Thursday, February 3, 2011

A little more clarity on Geely (a little less on Volvo?)

More arcane corporate governance stuff...

In my previous post, I noted that Geely's 2008 and 2009 annual reports mentioned an unnamed "associate" of Li Shufu as co-owners of the entity that has ultimate control over the sprawling Geely empire.

In the interest of ensuring my readers (all three of you) have the most up-to-date information that I have, and in the interest of the pursuit of truth and transparency, I think a new post is in order.

Fortunately for the English speaking world, Geely is listed in Hong Kong, which means that, not only is the company required to report significant events to its shareholders, but it is also required to do so in English. (Call me lazy, but plowing through a 150-page annual report in Chinese is not my idea of fun--not to mention the fact that mainland reporting standards still don't measure up to those in HK.)

Here is what I have learned today. I can now say for certain that Li Shufu has complete (legal) control over the Geely listed company. This document (pdf) that I found on the HKSE website just happens to mention that Li Shufu owns 90 percent of Zhejiang Geely Holding Group, Ltd. (ZGHGL), which means the "associate" (in the yellow box) can own no more than 10 percent. (See abbreviated corporate structure below.)

What the document also spells out is exactly which entity now owns Volvo. As you can see in the structure below, I have added a couple of boxes at the bottom left side. The green box is "controlled" by ZGHGL (which we now know is 90% owned by Li Shufu). The orange box is Volvo, which is clearly owned and controlled, not by the listed Geely Auto Holdings (the purple box), but by Li Shufu's unlisted ZGHGL.

That explains why Li Shufu has been quoted as saying, "Volvo is Volvo, and Geely is Geely", meaning that these two companies are entirely separate entities. The only thing they have in common is control by Li Shufu.

This means a couple of things.

First, Li Shufu almost certainly had to rely on bank loans in order to pull off the Volvo purchase. Since the cash on the HK-listed Geely Auto Holdings' balance sheet belongs, not only to Li Shufu, but also to the company's public shareholders, Li Shufu could not have used Geely's cash to fund even part the Volvo purchase. Whatever cash was put into the deal would have had to come from any of the entities on the Li Shufu side of the chart. (Yes, it's possible Li could have borrowed money from Geely for the Volvo purchase.)

And while it's possible those entities have other business operations of which we aren't aware, the likelihood that these apparent shell companies were sitting on the necessary cash to fund the deal is pretty slim. Of $1.3billion in cash given to Ford in the Volvo purchase (Ford also got a note for $200 million), about $588 million came from Daqing and Jiading local governments, the remaining $712 million would have had to come from Li Shufu-related entities. At least part of that must have come from loans. (Early indications were that several major state-owned banks were lining up to help with the Volvo purchase, but this has not been verified since the purchase took place last August.)

Second, because Volvo is now 100 percent owned by an unlisted entity, we will no longer have full transparency into the company's operations.


  1. Greg,

    How about the identity of the associate - presumably that's not mentioned (although I'm not sure if there is any obligation to do that for a minority owner?).

    The distinction you draw on ownership of Volvo is also noted - in my fairly rudimentary reading of the "Will China destroy Volvo" story, few sources make clear that it is Li and not Geely that owns the brand.

  2. Hi Will,

    Sorry, still no luck on the ID of the associate. The 90% revelation was a step forward though. I'll be interested to see what they include in their 2010 annual report under their new auditor.

    As for Volvo ownership, the document I linked goes so far as to set out the following in a paragraph all by itself:

    "The Board would like to reiterate, and shareholders of the Company and the public are reminded the Group is not a party to the Geely Holding Acquisition."

    So while the entity that now owns Volvo has "Geely" in the name, it's not the same Geely that most in the media think it is.

    You'd think someone would have picked up on that by now.

    The whole Geely-Volvo story is really a Li Shufu story. It's a good thing he's young and healthy. :)


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