Geely bid for Volvo makes Goldman-backed boss disregard Toyota

In a sprawling factory south of Shanghai, Li Shufu, the self-made Chinese billionaire who is poised to buy Volvo Car Corp from Ford Motor Co, is presiding over a new-model launch party. If he has any concerns that his Geely Automobile Holdings Ltd’s rising sales and surging stock price could falter, he’s not showing them on that summer day.

Geely, the publicly traded automaker that Goldman Sachs Group Inc is backing to the tune of $334m, is unveiling its first homegrown model specifically designed for Western markets, Bloomberg Markets reported in its February 2010 issue.

The gleaming-white four-door compact, which retails for $11,700 to $17,600 in China, is called the Emgrand, a name made up to conjure grandeur. Policemen salute as the first Emgrands leave this plant in the port city of Ningbo through clouds of theatrical smoke.

Li, Geely’s chairman, already has an international auto business. Since 2006, Geely Automobile has been a 23 per cent shareholder in the company that’s the biggest maker of London’s iconic black cabs. In October, Ford named Geely Holding Group Co, Geely Automobile’s closely held parent, as the preferred bidder for Volvo. On December 23, Ford said the companies had agreed on most terms of the sale, which would be completed in the second quarter.

As Li, 46, answers questions at the factory, a reporter asks whether he wants to emulate Japan’s Toyota Motor Corp. Toyota, the planet’s No 1 carmaker, lost ¥437bn ($4.85bn) in the year that ended on March 31, 2009. “Why should I want to be Toyota?” Li deadpans. “They’re losing billions.”

If any product illustrates China’s place in the new economic order, it’s the automobile. The country has averaged annual 10 per cent increases in gross domestic product since 1978 - growth that has helped turn a nation of bicyclists into a land of car­craving consumers. China, with its 1.37 billion people, overtook the US in 2009 to become the world’s largest vehicle market by sales. The government projected that auto sales for the full year would soar 39 percent to more than 13 million vehicles. While US manufacturers shrink, China had 117 automakers at the end of 2008, according to the China Association of Automobile Manufacturers.

Amid a global recession, the collapse of Detroit and trouble at Toyota, investors are wild about China’s prospects. Geely, in which a Goldman-managed fund holds bonds and warrants that can be converted into 15 percent of the company, saw its shares jump 573 per cent on the Hong Kong stock exchange in 2009 through December 28. That’s more than 10 times the rise in the benchmark Hang Seng Index.

BYD Co., maker of the world’s first commercially available plug-in hybrid, an electric-powered car with a small gasoline engine for backup, attracted Warren Buffett. He bought a 10 per cent stake for $232m in September 2008. BYD shares surged more than fivefold in 2009 through December 28. Shares of six other Chinese car companies, including SAIC Motor Corp, China’s biggest domestic manufacturer, have at least tripled. Goldman’s September 2009 investment in Geely increased in value by 50 per cent in the first two months.

Now, spurred by the government, Chinese automobile companies are challenging Western, Japanese and Korean rivals on the global stage. By 2015, China is aiming for 10 per cent, or an $85bn share, of the world’s vehicle and auto parts sales, the Ministry of Commerce said in November “There’s no doubt that 2009 marked the year that China became king of the automotive hill,” says Michael Dunne, president of Beijing- based Dunne & Co, which advises fund managers on buying shares in Chinese automakers.

There may be roadblocks ahead. The most immediate threat would be if the government winds down its $586bn stimulus. The incentive package has given tax breaks and subsidies to 700 million rural residents, enabling them to buy minivans and light trucks for as little as $3,800. Already, on December 9, China said it would raise the sales tax on cars with engines of 1.6 liters or smaller, although not to pre-financial crisis levels.

Chinese carmakers, including Geely, have yet to make inroads into developed markets partly because quality, safety and brand recognition still lag behind rivals’. At home, the car frenzy has sparked traffic jams and worsened air quality. Profit margins in China can be fractions of what they are in the West. And the torrid growth that’s luring investors may slow to 10 per cent to 15 per cent in 2010.

“This is a crucial time for Chinese carmakers,” Dunne said in December. “What happens in the next six months will have a major impact on whether they will succeed or struggle.”