Geely and China’s Two Markets

It’s hard to believe that just over 10 years ago Geely was producing $100 motorcycles for China’s local market for transportation. When Li Shufu, the company’s visionary founder and chairman, announced in 1997 that he wanted to enter China’s fast-growing passenger car business, everyone in the world, including nearly everyone in China, thought it was the funniest thing they had ever heard. How could such a company compete with the likes of Volkswagen, GM and Ford in China?

The doubters seemed to forget that no less than Honda had made a similar leap several decades before. But most of all, they didn’t understand the dynamics behind the two markets in China, and they underestimated the tenacity of Chinese entrepreneurs like Mr. Li.

From its humble beginnings and that bold announcement by its chairman, Geely has emerged as one of China’s largest local passenger car brands with nearly 4 percent of the market, more than Citroen, Ford and a host of other more famous players. Through September, Geely produced 223,000 cars, a 33 percent increase over the prior year.

Once local Chinese companies achieve a certain level of success in the China market, most begin thinking about markets outside the country, and Geely is no exception. As MTD reported in September, 2008, Geely struck a deal last year with Manganese Bronze Holdings PLC, did a U.K. company and owner of London Taxi International (LTI), to produce London taxicabs in China. An updated–and lower priced–version of these classic vehicles began rolling off Geely’s assembly line in Shanghai last fall, and are now being sold in China as well as to the export markets.

As impressive a development as that was, it wasn’t enough for Li Shufu. For the past two years, he has been eyeing Volvo, and the combination of the global financial crisis and the plight of the U.S. auto industry is now making his dream a reality. Last week, it was announced that Geely is the preferred bidder for the last member of Ford’s Premium Auto Group, which once included Jaguar and Land Rover, as well as the famous Swedish brand.

I happened to be in Europe when the Geely announcement was made, and needless to say, it turned heads. The reactions in the United States and Japan, I imagine, were similar. The fact that a Chinese car company is buying one of the world’s truly global automotive brands is in itself shocking. The fact that it is being bought by a privately-owned, relative newcomer to the industry, and not by one of China’s well-funded state-owned companies, is even more so.

Geely’s purchase of Volvo underscores the powerful forces that are being unleashed by China’s two markets. MTD readers are well aware of the fact that for any product, there are two markets in China—a high priced, high technology market where the 400 million people who have benefited most from China’s economic development shop, and the low priced, low technology, purely local, market where the other 900 million people buy the goods needed in their daily lives. I devote an entire chapter to this subject in my book, Managing the Dragon, and have referred to it on numerous occasions in this blog.

In autos, the headline number is that China will produce 12 million vehicles in 2009, itself an impressive accomplishment. However, that is just the tip of the iceberg. Every year, China produces at least 50 million vehicles for transportation. Twelve million are the BMWs, Buicks, and Audis that China’s wealthier citizens can afford, while the remaining 38 million are used in vehicles that the country’s less advantaged citizens must buy to meet their transportation needs–motorcycles, agricultural vehicles and the so-called “inkfish” that combine a chassis with a one cylinder diesel engine and receive their name because they spew so much black smoke.

The existence of this vast local market, where price is paramount, gives companies like Geely a chance to develop. The continued growth of the local market gives the Geelys of the world a chance to grow and prosper. If a company’s leaders are sufficiently visionary, and they succeed in raising the quality and technology levels of their products, they soon begin to compete in the higher price, higher technology market in China. Once success is achieved in this market, it is but a short step to the global markets.

Geely is only one example of this phenomenon at work. If Geely can bootstrap its way to the top of the auto industry, one of the largest and most technologically sophisticated in the world, it can happen in any industry–and it will. The rise of local Chinese companies like Geely in one industry after another will be the story of the coming years.

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