Volvo Cars, despite being majority-owned by Zhejiang Geely Automobile, needs a joint venture in China to produce cars in the country according to Chinese auto policy which stipulates all foreign automakers must have a local production partner to produce cars in China.
IHS Global Insight Perspective | |
Significance | Volvo will form a joint venture (JV) with its parent company Geely to produce cars in China as Chinese regulations stipulate that foreign automakers must have a local JV partner to produce cars in China. |
Implications | The new potential Geely-Volvo JV will also face the hurdle of acquiring a vehicle production licence from Chinese regulatory authorities, unless a licence has already been acquired through a previous acquisition. |
Outlook | China's regulations firmly indicate that foreign automakers must have a local JV partner in order to produce vehicles in China, although there was confusion as to what the government considered Volvo to be, as it was acquired by Chinese automaker Zhejiang Geely in 2010. |
In 2010 Zhejiang Geely acquired majority shares in Swedish automaker Volvo Cars (see United States: 3 August 2010: Geely Concludes Deal to Buy Volvo from Ford). The consortium of companies, led by Geely, and comprising various government-linked departments and local bureaux, have prized their ownership of the Swedish brand and have regularly reiterated that it remains true to its Swedish roots. Now the situation has further complications due to a Chinese law stipulating that foreign automakers need to have a local automaker as a joint venture (JV) partner in order to produce models in China. The second issue is that the JV needs its own vehicle production licence from the Chinese regulatory body, the National Development and Reform Commission (NDRC).
Volvo and Geely to Form JV in China
IHS Automotive contacted Volvo's China spokesperson Michael Ning who said that Volvo will have to form a JV as per Chinese auto policy. In a recent interview in Chinese media Sina, the chairman and founder of Geely, Li Shufu, was asked about whether Volvo is considered a foreign brand by the Chinese regulatory bodies, to which Li replied: "Volvo is still a foreign brand." He added that Volvo and Geely would set up a 50:50 JV for domestic vehicle production in China. Further details of the timeline and investment are as yet not known.
Volvo-Geely JV Will Need Production Licence
The new JV between Volvo and Geely will need to acquire a vehicle production licence, although there are speculations that Volvo has already acquired a smaller company in China which had a production licence. In January, local media reported that Volvo was keen to acquire Kunming Chahua Automobile Factory. The company is relatively unknown except that presumably it has a vehicle production licence, which would make it appealing to Volvo. A Volvo spokesperson declined to comment on the matter.
Volvo-Geely JV to Produce Local Brand for China
Government policy is also encouraging JVs between local and international players to produce a local brand for China, and according to a report by Bloomberg, the Volvo-Geely JV will have to do just that.
Outlook and Implications
Volvo aims to increase production and sales in China. In 2011 Freeman Shen, chairman and senior vice-president of Volvo China said that production in China is slated to begin in 2013 at the 150,000-upa-capacity plant in Chengdu (see China: 20 December 2011: Volvo to Start Production in Chengdu in 2013). Volvo also has a second plant under construction in Daqing in China's north-eastern Heilongjiang province with an investment tag of around CNY4.58 billion, but it still needs government approval for the plants, and this will depend on its adherence to policies in China. Volvo is also said to be planning another new plant in Hebei province expected to begin production in 2015 (see China: 31 January 2012: Volvo Plans New Plant in Chinese Province of Hebei).
According to media reports, Volvo will announce plans regarding the forthcoming JV with parent Geely within the next two months. The timing is crucial for the automaker as it aims to begin production at its new plant in Chengdu next year. Volvo currently makes a couple of models via an agreement with Changan-Ford-Mazda in Chongqing but the main bulk of its potential growth in China is expected to come once the automaker commences production at its own plants in China. Volvo is also expected to see strong growth in 2014 when production of its S80L is scheduled to begin, which is expected to win favour with government fleet purchasers (see China: 1 February 2012: Influence of Government Fleet Purchases on Vehicle Sales in China).