Cross Cultural Consumer Behaviour:

The future of Volvo Geely

By Group 5:

Abdellatif Bouhid, Gleb Zhukov, Satpal Daryanani,

Svetlana Vladyshevskaya, Gayaneh Heyne

01 April 2011
Contents
Introduction ............................................................................................................................................. 3
Volvo ....................................................................................................................................................... 3
Geely ....................................................................................................................................................... 4
The Chinese Market ................................................................................................................................. 4
Merger ..................................................................................................................................................... 5
Corporate structure .................................................................................................................................. 6
Possible dilemmas .................................................................................................................................... 8
Dilemma reconciliation model.................................................................................................................. 9
Quality ................................................................................................................................................... 10
Sales ....................................................................................................................................................... 11
Integrated process .................................................................................................................................. 12
Best of both worlds ................................................................................................................................ 12
Action Plan ............................................................................................................................................ 13
Supporting behavior ............................................................................................................................... 14
Appendix: Sources................................................................................................................................. 16

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Introduction

In a sign of the times and maybe of things yet to come frequently in the future, a small private
Chinese automotive company, Greely Holding Group, making cars only as of 1998, bought from
an American mid-class, mass-market oriented venerable automobile manufacturer founded in
1903, Ford Car Company, a highly prized Swedish car company, Volvo, itself in existence since
1927. When Ford acquired Volvo in 1999 for 6.4 billion dollars, it became the second car
manufacturer in Europe. It is a sure bet that it never occurred to Ford, or anyone else maybe,
that a mere 11 years later, it would be selling its prestigious acquisition to a young company in
the car manufacturing business, unknown outside of its home country, and for a mere 1.8 billion
dollars. Greely means “lucky” in Mandarin. Its CEO, Li Khufu, must have been feeling very
lucky to land such an acquisition. It could have been the case of a bride asking for the hand of its
suitor. The stars were aligned just the way they should be. What Greely saw in Volvo was of
course access to a technology of much higher standards in design and quality. It has also
acquired a brand known the world over for it high intrinsic value built on uncompromising
safety goals. Finally, it acquired a dealership network present on all continents and all desirable
markets for Greely‟s future plans. The ambition of Greely is to become a global automotive
player by gaining “an international profile and a degree of credibility”. What Volvo received in
exchange was access to a market with a future growth unlike any other. This paper will attempt
to shed some light on the challenges to be faced by both Geely and Volvo brands in leveraging
their respective strengths in their various markets, taking into consideration not only their
companies different cultures but more importantly to the success of their ambitions the cultural
consumer behaviours of their consumers in each and in the rest of the world's car markets.
Leveraging each other's advantages for mutually supporting success within the limitations of
their challenges will be the key to the sustainability and prosperity of both brands. The
acquisition's various agreements with Ford, Volvo's former owner, run over 10,000 pages and
will constitute a daunting challenge for Geely.

Volvo

The trademark “Volvo” was registered in 1911 by SKF, the Swedish ball-bearings manufacturer.
It intended to use it for a special series of ball-bearings, but decided in 1924 to use it as
trademark for its new venture to manufacture Sweden's first ever home built car. The founders,
Assar Gabrielsson, sales manager and Gustav Larson, a mechanical engineer working at SKF
were set out to make a car that would resist the rigors of Sweden harsh winter, rough roads and

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cold temperatures. Their obsession with safety for the people who would be riding in their cars
was infused throughout the new company and remained one of its distinguishing characters to
today. Still headquartered in its original hometown of Gothenburg, Sweden, it manufactures
trucks, buses, construction equipment, marine and industrial power systems, parts for the
aerospace industry and financial. Its employees totalled 105,260 at the end of 2010 found in
several subsidiaries comprising Mack Tucks, Renault Trucks, UD Trucks, Volvo Construction
Equipment, Volvo Buses and Volvo Trucks. Volvo cars are currently mainly manufactured in
Belgium (Ghent for the regular models such as the C30 or the S60) and in Sweden (Gothenburg
for the bigger models such as the XC 70 and the S80). Volvo had total revenues in 2009 of 12.4
billion dollars, and a pre-tax loss of 653 million dollars. Geely sold about the same number of
cars in the same year, generating only a sixth of Volvo's revenues but realizing a net profit of 200
million dollars.

Geely

Founded in 1986 by Li Shufu, an electrical engineer, in Hoangzhou, China. It started its activities
making washing machines before starting to make motorcycles in 1994, followed by small van
manufacturing in 1998 and car manufacturing in 2001. Its employees totalled 12,000 in 2010.

