Geely to Buy Volvo from Ford for $1.8 Billion

Zhejiang Geely Holding Group signed a binding deal Sunday to buy Ford Motor Co.'s Volvo Cars unit for $1.8 billion, representing a coup for the independent Chinese automaker which is aiming to expand in Europe, according to AP.

The purchase gives Geely a European luxury car brand with a reputation for safety and quality at a time when China, which last year surpassed the U.S. as the world's largest car market, is eager to improve its competitiveness by acquiring foreign automotive brands that might help it improve its technology and expand into overseas markets.

The price, which includes a $200 million note with the remainder to be paid out in cash, is far less than the $6.45 billion Ford paid for the Swedish automaker in 1999. The U.S. automaker has been trying to sell Volvo since late 2008 to focus its resources on managing its core Ford, Lincoln and Mercury brands.

"We think it's a fair price for a good business, and yes, we're happy with the deal we've achieved with Geely," said Ford Chief Financial Officer Lewis Booth on Sunday at a news conference at Volvo Cars headquarters in Goteborg, on Sweden's west coast. Booth added that his company believes that, under Geely, "Volvo can continue to build its business and return to profitability."

The agreement was signed by Booth and Geely's chairman, Li Shufu, and witnessed by Li Yizhong, the Chinese minister of industry and information technology, as well as Swedish Minister for Enterprise and Energy Maud Olofsson.

In a statement, Geely said it has secured all the financing necessary to complete the deal, as well as "significant working capital facilities to fund Volvo Cars' ongoing business." The sale is expected to be completed in the third quarter, subject to regulatory approvals.

The deal also covers further agreements on intellectual property rights, supply, and research and development arrangements between Volvo Cars, Geely and Ford. The U.S. automaker has committed to provide engineering support, information technology, access to tooling for common parts and certain other services for a transition period to smooth the separation.

Li, whose comments were translated by an interpreter, described the deal as "a milestone" for both Geely and Volvo, adding that his group will make a Volvo CEO public "in due course."

Geely said it aims to keep Volvo's existing manufacturing facilities in Sweden and Belgium, but that it also will explore manufacturing opportunities in China. Volvo Cars will remain separate from Geely's other operations, with its own Sweden-based management team and a new board of directors, the company said.

"China, the largest car market in the world, will become Volvo's second home market. Volvo will be uniquely positioned as a world-leading premium brand, tapping into the opportunities in the fast-growing China market," Li said.

As Western automakers unload unprofitable assets, they are finding keen buyers in Asia.

In 2008, Ford sold its Jaguar and Land Rover brands to India's Tata Motors Ltd. for $1.7 billion, a third of what it paid for them. In addition, General Motors Co. attempted to sell its rugged Hummer brand to a Chinese heavy equipment maker, but is now winding that brand down as the deal collapsed. China's Beijing Automotive Industry Holdings has also agreed to buy some powertrain technology from GM's Swedish Saab unit.

Geely, an independent automaker that has struggled to upgrade its image in overseas markets, has long coveted a bigger foothold in Europe and has earlier been rumored to be bidding for Opel and Saab. The long-awaited Volvo acquisition is therefore important for the company, which has gradually built its business with little government support.

Analyst Zhang Xin, with Guotai Junan Securities in Beijing, said Geely's pledge to keep Volvo's factory and business teams in Sweden after the takeover limits its leeway to cut costs.

"Reality is always much crueler than what people would wish. Geely wants to build itself as a new 'international Geely,' so they sought a strong foreign brand like Volvo," Zhang said. "Geely should foresee many difficulties. How will it manage to run Volvo well? How will it deal with the factory and employees? How much more will Geely have to spend to operate Volvo?"

Volvo, whose first car left its Swedish factory in 1927, employs nearly 20,000 workers, most of them based in Sweden. The group, initially a subsidiary of ballbearing maker SKF, was listed on the stock exchange in 1935. In 2009, it sold 334,808 cars. It currently has 10 models on the global market, with its crossover XC60 being the best-seller. The United States, Sweden and Britain account for its three biggest markets.

In a statement Sunday, Volvo Cars CEO Stephen Odell said Volvo managers fully endorse the sale to Geely.

"We believe this is the right outcome for the business, and will provide Volvo Cars with the necessary resources, including the capital investment, to strengthen the business and to continue to move it forward in the future," he said.

Volvo dealers in the U.S. said Sunday that Geely's assurance that the cars will still be made in Sweden has allayed customers' concerns about quality control. Chinese automakers seeking to expand into U.S. markets have faced quality questions from consumers concerned about defects and problems with a number of Chinese exports ranging from drugs and foods to furniture and appliances.

"They do show concern, but we are assuring them the quality of the car is still going to be there," said Chris Gastmeyer, sales manager at Volvo of Orange County in Santa Ana, California, on Sunday.

He said customers are comforted by the fact that the cars are still made in Sweden and that it's business as usual at this point.

Mike Kessler, new car sales manager at Volvo of Santa Monica, said he isn't seeing much worry from shoppers as it appears the manufacturing will remain the same. But staff are eager to see what changes are in store after the transfer in ownership.

Park Sae-jin swatchsjp@ajunews.com