Special Report: How the Chinese tycoon driving Volvo plans to tackle Tesla

Trend Micro Incorporated

03/09/2021 05:37

(Repeating story published on September 2.)
    By Norihiko Shirouzu
    HANGZHOU, China, Sept 2 (Reuters) - "Do you know how big
Volvo is?" asked Don Leclair, finance chief at Ford Motor
Co. F.N .
    It was 2008, and Leclair was responding to an offer from a
little-known Chinese businessman to purchase the Swedish
carmaker, which Ford owned.
    The businessman, Li Shufu, had a company with less than half
Volvo's sales and a flagship model, King Kong, almost unknown
outside China. He was politely shown the door of the "Glass
House," Ford's iconic headquarters near Detroit, according to
two people who were at the meeting. Ford's Leclair did not
respond to requests for comment about the episode.
    Fast-forward to 2021 and Li Shufu's company, Zhejiang Geely
Holding Group  0175.HK , is one of the biggest-selling
automakers in the world's biggest auto market. It controls not
only Volvo Cars but also a clutch of global auto brands, and a
significant stake in German giant Daimler AG, the maker of
Mercedes-Benz. These names are now part of its plans for a
revolution in autos.
    Geely is preparing Volvo for a listing on the Nasdaq
Stockholm exchange as a route towards the future of
transportation: One where cars are part of an electrified
network of mobility services, driving themselves, connecting to
each other and - like cell phones - generating an array of data
and new business opportunities.
    It's a vision more Silicon Valley than Detroit, where
traditional automakers globally are chasing another giant -
Tesla Inc  TSLA.O .
    Li Shufu and his advisers eventually convinced Ford to part
with Volvo in 2010 for $1.8 billion. It was the first in a
string of deals, tapping brands such as Lotus, Smart and the
London Electric Vehicle Company to form a network that he calls
a "bigger circle of friends" across industry segments.
    Li Shufu sees them as building blocks to help Geely compete
in a future where autos are not vehicles, but "service
providers," he told Reuters in his management suite at Geely's
headquarters in Hangzhou, eastern China.
    In that business model, cars will be available on
subscription and offer services such as making payments and
in-car apps. They will update their own software, and spawn
opportunities in the same way as the mobile operating systems
developed by Apple Inc and Google.
    "We are trying to create an automotive ecosystem similar to
Android," he said.
    Li Shufu, 58, recently adopted a foreign first name - Eric -
because he liked the sound of it. He has charted a path from a
remote fishing village in eastern China through dirty factory
floors to the heart of the world's auto industry. His
subordinates often still call him Chairman Li. 
    This account of his evolution into one of the industry's
most singular disrupters is based on interviews with Li Shufu
himself, other company leaders and advisers as well as rivals
and executives at firms in which Geely invested. They reveal an
agile opportunist who is making a stream of startup bets - on
ventures like flying cars and helicopter taxis - to prepare for
the new age of autos. 
    Besides vehicles, Geely has a Danish bank, a startup that's
developing vehicle control software technology and Geespace, a
China-based firm which got the green light from Beijing this
year to make low-orbit satellites that will be the eyes in the
sky for fully autonomous machines. The scale of his investments
- spanning Europe, Southeast Asia, China and the United States -
is unique among Chinese auto firms.
    Asked about his role, some of Li Shufu's rivals said his
status as a relative newcomer to the industry gives Geely a
potential advantage. He isn't weighed down by a big network of
gasoline-related suppliers, for instance, said an engineer at
Toyota Motor Corp, who spoke on condition of anonymity: That
makes it easier for him to shift to a digital industry.
    "Among traditional automakers, Geely has a more
sophisticated lens on the future of mobility," said Bill Russo,
head of consultancy Automobility Ltd in Shanghai and a former
Chrysler executive. "They understand the nature of this model is
shifting from a pure-play manufacturer."
    But Li Shufu's ambitions face mounting challenges. To
realize this vision, executives at several rivals say he needs
to upgrade perceptions of his own Chinese-brand cars. 
    "Geely's biggest challenge is its name, in part because of
its past as a low-cost, entry car brand," said an executive at
Honda Motor Co. "How does Geely go from that to become an
Apple-like brand? All legacy automakers struggle with that, but
that is particularly a tall challenge for Geely."
    And Li Shufu is moving in an increasingly tense global
climate. 
    His strategy of building diverse alliances around the world
has been made possible by the past 15 years of relative openness
to technology-sharing and marketing collaboration. Now
superpower rivalry between the United States and China has led
to a bitter trade war, and Washington and its allies are
blocking the expansion of major Chinese tech companies.
    The Chinese entrepreneur is undeterred, and says his foreign
investments are a map of opportunity. 
    "All roads might lead to Rome," Li Shufu said. "But the
question is which is the right road and which road leads to Rome
fastest?"
    Like many other businesses in China, Geely appears keen to
keep in lockstep with the pronouncements of President Xi
Jinping, who has increasingly called for the need to promote
what he calls "common prosperity." In June, ahead of the ruling
Chinese Communist Party's 100th anniversary, Geely issued a
press release announcing the "Geely Common Prosperity
Initiative" to help employees in the city of Ningbo where the
company has multiple facilities.
    Li Shufu has been a member of some political bodies in
China. He was previously a member of the Chinese People's
Political Consultative Conference, a top political advisory
body. And he was a delegate in March this year to the National
People's Congress, China's largely rubber-stamp parliament.
    
