Identity Crisis Rattles Volvo’s Chinese Owner

New models bearing the Chinese-owned Volvo badge shared a luxury spotlight at the Beijing International Auto Show in April with perennial stars Mercedes-Benz, BMW, and Lexus.

But behind the diamond-studded presentation was confusion over the legal status of Sweden-based Volvo Car Corp., its business operations in China, and the company’s owner China Zhejiang Geely Holding Group Co. Ltd.

Geely bought Volvo from Ford Motor Co. in August 2010 and soon unveiled a five-year plan that called for new factories in Chengdu and Daqing, as well as a Shanghai headquarters. The company said it would ramp up domestic sales to 200,000 vehicles annually by 2015, grabbing about 20 percent of China’s luxury car market.

So far, though, the plans have stalled over legal complications. The company’s request to build factories, for example, has yet to be answered by government market planners.

The company is also caught between very different legal systems: While Volvo is officially a foreign company operating in Sweden under Swedish law, it’s treated as a foreign company in China under Chinese law.

Geely officials are trying to iron out the confusion—and keep the business plan on track.

For example, under a proposed modification to the five-year plan announced recently by Shen Hui, chairman of Volvo’s China operations, Geely and Volvo would form a new joint venture for all operations in China. The venture would be foreign-financed but domestically controlled.

Lawyers in China interviewed for this article said Chinese law should pose no obstacle to the plan because Volvo, although it’s owned by Geely, functions as a Swedish-registered business that’s investing in China as a foreign entity.

But new obstacles could surface if the Chinese government, as some expect, decides to tighten foreign investment in the auto sector. The clampdown could come soon.

Moreover, a multinational source familiar with Chinese government policy told Caixin that Beijing officials are demanding that every joint venture automaker produce a new, Chinese-brand car as well as an alternative energy vehicle.

Shen as well as Geely Chairman Li Shufu, who also serves as Volvo chairman, have publicly discussed plans to build a domestic presence with a foreign identity through a made-in-China vehicle.

“Launching a joint venture-brand vehicle is a government rule,” Shen said. “We’ll follow it.”

Unexpected Hurdles

But Li apparently did not anticipate the various legal twists when he agreed to buy the carmaker from U.S.-based Ford for US$1.8 billion.

Indeed, a Geely lawyer who worked on the acquisition told Caixin that Volvo’s national identity was never even considered during the takeover talks.

A year after the deal closed, Shen told Caixin at a Frankfurt, Germany, auto show that people outside China “think we are a Chinese company. Chinese people think we’re a foreign company. It’s awkward.”

Li may have overlooked potential legal problems tied to the company’s identity because the Chinese government approved the Volvo deal relatively quickly. The plan to build Volvo plants in China apparently helped Geely win full government support within five months of deal’s hatching.

Since then, however, Li has found it harder to deal with officials overseeing his business at the National Development and Reform Commission (NDRC), Ministry of Commerce, and the Ministry of Industry and Information Technology.

Officials at each of these agencies refused Caixin requests for information about Geely-Volvo business plans and applications. An NDRC official in charge of foreign investment, for example, told a reporter to “ask Li Shufu.”

Li acknowledged, “The government wants us to form a joint venture, and as a company we can only be honest and obedient. We do whatever every government department tells us. We can’t have too many of our own ideas.”

Shen added, however, that since Geely and Volvo are ultimately “not the deciders” on any joint venture plans, the company will continue focusing on its investment plans and selling cars. He said 2012 would be “a year of strategic investment for us.”

The long-range goal, of course, is for Volvo to out-sell those overseas rivals who share the luxury stage at auto shows.

Carmakers sell more than 800,000 luxury vehicles annually in China, with more than 80 percent of the market controlled by Chinese-German joint ventures that build Audi, Mercedes-Benz, and BMW models. Volvo’s sales of about 40,000 vehicles in 2011 represented only 5 percent of nationwide luxury sales.

Liang Dongmei is a Caixin staff reporter.

Business, Politics
Volvo, Automobiles, Business