In 2010, it sold 415,000 vehicles (+27% over 2009 and 4% over sales target) from a production
capacity of 680,000. Its founder and chairman is reported to have said one that a car is “but a
sofa with four seats”. However, the growth of Geely during the short period of time of its
existence shows a unique capacity for steep learning and adaptation to new challenges. Li Shufu
has also said that “Geely is Geely and Volvo is Volvo” signaling an understanding that the
different brands sought to remain separate while at the same time helping each other in a sort of
living apart together relationship.

The Chinese Market

Between 2003 and 2008, 50% global growth in the car market has been attributed to China and it
is expected to surpass the USA to become the largest world economy in the next year. With
diminishing returns on investment, China‟s GDP growth rate is not sustainable and economists
predict the internal consumer market is to ensure the next phases of growth.

This massive domestic consumer market has plenty of savings and very little debt. It displays
that 50% of inhabitants save for the purchase of major consumer goods. Moreover rapid

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urbanization is underway; with over 20 million people every year migrating to the cities. In 2010
the urban population in China came to exceed the rural population.

Already in 2009 Chinese consumers were buying more cars than the Americans and this is only
the beginning of a massive car buying spree. 98% of the population spends more than 2 years
ago and 75% of inhabitants state this is due to more disposable income.

The car is a must have item and for 25% a car is the next major purchase, ranking above a house,
consumer durables or a vacation. When an individual‟s income increases the car is the first thing
they buy, there is thus a huge priority of car ownership. Especially with the emerging middle
class constituting the future mass market, which are the customer segments companies are
targeting, sales of cars are going to increase massively. These customer segments want high
quality and reliability. The dichotomy of the on one hand famous price consciousness Chinese
consumer and on the other hand the wealthy buyer of luxurious goods is fading rapidly.

Merger

On 2nd August 2010 Zhejiang Geely Holding Group Co. Ltd announced the acquisition of 100
per cent of Volvo Car Corporation ("Volvo Cars") from Ford Motor Company in Hangzhou,
China / Gothenburg, Sweden. Geely also announced that Stefan Jacoby would become
President and Chief Executive Officer of Volvo Cars.

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On 28th March, 2010 Geely signed a stock purchase agreement wherein it agreed to pay USD
1.8 billion for Volvo Cars, which included USD 200 million notes with the balance paid in cash
utilizing financing from Chinese institutions and its own balance sheet as well as international
capital market resources. Two Chinese cities Dacheng and Jiading helped Geely assisted in
finalizing the deal as well.

Under the terms of the new ownership, Volvo Cars would retain its headquarters and
manufacturing presence in Sweden and Belgium; and its management would have the authority
to operate independently and execute its own business plan under the strategic direction of the
board.

The terms of the deal also allowed Volvo and Ford to maintain close relationships for
components and supply to ensure continuity in areas which are still interdependent.

Li Shufu and Lewis Booth, Chief Financial Officer at Ford marked the completion of the
acquisition with a signing ceremony in London. The acquisition was completed after a year of
intense talks between Ford and Geely and Mr Li thanked Ford and the Volvo Cars management
for their support during the transaction negotiations. He also acknowledged and thanked the
union and government officials with whom Geely built close contacts

"The signing and completion of this acquisition reflects the commitment of Ford and Volvo
executives to the future of this company, along with the vital input of labour representatives and
government officials in Sweden, Belgium and China as well as other relevant countries," said Mr
Li.

The Geely Chairman added that Mr Stefan Jacoby will succeed Stephen Odell as Volvo Cars'
President and Chief Executive.

Corporate structure

Volvo tends to follow a decentralized, flat pyramid style organizational structure where the rules
and regulations or standardized processes are not emphasized and decision making is usually
quick. Comparatively, Geely has a more centralization, lofty pyramid structure consisting of
obvious hierarchy and slow decision making.

Volvos leadership style is mainly characterized by high management participation, less direct
supervision, performance based rewards and punishment, high flexibility and people orientation.

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Geely‟s leadership style is embodied in responsibility and commitment, authoritarianism and task
orientation.

Volvo‟s reputation relies on very strong values: quality, safety, ecology and design. Volvo cars
have always been identified with the word safety and it has remained as the most important value
for the organization since the creation of the brand: Volvo is also credited with lot of
innovations related to safety such as the three point seat belt. It was one of the first
manufacturers to equip cars with additional safety measures such as head rests in the front of the
car, the central survival security cell and the seat belts on rear passenger‟s seats .These initiatives
indicate the importance safety is for Volvo. The organizations website further illustrates
initiatives taken by the organization.

