing in definition and implementation of business strategies, organizational effectiveness, and corporate transformation. He has assisted several hundred companies—head- quartered both within and outside China—on all aspects of business related to China and its integration with the rest of the world. Bill Russo is a senior advisor localization for Volvo cars even if to serve a mass-market instead of with Booz & Company. He has they build a new production base merely following the luxury-market more than 25 years extensive experience in the automotive in China in the near future. Geely leader Audi. industry most recently serving may need to subsidize the Volvo as Vice President of North East global operation with the very thin Marrying Volvo was an ambitious Asia automotive operations for margins generated from Geely’s move for a “poor boy from the Chrysler having specialized in local brand operations, which countryside” with only a little new business development, poses high risk and places pressure more than a decade of automotive product and business strategy, on Geely’s working capital. experience. The automotive world is performance management, corporate governance and now closely watching to see if they post-merger integration. 3. Market positioning. Geely faces a can make it work. number of product portfolio and Tao Ke is a project principal platform decisions regarding Volvo With proper attention to the process with Booz & Company and is product offerings for China and of post-acquisition integration, a member of the automotive the global markets. The and by addressing the immediate competance center leadership manufacturing agreement with challenges noted here, Geely could team in Greater China. He has Chang’An Ford for the Volvo S40 indeed use the Volvo acquisition to more than 10 years’ consulting experience in a broad range and S80’s will need to be addressed accelerate the process of transforming of strategy, operations, and Geely has already stated an itself into a global automotive player. organization, and risk objective of building a 300,000- management assignments, unit production base in China. To covering the automotive, achieve this, Volvo products would financial services, consumer, need to be repositioned in order and telecom industries. Booz & Company 9
  12. 12. The most recent list of Worldwide Offices our office addresses and telephone numbers can Asia Bangkok Helsinki Middle East Los Angeles be found on our website, Beijing Brisbane Istanbul Abu Dhabi McLean Delhi Canberra London Beirut Mexico City Hong Kong Jakarta Madrid Cairo New York City Mumbai Kuala Lumpur Milan Dubai Parsippany Seoul Melbourne Moscow Riyadh San Francisco Shanghai Sydney Munich Taipei Oslo North America South America Tokyo Europe Paris Atlanta Buenos Aires Amsterdam Rome Chicago Rio de Janeiro Australia, Berlin Stockholm Cleveland Santiago New Zealand & Copenhagen Stuttgart Dallas São Paulo Southeast Asia Dublin Vienna Detroit Adelaide Düsseldorf Warsaw Florham Park Auckland Frankfurt Zurich Houston Booz & Company is a leading global management consulting firm, helping the world’s top businesses, governments, and organizations. Our founder, Edwin Booz, defined the profession when he established the first management consulting firm in 1914. Today, with more than 3,300 people in 60 offices around the world, we bring foresight and knowledge, deep functional expertise, and a practical approach to building capabilities and delivering real impact. We work closely with our clients to create and deliver essential advantage. for our management magazine strategy+business, visit Visit to learn more about Booz & Company. Printed in Greater China ©2009 Booz & Company Inc.