Geely’s Li Shufu isn’t using his cash well with all these acquistions, but hey, this is China

I recently interviewed several executive from Group 1 Automotive, www.group1auto.com the fourth largest automotive dealership group in the U.S.  We were talking about Group 1’s acquisition strategy – it acquired 16 dealerships in 2012, a year when many of the big dealership groups held back from acquisitions because they felt prices for the dealerships were too high.

Group 1 is listed on the New York Stock Exchange, so the management wants to do what is best for its shareholders at all times, and Group 1 thinks acquisitions are a good use of that cash.  It has its own way of evaluating a dealership’s worth, taking into account the cost savings gained from economies of scale because of Group 1’s size, said the executives.  And, Group 1 had cash because of some good decisions it made a few years back.

It won’t buy a dealership unless the investment will earn 15% return on a discounted cash flow, said Pete DeLongchamps, vice president of financial services and manufacturer relations.  “That is what our job is to our shareholders, to make acquisitions and provide those types of returns,” he said.  “We think acquisitions are the best use of our cash, followed by dividends or share buybacks.” www.autoretailbusiness.com

That got me thinking about Geely www.geely.com chairman Li Shufu’s acquisition splurge over the last few years.  Were those acquisitions the best use of shareholder’s cash?  Of course, I can’t be sure if the cash for the acquisitions came from the portion of Geely that is listed on the Hong Kong Stock Exchange.  But the question is valid nonetheless.  Were those purchases the best use of Geely’s cash?  Not in most cases.

The purchase of Swedish luxury automaker Volvo in 2010 was arguably a good use of Geely’s cash.  http://www.nytimes.com/2010/08/03/business/global/03volvo.html Geely obtained management and technical knowhow it could use.  But the brand was struggling when Geely bought it, and is still struggling.  In December Volvo borrowed $1.2 billion from China Development Bank to refinance existing loans in the face of falling sales and growing financial losses. http://www.reuters.com/article/2012/12/13/volvocars-loan-idUSL5E8ND9PI20121213

In February of this year, Geely bought British taxi cab maker Manganese Bronze Holdings, http://www.ft.com/intl/cms/s/0/a4fc2992-6c5c-11e2-b73a-00144feab49a.html#axzz2LUzZL0du a company in which Geely already owned a 20% stake.  That seems like a questionable use of cash.  Manganese Bronze was in “administration,” which seems to be a British term for something like a Chapter 11 bankruptcy in the U.S.  The taxi maker hadn’t posted a profit since 2007, had faced several recalls for faulty components in the last year, and posted a pretax loss of 3.6 million pounds in the first half of 2012, according to Bloomberg news.

Also in February, Geely subsidiary Shanghai Maple Guorun announced it would form a 50/50 joint venture with Kandi Technologies Inc., a producer of low-speed electric vehicles based in the east China province of Zhejiang. http://www.greencarcongress.com/2013/02/kandi-20130204.html  Also questionable.   Geely said in a statement that the consumer market in China for electric passenger vehicles had not materialized, and was not likely to be viable for a long time.   However, Geely believes electric vehicles will be a “major solution” for the current energy and traffic congestion problems, and “Geely took a fancy to Kandi’s smaller-sized low-cost and low-speed electric vehicles,” the company said.

China has dozens of low-speed electric vehicle producers, and Kandi’s EV technology has never been tested for mass production.  The company, which is listed on the NASDAQ stock exchange in the U.S., (KNDI) had net income of $3.88 million in the first nine months of 2012 vs. $9.94 million in the same period in 2011. Go cart sales are its main source of income right now.  Kandi says the fall in income is because it invested that money in R&D in hopes of establishing a leading position in the EV market. http://secfilings.nasdaq.com/filingFrameset.asp?FileName=0001062993%2D12%2D004743%2Etxt&FilePath=%5C2012%5C11%5C14%5C&CoName=KANDI+TECHNOLOGIES+CORP&FormType=10%2DQ&RcvdDate=11%2F14%2F2012&pdf=

According to a filing with the U.S. Securities and Exchange Commission, Kandi borrowed heavily the first three quarters of 2012, as well as standing as guarantor for $19.7 million in loans for local companies (who also stood as guarantors for Kandi’s loans) “It is a common business practice among companies in the region of China where Kandi is located to exchange guarantees for bank debt with no consideration given,” said the filing.

Which brings me to Geely’s bid for Fisker Automotive. www.fiskerautomotive.com Fisker has one model in production, the US $100,000 Karma.  Fisker is trying to launch a new, more moderately-priced PHEV, called the Atlantic.  But development of Atlantic is stalled waiting funding.

Meanwhile, the Karma has been plagued with problems. First, the batteries in a couple of Karmas spontaneously ignited. Then, the influential independent product review publication Consumer Reports bashed the Karma.  The battery failed on the first test drive by Consumer Reports, not a good start. http://news.consumerreports.org/cars/2012/03/video-bad-karma-our-fisker-karma-plug-in-hybrid-breaks-down.html

The Karma is currently Fisker’s only model. It need more cash to finish development its next model

When it did get to drive a Karma, Consumer Reports was not impressed.  It wrote that the Karma had “poor dash controls, limited visibility, a cramped interior, awkward access into and out of the seats, an engine that is noisy when running, long battery recharge times, and a small backseat and trunk.” Concluded the review, “The Karma’s heavy, SUV-like weight affects agility and performance, and the Karma lacks the oomph you would expect.”  Ouch.

What would Geely get out of owning Fisker?  Geely has access to plug-in vehicle technology through Volvo.  While there may be a market for Fisker’s cars in China – after all, Leonardo di Caprio owns one, who wouldn’t want one? – it will be small, while the investment to make Fisker a success will be big.

Li Shufu has big ambitions.  But I think he should study Group 1’s approach to investment and ask if his investments are the best use of Geely’s money.  The answer, in many cases, would be no.