On the other hand, Geely‟s history has shown that the organization is more focused on profit
maximization. The centre of the organization is the founder Li Shufu. His strategy in all the
business he has been involved in has been to cut costs drastically, increase production for
economies of scale and dominate the industry. His motto for Geely was "Build affordable cars
for the masses." Initially his strategy worked and Geely quickly captured the small car market in
tier 2 and tier 3 cities, where small incomes meant smaller cars. However over the last few years
there have been dynamic changes in the industry. Other players like BYD have taken the lead in
the low cost small car segment. In its effort to rapidly scale production, Geely had not focused
its efforts in corporate branding and suffered as such. Each car was given different names and
had different identities. This reduced brand recognition significantly. The Chinese luxury car
market is expected to see huge growth and Geely sees the Volvo acquisition as a natural fit to
take the step into the luxury market. The technology and brand name of Volvo with the
economies of scale of Geely is seen to create a company with credibility and scale.

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Possible dilemmas

While the deal has been welcomed by many quarters, doubts still linger over the future of this
combination and there are several questions which remain unanswered.

Geely may see an opportunity to drastically cut costs at Volvo. Currently, Volvos are
manufactured mainly in plants in Belgium, Canada and Sweden where labour costs are among
the highest in the world. Given a chance, Geely would probably like to move Volvo‟s entire
production to China right away. This swift transplant would however cause buyers, both in the
West and the East, to question quality. North American and European customers who are 75%
to 80% of Volvos entire market identify strongly with Volvo's Swedish and European heritage;
especially to the extent they perceive it as a guarantee of quality. Another factor would be
Volvo‟s labour unions. They have been an integral part of the decision making in Volvo and
have opposed the deal with Geely since the start of the talks. Their main concern is a lack of
clarity about the future of Volvo post the acquisition. The Union as well as the government will
respond aggressively to stop any transplants that might lead to work losses or a lower tax base.
Most of the design and development still takes place in Europe and a disruption with the work
force them can adversely affect the supply of vehicles

If Geely are unable to cut costs in Volvo's European base, it will have to grow in China to
expand its way past the burden of legacy costs. Fortunately for Geely, it enjoys the support of
China's central government. The minister of Industry and Information Technology Li Yizhong
gave a strong show of support by attending the deal-signing ceremony.

Geely intends to build new Volvo factories, probably starting in the port city of Tianjin. They
intend to quickly increase production to between 200,000 and 300,000 units per year. This target
is very ambitious considering that Volvo sold fewer than 30,000 cars in China in 2009.

Geely is betting big on the luxury car market potential in China. Chinese consumers bought
340,000 luxury cars and SUVs in 2009, and that demand is estimated to climb to 650,000 by
2015. Wealthy Chinese car buyers are ready to pay more than $100,000 in cash for a new
Mercedes-Benz, Porsche or Lexus. Geely will have to charter new territory by increasing sales
through maintenance a brand image rather than through low costs achieved through aggressively
reaching economies of scale.

A lot of the success of the acquisition strategy is on how Chinese luxury car buyers will feel
about Volvo under Chinese ownership. Much depends on how well Geely will preserve the

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Volvo brand name. Ford also had ideas about how to reduce costs, by sharing auto parts across
Ford and Volvo products; however this platform sharing approach stripped a brand of some of
its distinct character. Years of neglect by Ford diluted Volvo's once-robust image to a large
extent. Volvo has not turned a profit since 2005 and lost $1.7 billion in 2008 and lost $934
million in 2009.

The cracks of this partnership are already beginning to tell with a dispute over the expansion
strategy into China. Volvo currently sells about 30,000 cars in China, half of which are imports.
To benefit from the booming luxury car market, Geely intends to open factories in three
locations for Volvo car parts and car engines. Volvo on the other hand in sceptical about taking
such major steps so quickly. After being in the red for many years, the car maker now has an
opportunity to make it globally competitive again. „It is a case of learning to walk before you can
run‟ according to the Volvo management team and they would like to solidify and understand
their position before expanding.‟ These two sides explain the main dilemma or hurdle the
organization faces and which direction the entity takes will ultimately determine the success of
this acquisition.

Dilemma reconciliation model

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Quality

This strategy allows Volvo to focus on their core competence which is providing safe and quality
cars. A large focus in this strategy would be on technological innovations from their European
research and development strategy. Geely could benefit from this strategy by incorporating some
of the innovation in their existing line or using the expertise to create their own line of luxury
models. Their growth strategy in china would be to scale up depending on current demand
rather than forecasted demand.

Pros

Image maintenance

This strategy would allow Volvo to maintain its image as a high end luxury brand with a large
emphasis on safety and security. It will also help Geely lift its own brand image by incorporating
Volvo‟s technologies.

