Where is Geely Getting the Money to Buy Volvo?

News, cover, issue 465, April 20, 2010
Translated by Liu Peng
Original article:[Chinese]



Above: The Geely GL Eagle GS sports car, currently on display at the 2010 Beijing Auto Show

If everything goes smoothly, after completing the acquisition of the Swedish auto company, Chinese private automaker Geely Holding Company will locate the office of Volvo China's headquarters in Shanghai.

The office will be situated in Jiading Industrial Zone located in Shanghai's Jiading district, home to Volkswagen AG's joint venture with local car-maker Shanghai Automotive Industrial Corporation.

Geely Holding has also chosen Jiading District and the city of Daqing in the northeastern province of Heilongjiang to be the home of the two production bases that will be produce vehicles under the Volvo brand, the EO learned.

People familiar with the matter revealed to the EO that Shanghai Geely Zhaoyuan International Investment Co., established on March 2nd this year, is in charge of Geely's acquisition project.

A worker at Geely Zhaoyuan confirmed the news but declined to talk more about it. "The company's project is awaiting approval from authorities so I am not able to discuss the details." he said.

The EO learned that with registered capital of 20 million yuan, the new company is being established by Beijing Geely Wanyuan International Investment Company and Shanghai Jia'erwo Investment Company.

According to the Beijing Yizhuang Administration of Industry and Commerce, Geely Wanyuan was established by the Beijing Geely Kaisheng International Investment Company, a wholly-owned subsidiary of Geely Holding, and the state-owned asset management firm of Daqing City.

On March 8th this year, Geely Wanyuan increased its registered capital to 7.1 billion yuan with Geely Kaisheng contributing 4.1 billion yuan and the state-owned asset management firm of Daqing putting forward 3 billion yuan.

Shanghai Jia'erwo Investment Company is being established by Shanghai Jiading Development Zone and a local state-owned asset supervision and administration commission; its start-up capital was registered at 100 million yuan in early February this year.

People close to the matter said, "The purpose of Jiading District's establishment of Shanghai Jia'erwo is to take part in Geely Holding's acquisition deal."

"Within two weeks, Beijing Geely Wanyuan Investment Company and Shanghai Jia'erwo Investment Company will transfer 8.02 billion yuan to the bank account of Beijing Geely Zhaoyuan International Investment Company. According to Geely's agreement with Ford, the registered capital of the company that is in charge of the acquisition should reach 8.1 billion yuan before the end of April," the source quoted above added.

The financing of the deal is now clear, of the total required 8.1 billion yuan, Geely Holding needs to offer 4.1 billion yuan, the Daqing state-owned asset management firm will contribute 3 billion yuan while Shanghai Jia'erwo will put forward 1 billion yuan.

Correspondingly, Geely Holding acquired 51 percent shares of the new company while the remaining two bodies respectively hold 37 percent and 12 percent.

In addition, the EO learned the funds that Geely Holding needs to complete its takeover of Volvo is composed of 8.1 billion yuan (some 1.2 billion US dollars) of registered capital and 1.5 billion US dollars of cash reserves for vehicle development.

Location, Location, Location

The source mentioned above also revealed that Heilongjiang's Daqing and Shanghai's Jiading district were not simply investors of Geely Holding's acquisition deal. Their decision to invest also involved the site selection of Volvo's Chinese headquarters and production bases, the source added.

On February 9th this year, Geely Holding signed Geely's Volvo Shanghai Project Framework Agreement with Shanghai Jia'erwo Investment Company.

According to the agreement, Geely will locate Volvo's Chinese headquarters in Shanghai's Jiading district and also build a factory there.

After the factory is set up in Jiading, the local government will offer more financial support to Geely Holding.

The agreement still requires approval from the relevant government departments and will likely be approved before the end of April this year.

The EO learned that Beijing Geely Kaisheng International Investment Company also signed an agreement with the Daqing state-owned asset management firm to mortgage its shares worth 3 billion yuan to the latter company, which would enjoy the dividends from the shares.

In addition, Geely Holding signed an investment agreement with the Daqing company, which noted that after Geely finalized its takeover of Volvo, it would build a new factory in Daqing, the source quoted above said.

It still remained unclear whether the new factory would produce Geely or Volvo branded vehicles. "It is more likely that it will produce Volvo cars. After all, 3 billion yuan isn't a small sum." the above source added.

People close to the matter said, "The framework of the investment agreement is very clear, Daqing will develop itself as the material supplier for Geely and Volvo cars."

In a telephone interview with the EO, Jin Hongda, chairman of the Daqing state-owned asset management firm admitted the company's cooperation with Geely.

"We have signed confidentiality agreements, so I can't reveal anything about it." Jin said.

Industry players held it was by means of awarding the location of where Volvos would be manufactured that Li Shufu, chairman of Geely Holding Group, managed to acquire financial support from both Daqing and Shanghai's Jiading District.

One of the important reasons Ford chose Geely Holding to take over the Swedish automaker is Geely's status as a private firm.

Therefore, how to efficiently utilize these governments funds while dispelling Ford's suspicion of the involvement of the state and ensure the smooth takeover of Volvo are emerging problems Li Shufu will confront in the future.

Links and Sources
Jiading Industrial Zone: Official Site
Associated Press: China's Geely challenge: High hopes, hard reality
Inside Line: Geely GL Eagle GS sports car at 2010 Beijing Auto Show
China Car Times: Geely at the Beijing Show