After acquiring a nearly 10 percent stake in Mercedes-Benz owner Daimler AG to become its biggest shareholder, Zhejiang Geely Holding, the parent of Geely Automobile Holdings (00175.HK), now controls three major auto brands.
Li Shufu, the founder of Geely, is reportedly setting his sights on Jaguar, Land Rover and Jeep as well.
The Chinese automaker bought an 8.2 percent stake in Swedish truck maker AB Volvo for US$2 billion in December last year.
The Daimler and Volvo deals cost a total of US$11 billion. Where does the money come from?
According to reports, Geely only paid a fraction of the amount as deposit and is going to pay interest on the balance. Given Geely’s strong credit, it might only need to pay 25 percent initially, or US$2.25 billion, for the Daimler stake.
Back in September, Geely approached Daimler for the first time and asked it to issue new shares. But Daimler CEO Dieter Zetsche was concerned about the dilutive effect of a share placement and possible objection from minority shareholders.
Finally, Geely decided to buy the shares in the secondary market after both sides reached a consensus.
Investment banks including Morgan Stanley and Industrial Bank then executed on behalf of Geely.
The stake size was set at such a level that Geely will have enough influence on Daimler but not large enough to challenge the existing management.
Li acknowledged that the deal was funded by “overseas capital market, rather than onshore capital”.
The Daimler deal was applauded by the state mouthpiece People’s Daily, praising Geely for consolidating global resources and pursuing technical innovation.
In fact, President Xi Jinping is said to have repeatedly voiced support for Geely when he was the party boss of Zhejiang province in 2003.
So, why is Geely buying Daimler shares?
Li has made it clear that the Daimler deal was not a financial investment or a simple strategic move.
He is banking on Daimler to help Geely become a leading player in electric and autonomous cars.
With the huge technological changes going on in the global auto industry, Li foresees that the sector will consolidate into three alliances, one from Europe, one from the United States and the third from Asia. Li clearly wants Geely to be leader in Asia.
Li has reason to be confident, having successfully turned Volvo around.
Geely bought Volvo Cars in 2010. Last year, Volvo sales hit a record number of 570,000 units, 70 percent higher than the level before the acquisition.
Meanwhile, the technology and brand image of Volvo also gave a boost to Geely’s own brand business. In 2017 sales of Geely cars jumped 60 percent from the previous year to 1.25 million units.
This article appeared in the Hong Kong Economic Journal on Feb 27
Translation by Julie Zhu
[Chinese version 中文版]
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