China's Geely: First London Cabs, Now Volvo

Last Updated Mar 29, 2010 7:52 AM EDT

A few weeks ago at an Economist conference, there was some dissent around the future of China's economy: were its businesses sufficiently innovative in their own right to sustain the country's fast growth? Zhejiang Geely Holding Group's purchase of Swedish car-maker Volvo reminded me of this debate.

It's not hard to see what Geely gets from the deal and, superficially at least, it looks like its $1.8bn Volvo purchase proves the argument that China's not innovative, but acquisitive, picking up companies from mature markets for their technical capability and supply chains.

The buy is seen as "just one in a long line of deals going forward in which Chinese companies buy Western technology know-how", and Geely has already added specific western buys to its stable, from Manganese Bronze Holdings, makers of London cabs, to transmission-maker Drivetrain Systems International.

Geely's founder, Li Shufu -- with government endorsement of the buy -- hopes to revive Volvo's fortunes within a couple of years, opening a plant to produce 300,000 cars a year (double Volvo's current output). And the purchase was a bargain, with Shufu's business paying considerably less for Volvo than the nearly $6.5bn Ford did in 1999. All if this suggests the buy was a purely output-driven decision.

But it's also pledged to keep the company's Swedish operations going, a potentially expensive option that suggests Shufu has more than just pure output in its sight. The argument is that it can use the prestige marque as an image enhancer, improving its brand image and its reputation in the local market, where it's known for selling cheap cars.

And yes, it is a capability-building move: it can learn from the Volvo acquisition, fulfilling predictions that "with much of the automotive industry in Europe and America in deep trouble, Chinese companies look highly likely to make some strategic purchases," as Booz's Edward Tse writes in his book, "The China Strategy". But Geely can also develop on that learning, using the Chinese market as a test-bed to develop efficient practices to keep prices down but quality up.

And that's perhaps where China's innovative capacity's underestimated by more mature markets. As a young market, it's bound to need acquisitions to grow quickly and enhance technical clout against competitors. But it's dangerous to assume that innovation isn't part of its future. It may not produce groundbreaking Apple-style products, but, in flagging industries such as automotive, it's feasible that acquisitions will feed into process innovations that re-shape those industries. As Tse writes, "Do not underestimate how much change China can get through in an extremely short time."