FORD'S CROWN JEWEL FOR SALE - VOLVO

- relevant to P3 (BA)

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When parents face financial distress, rarely they will consider selling their children. But in the commercial world, parent company will not hesistate as seen in Ford selling off its crown jewel (Goold & Campbell framework).

Volvo has rock solid reputation for safety and mid-range luxury appeal. The successful launch of MPVs and SUVs model further enhanced the potential. Its parent, Ford, faced with sudden sharp drop in demand back in USA forced it to restructure ie par down debts and capacity.

Why Malaysian automakers not buying?
In Malaysia, that infamous outdated technology car maker Proton which dominates the local market with 32% or so market share selling 143,000 units last year, surprisingly has not express interest to bid for Volvo. Why not buy? If funding is an issue, really taking a closer look, its not a huge barrier with its SOFP sitting on cash reserves $250million, its NCA is valued at $1.5 billion chargeable to banks and not to forget that it can raise debentures as a listed status. After all, it did manage to pay Mitsubishi Japan Motor amount of $7.3billion over last 25 years in royalty for outdated car engines technology. I am sure Volvo will be a better gain ie to own it.

The simple answer to above is the political paradigm of its major shareholder, the government. It appears that they rather put funding, guarantees for national interests such as fuel subsidies, staple food subsidies and even national defense expenditure like the purchasing of submarine which at one time was non-submersible - teething process, I guess.

This illustrates the folly of government involvement in commerce. The cosy relationship between commerce and government involvement has bred complacency and mediocracy. Well, look at the following article as we see how Chinese carmaker Geely is gayly swooping up this deal.

Ford's selling its crown jewel
Ford Motor Co. Chief Executive Officer Alan Mulally said talks to sell the automaker’s Volvo unit to China’s Zhejiang Geely Holding Group Co. are proceeding, rebutting local media reports the deal could be delayed.

“We are making progress on the negotiations,” Mulally said in an interview in Shanghai, without giving a time frame for when the agreement will be made.

Ford aims to sign a $2 billion deal to sell Volvo Cars to Geely by the end of this month, three people familiar with the talks said last week. Dearborn, Michigan-based Ford put Volvo up for sale in late 2008, part of a strategy of dropping European luxury lines to concentrate on its namesake brand. The China Daily said yesterday financing and technology problems could delay the acquisition, citing people familiar with the matter.

Ford ended three years of losses in 2009 by posting $2.7 billion in net income, its first full-year profit since Mulally came from Boeing Co. in 2006. Mulally has focused on refreshing Ford’s lineup, including adding more fuel-efficient small cars, while cutting costs. He reduced the North American workforce by about 47 percent and sold the Jaguar, Land Rover and Aston Martin luxury brands.

“Whoever buys Volvo, in this case it’s Geely that’s a frontrunner right now, they are gaining a great brand,” Mulally said. “We will continue to support Volvo just like we did with Aston Martin, Jaguar and Tata.”

Asia Growth
Geely, China’s largest private automaker based on 2008 sales, wants to gain insights into Western vehicle development and manufacturing through buying a mainstream European brand.
Mulally, 64, said he sees about 40 percent of global auto sales coming from the Asia-Pacific region over the next 10 years, while 35 percent will be in the European region and 25 percent in the Americas.

“We are going to invest whatever we need to support Asia- Pacific,” Mulally said. “It’s clearly the highest growth market going forward.”

Ford gained U.S. market share last year for the first time since 1995 with new models such as the revamped Taurus sedan, while the predecessors of GM and Chrysler Group LLC reorganized in bankruptcy and received federal aid. Ford surpassed General Motors Co. last month to become the top-selling automaker in the U.S. for the first time since 1998.

Mulally broke ground in September on a $490 million small- car factory in Chongqing, Ford’s third assembly plant in China. Ford ranks 12th in the nation with 2.8 percent of sales, according to auto researcher J.D. Power & Associates. GM, which emerged from bankruptcy July 10, outsells Ford 3-to-1 in the country, building twice as many vehicles.

PS: All currency above are in US$.