Geely's UK investment fails, Volvo next?

The bankruptcy of Geely's UK investment could foreshadow a similar fate for its Volvo unit, which has been plagued by management turmoil and failure to execute a turnaround plan.

Doug Young

Published: 2:33pm, 25 Oct 2012

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A week after I commended home appliance maker Haier (1169.HK) for a job well done with its recent purchase of a New Zealand company, I'm sorry to say I can't give the same positive assessment for more problematic overseas investments by the parent of Hong Kong-listed Geely (0175.HK). The latest news has seen one of Geely's biggest overseas investments, UK taxi maker Manganese Bronze, file for bankruptcy, even as Geely's bigger Volvo car unit appears to be heading down a similar road.

Geely made headlines in 2010 with its landmark purchase of the struggling Volvo for $1.8 billion, continuing a Chinese tradition of purchasing overseas assets with multiple problems that would be difficult for even the most experienced company to fix. Four years earlier, Geely had made another lower-key purchase of a similar problematic asset with its acquisition of around 20 per cent of fabled but struggling Manganese Bronze for about $85 million. That investment has now become essentially worthless, as Manganese announced its intent to appoint an administrator earlier this week, in the equivalent of filing for bankruptcy.

Geely was in talks as late as last week to provide emergency funding for Manganese Bronze, but clearly those talks fell through. Geely was also quick to note in a stock exchange filing that it wrote off its Manganese Bronze investment long ago, and thus the latest developments will have no impact on the company.

I suppose I should commend Geely for realizing that Manganese Bronze was probably unsalvageable at this point, and refusing to pump more money into this deeply troubled company. Still, Geely never should have tied up with Manganese Bronze in the first place -- a move that put it into the unfamiliar British market with a financial troubled partner.

Failure of this tie-up bodes poorly for Geely's much larger Volvo unit, which could easily suffer the same fate. Volvo itself doesn't release formal profit figures, since it is now a fully owned unit of Geely. But the company has been emitting a steady string of signals that indicate it is going through a period of turbulence under its Geely ownership.

The latest of those came just last week, when Volvo Cars, the unit that Geely owns, announced the appointment of a new president and CEO to replace the man who had held that position for the last two years. That change came just a month after Geely replaced Volvo's China head, a foreigner, with a Chinese auto industry veteran. At that same time, a Volvo executive told Swedish media last month that the car maker was unlikely to meet its target for China sales of 200,000 cars per year by 2015, due to "significant weakness" in building its Chinese organization.

All of these signals point to a company in turmoil, which I and many others predicted shortly after Geely made the purchase more than two years ago. Perhaps the biggest problem to date has been a difference in vision for Volvo between Geely and Volvo's Swedish executives. Geely wants to position Volvo as a luxury brand and significantly build up its presence in China, even though Volvo leaders seem to prefer retaining the unit's image as a more global, mid-range brand.

Perhaps these recent executive changes will finally bring some stability and unified vision to Volvo. But I suspect we'll continue to see more turbulence at the troubled Swedish unit for at least the next couple of years, perhaps leading Volvo to ultimately follow down a similar road to Manganese Bronze.

Bottom line: The bankruptcy of Geely's UK investment could foreshadow a similar fate for its Volvo unit, which has been plagued by management turmoil and failure to execute a turnaround plan.

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