A Big Investment for Big Ambitions

Geely Automobile, a Chinese car maker, soon may be getting more fuel in its tank. Several publications, including the Wall Street Journal, reported over the weekend that a Goldman Sachs private equity fund is discussing an investment of $250 million in the company.

An announcement to this effect is expected soon, according to a Reuters report. It is also likely that Geely could use this influx of capital to bid for Ford’s Volvo unit. The Swedish auto firm has been on the block for some $2 billion. Geely, despite being China’s largest private auto maker, has annual sales of $625 million; it has previously said it would issue convertible bonds and partner with a Chinese state-owned enterprise to bid for Volvo.

Why would Geely want Volvo in its garage, so to speak? The reason is the company has long harbored global ambitions, but its efforts have been stymied by the perception that Chinese auto makers face quality challenges in markets such as the U.S. A former fridge maker that started producing cars in 1998, Geely presented its vehicles at the Frankfurt Motor Show in 2005 and at the Detroit auto show in 2006. The company intended to launch its vehicles in the U.S. in 2008 – to coincide with the Beijing Olympics – but was unable to do so because they failed crash and emissions tests. Still, Geely vehicles are sold in countries such as Russia and Ukraine, and the company has announced plans to set up plants in Africa and Latin America. Li Shufu, Geely’s founder and chairman, has reportedly said that by 2015, Geely would sell 1.3 million vehicles outside China. He is often described in media reports as “China’s Henry Ford.”

Commenting on the desire of Chinese auto executives to expand in global markets, Wharton management professor John Paul MacDuffie told Knowledge at Wharton in a previous interview that in the past, Japanese and Korean auto firms had to work equally hard to overcome the view that their products were of poor quality. "There was a long period of retrenchment and rebuilding after leaving that bad impression," he said. "The Chinese companies will have to be wary of repeating that. If anything, American consumer standards for quality have only gotten higher."

Marshall Meyer, a Wharton management professor whose research focuses on China, admits that Chinese auto firms are eager to enter global markets and compete with the Japanese and Korean car makers. “There’s no reason to believe they won’t; the question is when,” he told China Knowledge at Wharton in an interview.

With Goldman Sachs’s investment, Geely will have more resources for global expansion – especially if the Volvo deal goes through. While it won’t overtake Toyota, Honda or Hyundai anytime soon, it could certainly give its Asian rivals a run for their money.

More from China Knowledge at Wharton:

Can China Gear Up to Sell Its Cars to U.S. Consumers? Quality is Key