January 26, 2010 / 4:43 AM / 9 years ago

UPDATE 3-Geely to double Volvo output with China plant-source

* Aims to sign Volvo deal in Feb, close by May - source

* To pay up to $2 bln, expects Volvo to break even in 2011

* To maintain Volvo Sweden operations, add China production

* Geely shares down 5 pct in weak HK market after run-up (Adds details, updates share prices)

By Huang Yuntao and Jacqueline Wong

BEIJING, Jan 26 (Reuters) - China’s Geely Zhejiang Holdings will nearly double Volvo’s annual global production with a new factory in Beijing as part of its plan to pull the Swedish automaker out of the red by 2011, a source said on Tuesday.

Zhejiang Geely, parent of Hong Kong-listed Geely Automobile (0175.HK), aims to complete the purchase of Ford’s (F.N) Volvo unit for up to $2 billion by May, according to an industry source who obtained a copy of the plan but wasn’t authorised to talk about it publicly.

Geely, China’s largest privately owned car maker, plans to produce 300,000 Volvo branded cars at a new factory in Beijing, according to the document seen by Reuters, almost doubling its own 2009 output, too.

Analysts said the 2011 break-even target could be a stretch for Geely, which under its charismatic founder, Li Shufu, has outlined ambitious global goals but has no experience running a foreign company.

“I think it’s optimistic to break even next year as it needs to build a plant first and it might take time for Chinese buyers to accept a made-in-China Volvo,” said John Zeng, an analyst with IHS Global Insight. “It will break even eventually but that’s going to take time.”

But he added that strong government support could work to the company’s favour, especially if the government puts Volvo on its list of approved brands for official purchasing. Such status has helped Volkswagen’s (VOWG.DE) Audi become one of China’s best selling luxury brands.


The deal would see Geely acquire Volvo for $1.5 billion to $2 billion, with an expected closing date in May after the signing of the initial agreement next month, according to a copy of the Geely document.

Geely, which means “lucky” in Chinese, said in December it was near such a deal, and later added it had strong support from the Chinese government for the purchase.

A Geely representative declined to comment.

The purchase would be the biggest in a recent spate of similar acquisitions of distressed global assets by Chinese carmakers. Local auto firms have thrived during the global downturn due to strong incentives for their industry under Beijing’s 4 trillion yuan ($586 billion) stimulus plan.

Ford, the only major U.S. automaker to avoid bankruptcy last year, is selling its luxury Swedish brand to free up cash as it climbs out of the industry’s worst ever downturn.

Geely will set up a separate company with registered capital of 8 billion yuan ($1.17 billion) to buy Volvo. Foreign strategic investors and the Hong Kong-listed Geely will hold 51 percent of the company.

Geely shares were down 5 percent amid a broader market sell-off and following a run-up that saw the shares more than double since mid-September on hopes for a Ford deal.


Under the deal, Geely will keep the brand and operations in Sweden, including Volvo’s headquarters, production facility and research centre, intact after the acquisition.

“(Geely) will keep the core value of Volvo as a luxury brand unchanged, while improving it with the development in emerging markets, and add more fashionable, dynamic and passionate international elements,” said the document.

To date, Geely’s focus has focused on the mass market with models such as the Free Cruiser and Geely Kingkong, which sell for as little as 40,000 yuan ($5,859). In contrast, Volvo’s China-made cars typically start at around $37,000 in the country, though its top of the line XC 90 sells for up to $205,000.

Geely sold a total of 321,900 units in 2009, up 45 percent from a year earlier and has set an ambitious annual sales target of 2 million cars by 2015.

Of Volvo’s 311,413 cars manufactured last year, the vast majority were made in Europe. The company’s Chinese joint venture sold around 15,000 vehicles, accounting for the majority of Volvo’s sales in the country last year.

Volvo is expected to grow its earnings before interest and tax (EBIT) of $703 million in 2015, the document said.

Among other deals involving Chinese vehicle makers, Sichuan Tengzhong Heavy Industrial Machinery is in the process of buying GM’s Hummer brand, while Beijing Automotive Industry Holding Corp (BAIC) last month sealed a deal to buy technology from GM’s Saab unit for $200 million.

The buying spree comes as China zoomed past the United States to become the world’s largest auto market last year, with sales jumping 46 percent to a record 13.6 million units.

To see a graphic on China's 2009 auto sales, please click on: here

Analysts expect China’s car sales to continue growing this year under renewed government incentives, though they expect the growth rate to slow to about 10 percent. ($1=6.826 Yuan) (Additional reporting by Michael Wei and Fang Yan in SHANGHAI; Editing by Doug Young and Lincoln Feast)

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