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

February 21, 2013

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

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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.

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6 Comments leave one →
  1. Lee permalink
    February 21, 2013 4:22 am

    I’ve been watching what Geeley does with Volvo. I had set certain goals if Geeley were smart, and missing these same goals would suggest Geeley is just another Chinese OEM, more money than brains. Unfortunately, the general concensus is that Geeley bought Volvo, and is getting very little of the potential benefits (systems, processes, technologies of a Western company). Instead of having parallel “shadows” of each role in the management and product development process, Geeley appears to be using their Swedish technical center as a self-owned contract design firm, much like how Hawtal Whiting or a Lotus might be contracted externally. This suggests that, 5 years from now, Geeley in China will have no more capability than they did 5 years before to develop cars to Western standards. This problem is an ongoing characteristic of Chinese OEM, and is the reason that I don’t pay much attention to Market Research reports which suggest that China is advancing, but at a lower pace. This characterisitic of Chinese OEMs ensure that they will be paying for contract powertrains and BIW in perpetuity. Besides that, there appears to be a push for future Chinese built Volvo’s to use Geeley’s Chinese supply chain. I wonder how that will contribute to Volvo’s reputation for quality.

    I have no idea why owning an anachronistic taxi builder from the middle of last century makes any sense to help a Chinese OEM who’s aim is to learn how to build modern cars.

    However, Fisker may be a cheap way to purchase NEV technology since Geeley probably knows they have no in house capabilities to develop it, even at greater expenditures. At least, they will have a team of clever American guys in LA who will tell them how it is done.

    W/SR

    • February 21, 2013 5:39 pm

      Lee, Thanks for a thoughtful reply. I agree that Chinese OEs do not use their access to foreign technology very well. Of course, in the original JVs the foreign partners did manage to keep most of their technology from their Chinese partners. But Geely actually owns Volvo so it could easily integrate its development processes. Re: Volvo and Geely sharing supply chains. Since Geely uses many multinational suppliers, quality should not be an issue.

  2. Jim Newbery permalink
    February 21, 2013 6:07 am

    They r crazy!

    Regards,
    Jim

  3. John Kua permalink
    February 25, 2013 7:06 am

    Hi Alysha,

    Having worked with Chinese automakers, here’s what I think probably happened. In China, there are just too many companies competing with each other for the top 5 to 10 spots. Consolidation in the auto industry, unlike Japan, EU, US and recently Korea, is still some time away. Local brands are still relatively not that reputable in both local and overseas market. These companies understand that in order to stand above their competition, they have to be uniquely linked to foreign automakers for their technologies, branding or markets. Hence the rush to outdo each other in foreign JVs. Some Chinese companies judiciously seeking out relevant technologies and competencies relevant to their long term growth strategy with laser-like focus – as example: your earlier post on Wanxiang acquiring A123. Geely’s problems, as with its major competitors, are brand recognition and international market exposure. Their longer term strategy may be sound, but as you rightly pointed out in this blog’ title, the execution part is somewhat befuddling. I agree they seem to be “acquisition splurging” around without adequate strategic filtering to guide them to their final goal. Take the case of Fisker Karma – I also wondered why they chose to invest in a company that makes a PHEV that is based on same technology principle (i.e. series range-extender) as the current GM Volt ? – which by the way, already has sales statistics to show that it has not met its projections since production was launched about two years ago.
    As for the Kandi mini-EV acquisition, one need to go no further than the recent case study of the fortunes/bankruptcies of a similar class of EV – the Think Global.
    If it is for the technology and brand recognition, I agree they would be better served by leveraging on their recent investment in Volvo on the R & D center to churn up new technologies and models for the word market.

    John Kua
    Singapore

    • February 25, 2013 11:15 pm

      Hi John,
      John, In fact Volvo also has PHEV technology, I believe. But, I know why Geely chose to invest in PHEV technology, just not why Fisker! The Chinese government is encouraging China’s automakers to pursue PHEV technology as in interim step to pure EVs. Pure EV technology is not mature enough for mass production, as several Chinese officials have noted recently.
      Alysha

      • John Kua permalink
        February 26, 2013 9:04 am

        Yes, you’re right. Volvo already has the production model of PHEV (the V60), but diesel version. (European automakers tend to be strong in diesel technologies). As for EVs, well, batteries are always the problem – reliability, performance and safety issues. The point I wish to raise was, as you mentioned, Volvo already has the PHEV technology- and production ready! – why would Geely go for the relatively untested PHEV technology of Fisker, which is similar to the GM Volt that uses gasoline engine-generator as range-extender? Maybe they think gasoline PHEVs is the way to go in China. (By the way, BYD’s F3DM is a 1-litre gasoline engine PHEV).

        John

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