3 reasons why Volvo will suffer for its foreign status in China

Yang Jian is managing editor of Automotive News China
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SHANGHAI -- Despite Volvo Car Corp.'s Chinese ownership, the central government views the automaker as a foreign entity, Volvo Chairman Li Shufu admitted last week.

That's very bad news for Li and for Volvo, which was acquired 19 months ago by Zhejiang Geely Holding Group Co. Li also is Geely's chairman.

Volvo will suffer for its foreign status for three reasons.

First, China's government spends billions of dollars each year on vehicle procurement. After acquiring Volvo, Li lobbied Beijing to include Volvo in the government's procurement program.

But with Volvo considered a foreign automaker, government agencies are less likely to procure their vehicles from the company.

Second, if Volvo is treated as a foreign company, government permission to produce vehicles in China will be delayed.

Li wants to sell a lot of Volvo cars in China to help revive the brand. But the cars must be built in China to avoid hefty import duties.

Volvo -- like any foreign automaker -- will have to form a joint venture with a Chinese company, create a separate brand for the partnership and produce electric vehicles in China.

Volvo intends to form a joint venture with Geely. But this takes time, and it will delay Volvo's plans to build vehicles in China.

Third, with Volvo considered a foreign company, the automaker's image will suffer.

Li sees Volvo as a luxury brand. Since Geely acquired Volvo, he has made every effort to keep the two brands apart for fear that Volvo's association with Geely, which makes inexpensive cars, will tarnish the Swedish brand.

But now his effort to protect the Volvo brand is doomed. To produce Volvo cars in China, he must comply with government regulations by setting up a joint venture between Volvo and Geely.

Vehicles to be built by the joint venture would carry a Geely Volvo badge, which is not something Li wants to see.

The Volvo acquisition established Geely as a global player. Proud of this achievement, Li must have lobbied the Chinese government hard to let the brand produce in China on its own.

But obviously, he failed. In a global age, insular Chinese government officials insist that an international brand owned by a domestic company is still foreign.

What an irony! But Li must grin and bear it.

All Li can do is hope for quick government approval of a Geely-Volvo joint venture so that he can produce Volvo cars in China as soon as poss

Workers walk out

Workers feared a merger would cause many of them to lose jobs, so they staged a walkout. The strikers quickly won support from local officials in the city of Jingdezhen in east China's Jiangxi province, where Changhe is headquartered.

The municipal and provincial governments view auto manufacturing as a pillar of their region's economy, so they petitioned China's central government on behalf of the striking workers.

Beijing, which was eager to maintain social stability ahead of the Chinese New Year holiday, vetoed the proposed consolidation of Changhe's operations.

To Changan's chagrin, Suzuki's two joint ventures with Changan and Changhe will not merge anytime soon.

Unintended consequences

How does all this affect Ford Motor Co. and Mazda Motor Corp.?

Changan wants to break its three-way joint venture, Changan Ford Mazda Automobile Co., into separate, two-party joint ventures -- one with Ford and the other with Mazda.

The breakup will lead to the creation of an extra joint venture. Under existing regulations, the Changan-Ford partnership can inherit the former three-party venture's license.

But Changan-Mazda will need a new license. And that's where things get sticky.

In a bid to prevent excess production capacity, Beijing recently announced it would not allow foreign automakers to form new joint ventures.

To circumvent the restriction, Changan decided to merge Changhe Suzuki with Changan Suzuki, then transfer the extra license to its planned joint venture with Mazda.

But after the strike at Changhe, Beijing blocked Changan's attempt to transfer the license.

That means that Ford and Mazda will have to stick, at least for a while, with their inefficient three-way partnership with Changan.

Ford and Mazda have ambitious plans to expand in the world's largest auto market. But the complexities of the new rules are holding them back.

You can reach Yang Jian at yangjian@autonewschina.com.

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