'Geely Holdings' Purchase of Volvo - Another Big F@&#% Deal"

Sydney M. Williams

Thought of the Day

“Geely Holdings’ Purchase of Volvo – Another Big F@&#% Deal”

March 29, 2010

The sale of a Swedish company, owned by an American company, to a Chinese company says a lot about the world in which we live. Zhejiang Geely Holding Company is buying Volvo Cars for $1.8 billion.

First, the transaction makes clear we live in global world and is indicative of the increasing wealth in the rising East. (Three years ago Ford sold three British auto companies – Aston Martin, Jaguar and Range Rover – to Tata Motors of India.) Second, the price, at $1.8 billion was 72% below what Ford paid eleven years ago in a bidding war with Fiat and Volkswagen.

Of course, the world is a different place than it was in 1999 – just as it will be different in 2021. In 1999, about 17 million cars were sold in the United States and less than 5 million cars in China. Last year, for the first time, China’s market proved larger than the U.S. – 10.2 million cars versus. 13.6 million in China. According to this morning’s New York Times, the average car in China sells for $17,000 versus just under $30,000 in the U.S., so on a dollar value basis the U.S. remains the largest market, but the trend is obvious. Geely’s plans are ambitious. Last year 20,000 Volvos were sold in China. Geely Chairman Li Shufu said he plans to build a plant in China capable of producing 300,000 vehicles.

Earlier in March, an article in the Wall Street Journal by Kris Maher and Bob Tita spoke of the trend toward “onshoring” – the relocation back to the United States of manufacturing facilities. The article focused on Caterpillar, but mentioned that both General Electric and U.S. Block Windows, Inc. were moving some facilities back to the U.S. Disadvantages of manufacturing offshore, according top the authors, include shipping costs, logistics, quality issues, political unrest and fear of theft of intellectual property. The relocation of manufacturing facilities is a process in constant motion. But, as Scott Paul, executive director of a lobbying group Alliance for American Manufacturing, says of the trend, “I would call it a trickle.”

In my opinion, the message from this announcement is two-fold: China and other emerging nations cannot be ignored and, over time, will continue to expand and second – and perhaps more relevant – the price indicates that values, in general, are far more attractive than they were a few years ago. What is true for the value of businesses is also true for stocks. This is an important deal, and it won’t be the last.

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I will be in Florida for the balance of the week with son Edward, his wife Melissa and their three little blondes.