Volvo is Geely, and Geely is Volvo

It was only a matter of time.

The privately-held Chinese automaker Geely has announced that it will be forming a joint venture with its subsidiary Volvo.  As you may remember, Geely’s owner, Li Shufu conducted a high-profile purchase of the Swedish automaker Volvo from Ford in 2010.

The concern at the time had been that Geely simply wanted to strip away Volvo’s intellectual property for itself, but Li Shufu assured observers that the two entities would remain separate: “Volvo is Volvo, and Geely is Geely.”  And indeed, the purchase was structured so that both the Hong Kong-listed Geely Motors and Volvo are both subsidiaries of a holding company controlled by Li Shufu.  (In other words, Geely doesn’t own Volvo, technically, Li Shufu does.)

So why is Geely now forming a JV with Volvo?  Because it has to in order to build cars in China.  China’s rules require that any “foreign” automaker that wants to assemble cars in China may only do so through a joint venture with a Chinese automaker, and the foreign entity may hold no more than 50 percent of the JV.  Since Volvo is still headquartered in Sweden, it is considered foreign.

The icing on the cake for China here is that, like all other foreign automakers who have sought permission from Beijing for expansion or establishment of a new venture anytime during the past two years, Volvo is also being required to “assist” Geely in building a Chinese-branded car.

Until now, this has only applied to state-owned enterprises because only state-owned enterprises had joint ventures with foreign automakers (with the exception of a small JV between BYD and Daimler to develop electric vehicles).  The assumption had been that the SOEs, which had been dragging their feet in terms of developing their own brands, would be “given” slightly out-of-date technology by their foreign partners.  They would then produce cars under a Chinese brand name using the foreign technology and designs.  (I have previously written about this phenomenon, which I refer to as "sub-brands" or “JV Brands.”)

What is interesting here is that Geely, unlike the SOEs cannot be accused of “dragging its feet” in developing Chinese brands.  Indeed, Chinese brands are all Geely has ever made!

So what does this mean for Volvo?  What it means is that Volvo will simply be handing over technology onto which will be slapped a Geely-owned Chinese brand name.

Perhaps Li Shufu would now like to change his quote to, “Volvo is Geely, and Geely is Volvo.”

GM's Kevin Wale on Innovation in China

The consulting firm McKinsey published on its website an interview with Kevin Wale, president and managing director of General Motors China.  The whole interview is worth a read if you are interested in the state of innovation in China, but here are a few of the more revealing excerpts with a little of my own commentary.

Kevin Wale: When the Chinese get an idea, they test it in the marketplace. They’re happy to do three to four rounds of commercialization to get an idea right, whereas in the West companies spend the same amount of time on research, testing, and validation before trying to take products to market.

This is both scary and admirable.  Scary, because the Chinese are, at least according to Mr Wale, willing to put products into the market before they are fully tested as a means of development.  When you think about it, this is pretty much what Apple does with its products.  The first iPhone wasn't fully ready, but it was ready enough.  Feedback from customers helped them to improve on subsequent iterations.

What's scary about this is that driving a car that has been put into the market on an experimental basis doesn't sound like something I would want to do.  If my iPhone blows up, I would probably survive.  I'm not sure I could survive my car blowing up.  While I would hope that GM is able to prevent its partner, Shanghai Auto, from putting dangerous vehicles on the market, I wonder whether other Chinese auto companies are quite as careful.

The Buick LaCrosse, partially designed in Shanghai

The Chinese system supports the idea that it’s OK to fail if you fail in a government-sponsored direction. It’s OK to make mistakes as long as you’re moving forward. They’re quite OK to get out there, do something, find out it’s not perfect, but quickly adapt it and move forward. There’s no recrimination internally for doing that if that’s the direction the country wants to move in.

It's a great thing that people feel comfortable to experiment within the boundaries set by the state, but the opposite of Mr. Wale's statement is that they do not feel comfortable experimenting outside the boundaries set by the state.  But what if a worker has an idea that's not in “the direction the country wants to move in.”?  Too bad.

This, in my view, is precisely why China will always be a step behind.  Governments have historically been quite bad at charting an unknown course in terms of picking winners and losers.  In China, true technical innovation will always have to come from outside until people feel free to make mistakes in all areas of business, not just those approved by the geniuses in Beijing.

McKinsey Quarterly: Do you source innovation from outside GM China?  Kevin Wale: The answer depends on whether you’re talking about joint ventures or GM. In our joint ventures, we’re happy to take innovation from suppliers any day of the week.

This is more interesting for what Mr Wale doesn't say.  When asked whether GM gets innovation from outside, Mr. Wale assumes the question is about whether GM sources innovation from its joint ventures in China.  From his answer, it seems pretty clear that they don't.

Let's be honest here, the technology is still only flowing in one direction, and that's from GM to its Chinese partners.  At what point will GM's partner have enough technology that it doesn't need GM anymore?