Creating a competitive advantage

This single minded focus on new safety technologies will allow Volvo once again to be the leader
in safety. In the past few years German and Japanese car manufacturers have successfully copied
Volvos strategy and have caught up with it. This will allow sufficient investment into R and d
and help regain the competitive advantage lost during its years with Ford. Geely can also use
these technologies to differentiate itself from competing players like BYD and regain its lost
market share.

Cons

High costs

High costs have been one of the main reasons Volvo has found it difficult to turn a profit in
recent years. The highly unionized labor force opposes any kind of downsizing attempts. This
will keep production costs relatively high. At the same time by having a conservative strategy on
China, a lot of the cars will have to be imported from Europe. The high transportation costs and
taxations make Volvos price tag uncompetitive to its rivals in China

Smaller market potential

By continuing to keep the center of its activities in Europe, Volvo is relying on Demand from a
mature, highly competitive market. A lot of effort will have to go in to make their cars

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competitive again. In contrast, their conservative policy in the emerging economies means that
they are ignoring a large, robust, growing market where the appetite for automobiles is ever
increasing.

Sales

This focus of this strategy would be reaching economies of scale through significant scaling up.
Under this strategy production and assembly plants will be opened in China. A quick go to
market strategy will be adopted and Geely will use some of its distribution network to push
Volvo out as soon as possible to the masses. Geely would be hoping to do the same with its
products in Europe.

Pros

Strong market penetration

This aggressive go to market strategy will allow Volvo to enter the growing market of China. The
established distribution network of Geely will allow Volvo to quickly create a presence in the
region

Profitability

By moving most of the production process in China, Volvo will significantly reduce costs.
Coupled with its large presence in the emerging market and the demand for foreign brands will
allow it to offshoot the losses from its European operations and move towards profitability.

Cons

Image

The main drawback of this strategy will be loss of image Volvo will face. The Volvo value of
safety and security will change to one of mass production as it is identified with Geely. This
erosion of brand value will ultimately deteriorate the value of the firm as a while in the long run.

Profit Margins

With this approach Volvo will have to compensate the loss of its brand identity by effective
pricing to remain competitive in the market. By hedging its entire bet on China, Volvo risks
liquidation if the forecasts made aren‟t accurate.

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Integrated process

An integrated approach would allow for both companies to benefit from each other‟s
competencies. This strategy would find synergies in the process of manufacturing, distribution, R
and D among others. Volvo can use Geely‟s economies of scale while Geely can take advantage
of Volvo‟s technological base to improve its own product line.

While this strategy has obvious benefits for both the parties involved there are a lot of risks
involved in this strategy as well. The primary concern would obviously be the huge difference in
the culture of both the firms and the people. Ford attempted similar synergy tactics with Volvo
and failed miserably.

The second concern would be trying to find a common strategy for the volume inclined Geely
and the safety concerned Volvo. With a full synergy of both the organization it will be difficult
for them to adopt different strategies. This will place extra pressure for the internal departments
of the organization especially in R and D and distribution. This will create a lot of tension and
mistrust between employees of both the firms and ultimately affect their productivity.

Another concern that can be foreseen is the customer perception over both the firms brand
identity. While Geely will improve the qualities of its product line it is still seen as a low cost car
in China. The enhancement will not alter this customer perception much. While Volvo‟s direct
association with mass producing Geely will drop its brand perception even further and make it
even more uncompetitive in the international market.

Best of both worlds

The fusion of a premium brand name with a competitive Chinese firm is to bring out the best of
both their competencies and one should preserve quality in order not lose out on market share
or damage customers perceptions now the company is in non-European hands. The way going
forward for both the firms would primarily revolve around catering to the different needs of the
customers. By understanding the differing needs of the target markets, Geely and Volvo can
prepare strategies that enhance their personal competencies

One needs to achieve economies of scale and scope. Manufacturing will be gradually transited to
China were labor costs are lower than in the European countries. Naturally one should carefully
take into account the position of the labor unions or unemployment created when production
facilities are moved away from Europe to China. Focus should be first on cost reduction,

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revenue enhancement and synergies created, to build a strong international enterprise with
industry experience and a strong brand name, achieving economies of scale and scope, ready for
the fierce competition. Now years of neglect by Ford diluted the strong image of Volvo, it lost
$934 million in 2009 and $1.7 billion in 2008; it had not turned a profit since 2005. They have to
rebuild and sustain the quality image. Moreover establishing assembly plants take time there is an
increasingly competitive and crowded car market, so keeping up with the pace not necessarily
implies you are also a competitive player in the long run. Attention has to be paid with respect to
integrating the corporate culture of the two companies, which are poles apart and even
manufacturing is a touch task for Gelly. The integration could still entail long-run problems.
After effectively pooling resources, then the global demand for quality cars can be efficiently
produced and for both the European and Chinese market the strong demand for quality vehicles
is met.

