Sunday, January 23, 2011

*UPDATED* - Who is Li Shufu's "Associate"?

UPDATE below...

From the corporate governance files...

Geely is probably best known as the Chinese auto company that bought Volvo from Ford last year. It is also known as China's largest "private" automaker. I put the term "private" in quotation marks because, in China, the meaning of the word is not quite the same as in most developed countries.

As is generally well-known among China watchers, the government -- particularly local governments -- have influence on private businesses that goes beyond mere regulation. And the larger the "private" business, the greater the government's influence.

At a minimum, the local state is everyone's landlord. At the extreme, a local government can force private businesses to sell out to state owned businesses, as has been done with alarming frequency in the coal industry, or local officials can demand an ownership share.

On the positive side, not all governments necessarily seek to own or control private businesses, and many even provide help to private businesses in startup mode such as tax breaks, free or cheap land and utilities, access to bank loans, etc.

But the question that this kind of help often raises is, what does the government expect in return? Is it enough to be a successful business that employs people and pays its taxes on time, or do local officials expect more?

Because we always hear that Geely is a "private" business, I decided to try to find out exactly how "private" Geely is -- at least in terms of legal ownership. Geely is listed on the Hong Kong Stock Exchange, so its audited financial statements and accompanying notes are made available on the HKSE website. Geely's latest annual report (2009) is available here (pdf).

In an effort to determine who exactly owns Geely, I constructed the following partial org chart from information available in the annual report. The listed company is in the purple box. About 48 percent of the Geely Auto Holdings is held by public shareholders, and the remaining majority of shares are owned by a company named Proper Glory Holdings which is incorporated in the British Virgin Islands.

According to the annual report, Proper Glory is ultimately controlled by Geely's Chairman "Mr. Li Shufu and his associate," but for some reason it does not say who this "associate" is. (Here I am referring to the yellow box at the top of the diagram.)

Looking back over the years, this "associate" did not begin to be mentioned as an owner until 2008, but he, she or it seems to be pretty important. If you do the math, this anonymous "associate" could potentially control up to 35 percent of the listed company. And if "associate" owns as little as 75 percent of Zhejiang
Geely Holding Group Ltd, he, she or it would be the listed company's largest single shareholder with a 26 percent interest.

Furthermore, as you can see at the bottom of the org chart, Li Shufu and this mysterious "associate" also own 9% of the auto plants.

I contacted several friends who are even more knowledgeable than I about China's auto industry, and their assumption, like mine, is that Li Shufu controls the company. One suggested, however, that the "associate" may be Li's son or brother. Another speculated that it could even be a Communist Party member to whom Li is beholden for something.

I am not suggesting that there is anything illegal going on here, but it seems to me that Geely's auditor, the Hong Kong office of Grant Thornton (which has recently lost most of its employees to BDO) is not doing a thorough enough job of reporting by allowing a shareholder with the potential to control the company to remain completely anonymous.

If there is nothing to hide, why not reveal the name of the "associate"? At a minimum, why not reveal the respective ownership shares that Li Shufu and "associate" have in Zhejiang Geely Holding Group Ltd?

UPDATE, January 28, 2011:

Thanks to one of my readers for bringing this to my attention.

Above I said that Li Shufu's unnamed "associate" could control the listed Geely company with 75% ownership of Zhejiang Geely Holding Group Ltd. (ZGHGL). That's not entirely accurate. I was thinking more like an accountant than a lawyer. (And I am neither, though my work previously involved a lot of accounting).

I should have more accurately said that the "associate" could control Geely with only a majority ownership of ZGHGL. If the associate held 50% plus one share of ZGHGL, then he would effectively control Proper Glory, which, because it owns 51.3%, also controls the listed Geely Company.

Again, while my assumption is that Li Shufu is the controlling owner of Geely, until someone reveals how much of ZGHGL the associate owns, we cannot be entirely sure of that.

Subsequent to the above post, I have also received information from someone who knows the identity of the associate. This "associate" is apparently an influential Party member who helped Geely to get central government approval for the Volvo purchase. Unfortunately, I cannot reveal the source, but it is someone whom I trust, and who is in a position to know.

If that is indeed true, then, if I were a Geely shareholder, I would be even more interested to know how much influence and/or control the "associate" actually has.


  1. Hello Greg,

    Interesting post. So you're saying the "associate" could be either a Li Shufu friend/family member or the state-owned part of the shareholding (or maybe both)? Revealing too that HK Stock Exchange seems relaxed about the mystery shareholder's identity - anything to pull in the China listings, of course.

    For some companies it also seems to be a badge of honour to talk about being a "private firm" when addressing international audiences. Hainan Airlines does the same to mark itself out as different to the Big Three.

    Perhaps these firms believe foreign analysts read "private" and think corporate nimbleness and forward thinking? But the locals might not see the same attractions in the label - probably preferring to invest in the bigger state fish, with all the market privileges that apply?

  2. Thanks, Will.

    Yes, as long as we don't know who that associate is, there's the possibility that he, she or it is affiliated with the local state -- which would not be surprising at all.

    On the positive side, even if the local state has an equity stake, their concerns tend to be more about economic growth than managerial control. And in the case of Geely, the fact that they have plants all over China tells us that no single local government is telling Geely what to do.

    Really, this post was more about transparency than anything else. I raised the issue of state ownership as one of the more extreme possibilities. There's always the possibility that it's Li's brother who simply wants to remain anonymous.

  3. Greg,

    If the associate did get his stake in Geely on that basis, it points back to a similar post you did a while ago on Geely and its policy relationship with the state (I remember Wen Jiabao turned up at a Geely plant and said some strange things in relation to state support, given Geely wasn't thought of as an SOE).

    What would government "approvals" consist of for a deal like Volvo? Clearly they must go beyond the commercial terms to policy-related objectives but any idea of the scope? Or might the approvals relate more to the financing the deal?


  4. Great questions, Will.

    My contact was not specific about whether approvals were related to financing. My assumption is that, if the enterprise can demonstrate it has the financing, approvals consist of a thumbs up or down from the central government.

    As far as that goes, both the Ministry of Commerce (MofCOM) and State Administration for Industry and Commerce (SAIC) have official approval functions for foreign investment -- even when the investor is "private".

    Realistically, however, my sense is that other interested orgs such as NDRC and MIIT, or even the State Council, get to weigh in on the decision and have the power to exercise a veto.

    Given the sheer number of potential vetoes that could exist in Beijing, we should not have been surprised the Volvo deal took so long to complete. My guess is that Ford and Geely had come to an agreement fairly early in the process and that most of Geely's energy was spent lobbying for approval in Beijing.


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