Ford Motor Company has sold off another one of its nonessential brands in an effort to bring profitability to the faltering company. In 2007, Ford sold Aston Martin, and in 2008 the auto maker shed Jaguar, Land Rover, and a significant portion of its ownership in Mazda. On Sunday, Ford created a landmark agreement with Geely Holding Group to sell Volvo for $1.8 billion. This agreement finally puts a Chinese company onto the global automotive selling stage.
China’s rise to economic power is displayed across a variety of industries and this deal will put a Chinese company in control of a major automotive producer for the first time. The country has burst onto the scene in recent years, going after the United States in the competition for the world’s economic superpower. Because of the deal, a Chinese company can now viably compete in the United States automotive market.
Ford, in cutting its losses, has inadvertently created another competitor in a largely stagnant market. That is why the agreement contains many conditions and regulations concerning “intellectual property.” Ford developed in conjunction with Volvo many ideas and technologies that now become available to Geely. This would not be a problem if the Chinese company didn’t become an immediate competitor to Ford. Though the agreements have not been specified, it seems that the “intellectual property” will be limited to production of Volvo vehicles and not be allowed to be included in Geely automotives.
Volvo has been a burden on Ford Motor Company since 2007 losing around $1 billion each year. But Geely has a plan to slash production costs by utilizing the cheap labor available in China. With its own country being the largest automotive market in the world, Geely hopes to make Volvo a profit-turning machine in the next few years. Right now, the plans of Geely look positive because Volvo has experienced a 40% increase in sales in the first two months of 2010.
The agreement is helping Ford move back to its core brand name and pay off its $23.5 billion debt to the United States government. Chief Financial Officer Lewis Booth stated in a press conference, “we think it’s a fair price for a good business.” The purchase agreement still needs government approval, followed by an official transfer of the Gothenburg, Sweden-based company before the end of the third quarter. Geely plans to keep current Volvo management for the time being as the company transition begins.