Action Plan

A healthy Volvo

Geely‟s first priority should be to strengthen Volvo's global market position in general. Volvo
needs to launch new Volvo cars in Europe, North America and other developed markets. These
quality cars are to keep the European customers satisfied. A plan an implementation process
needs to be put in place to make Volvo leaner, better, smarter, and especially faster. The regained
health of the organization will enable it to become more competitive.

Strengthen Brand identity

In recent years both these brands have taken huge hits - Volvo due to years of neglect from Ford
and Geely due to increased competition from Byd among others. Both the firms will need to
identify the direction they are heading and work towards strengthening their competencies.
Volvo should continue to remain a symbol for quality high end cars, while Geely should focus
more on the mass automobile market. Any deviation from this status quo will adversely affect
both the brands.

Localize

Each firm will need to adapt to the consumer needs of the market they are entering in to create a
competitive advantage in them. Geely will not be able to sell their current product line in Europe
and America and Volvo is not competitive enough or appealing enough to the Chinese

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consumers in its current state. Volvo will have to make relevant design changes in the look and
feel of the car as well as changes in the engines of the cars to fit to the Chinese tastes, while
Geely can look to create a niche for itself in smaller, environmental friendly cars for Europe and
America. This reversal of markets will itself boost profitability and allow the group to capture a
larger demographic of both markets.

Utilize competencies

To help enter and remain in new markets the resources and Geely will have to help each other
out by sharing information and knowledge as well as helping each other to set base in their
respective markets. Some of the spillover would be knowledge exchange of emerging
technologies, production processes etc.

Sustainable Growth

To maintain sustainability of growth for both the firms a phase wise growth and development
strategy will need to be adopted. Volvo will have to look at increasing its capacity in China but
not at the extent that Geely would like. A steady growth and transition plan will allow some
buffer for strategic changes should the business environment change in the near future. Geely
will also need to formulate ways to enhance innovation in their organization in order to sustain
growth.

Supporting behavior

Increasing quality awareness of Chinese customers

The Chinese consumer currently perceives Chinese products as inferior quality. In general the
standards of quality requirements in China are pretty low. Awareness activities will go a long way
in helping the consumers identify with the competitive advantages of Volvo.

Respond to needs of the different markets

In the luxury car market of China the trends are towards elongated cars. While in Europe and
America the trend is moving towards ecofriendly small family cars. Currently both these markets
needs are not being catered to by the Volvo Geely identity. Investment needs to be made to
ensure that requirements such as these are adequately tapped into.

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Network

Although integration is not an optimum solution for Volvo Geely, there is still a lot of scope for
collaborative work. An exchange of knowledge and collaborative work to create mutually
beneficial solutions can really be beneficial for both the firms.

Transparency with the employees

Volvo will need to have constant and direction communication with the labor union to ensure
continuity of work. Volvo will have to outline the benefits of the strategy to the employees and
ensure that there is continued growth in employment either from Volvo itself or through Geely‟s
action plans.

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Appendix: Sources

1. http://www.knowledgeatwharton.com.cn/index.cfm?fa=viewArticle&Articleid=2276&l
anguageid=1
2. http://en.wikipedia.org/wiki/Geely
3. http://www.chinaautoreview.com/pub/CARArticle.aspx?ID=5055
4. http://www.unfpa.org/6billion/populationissues/development.htm
5. http://www.pandaautomotive.com/news.html
6. http://www.umtri.umich.edu/content/Felicia.Chang.Inside.China.2010.pdf
7. Study on Enterprise Cultural Integration after Geely‟s Acquisition of Volvo - Chen
Xiaohui, Liao Haiyan- 2010
Geely Just Bought Volvo. Now What?- MICHAEL DUNNE- April 2010- wall street
Journal
8. The Eight Overarching China Automotive Trends That Are Revolutionizing the Auto
Industry- Bill Russo, Edward Tse, Tao Ke, Bill Peng-2009
9. http://www.thetruthaboutcars.com/2010/03/the-importance-of-geely%E2%80%99s-
volvo-purchase-for-the-chinese-auto-industry/v

10. http://www.bestgrowthstock.com/stock-market-news/2010/07/22/special-report-
saving-volvo-geely-buys-brand-management-test/
11. http://www.economist.com/node/16750095?fsrc=nlw|mgt|08-11-2010

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