    "SOFAS ON WHEELS"
    The third of four brothers born to farmers in a fishing
village called Luqiao, Li Shufu's business is rooted in the
entrepreneurial boom of the mid-1980s led by the economic
reforms of China's then leader, Deng Xiaoping. Li Shufu pivoted
to wheels from photography via fridges, and was producing
vehicles before he had the necessary paperwork.
    Opportunity first knocked when he went for a high-school
graduation photo in the early 1980s. Seeing the line of his
peers outside the village studio snake around the block, he
pestered the photographer for an apprenticeship.
    Then, Li Shufu said, he borrowed 120 yuan - about $70 at the
time, or five times the average monthly rural income in his
province - from his father. He bought a Chinese Seagull camera,
jumped on a bicycle and established the first mobile studio in
his village, charging 0.48 yuan per portrait.
    With money flowing in, he said he experimented with
salvaging appliances and melting the components to extract
metals, started making fridge components and in 1986, at age 23,
registered the company that became Geely.
    His village has now been absorbed by the city of Taizhou.
Mom-and-pop machine shops in an area stretching down to Wenzhou
diversified from trades such as repairing fishing boats to
making cigarette lighters, belt buckles, and eventually
motorbike and car components.
    In the early 1990s, Li Shufu looked at a mangled motorbike
brought into his factory, saw how simple it was mechanically and
decided to make bikes, according to his official biographer at
Geely.
    Soon he was dreaming of cars. He dismantled existing models
to see how they worked, and quietly built a car plant and made
some primitive prototypes, the biographer told Reuters.
    The first model, the Geely Haoqing, was finished in 1997. It
was a disaster. His engineers had not water-proofed it and
torrents gushed into the cabin when it was tested for leaks.
    To progress in an industry tightly controlled by the state,
Li Shufu needed Communist Party support.
    In 1999 - the year Tesla chief Elon Musk sold his online
publishing startup - Li Shufu persuaded an up-and-coming
Communist Party official to give him the licence to manufacture
cars in China officially, by saying they were not that
complicated to produce - they were really just "two sofas with
four wheels," he said.
    His factory wouldn't cost the state anything, he recalled
telling the official: "At least give me a chance to fail." 
    Reuters could not verify that account, but by the following
year, the waterproofed Haoqing was rolled out to showrooms in
large numbers.
    
    CHANGE OF PLAN
    Geely was soon selling a few hundred thousand
rough-and-ready cars a year - models with bumpers that tended to
sag after a few years - but Li Shufu had his sights on the
global market.
    Geely displayed one of its models in the lobby of the Cobo
exhibition hall in downtown Detroit at the 2006 auto show, with
a view to setting up a plant and sales network in the United
States. In March 2007 a group of potential U.S. backers gathered
at Geely's headquarters in China to discuss how to help set up a
U.S. factory. 
    Li Shufu announced he had changed course.
    "He basically said, 'I have a new plan,'" said one of those
present, who spoke on condition of anonymity. "'We wonder if
Volvo might be for sale?'"
    There was an awkward silence. Li Shufu, who declined to
comment on this version of events, told the investors it would
take too long to engineer vehicles to meet U.S. safety and
emissions regulations, the person said. Buying a brand like
Volvo - renowned for its safety and reliability - would be a
quicker way to acquire technology and become an established
name.
    Volvo initially wasn't for sale - Li Shufu was rebuffed by
Ford's Don Leclair at their meeting. But as the global financial
crisis hit U.S. carmakers, Ford turned to preserving its core
business, and parted with Volvo. "We elected to sell a storied
brand to a great new owner," a spokesperson said.
    By 2010, Geely had mustered the funds for the deal. Most
came as subsidised low-interest loans from the Chinese cities of
Chengdu, Daqing and the Jiading district of Shanghai, the
company said. Geely went on to build Volvo factories in the
first two cities and a Volvo technology centre in the third.
    Other auto firms, including Tesla and Ford, also received
aid, in the form of billions of dollars in low-interest loans
that year under the U.S. Advanced Technology Vehicles
Manufacturing Loan Program, a bailout following the global
financial crisis. 
    Meanwhile, China's car market had boomed. And Volvo, which
was running at a loss when Li Shufu took over, was in the black.
Geely and Volvo executives said they made Volvo profitable
chiefly by beefing up its presence in China, sharing components
and suppliers and developing common platforms.
    
    A DISADVANTAGE
    The year that Geely bought Volvo, Tesla became the first
American car company to sell its shares to the public since Ford
in 1956. Based in Palo Alto, Tesla had a two-seater electric
sports car, which Musk called "a freaking technology
velociraptor," saying it was ready to revolutionise the way
Americans buy and drive cars.
    Li Shufu also saw the need to go electric. Geely and Volvo
set up a joint technology centre in Gothenburg, Sweden, in 2013
and developed hybrid and electric vehicle ventures Lynk & Co.
and Polestar a few years later. Earlier this year, it launched
Zeekr in China, a new electric car brand.
    But Li Shufu and his lieutenant Daniel Li, the Chief
Executive of Geely Holding, faced another obstacle.
    The likes of Tesla - backed by venture capital hungry for
the next big thing - could command high valuations without
delivering profits, making it easy for them to raise capital.
Geely was at a disadvantage, the Geely executives said, partly
because its investor base of pension funds and investment funds
is tasked with taking lower risks to achieve steady returns.
    Tesla did not respond to requests for comment for this
story. It made a full-year profit for the first time last year.
But its market value has surged from $34 billion in 2016 to a
peak of $834 billion in January.
    Since 2011, Geely's Hong Kong listed business - a subsidiary
of Geely Holding Group - has reported net profits every year,
averaging 5.19 billion yuan or $800 million at today's rates.
Its market value is about $35 billion.
    The way forward, Li Shufu decided, was to combine resources
with legacy carmakers, known in the industry as original
equipment makers (OEMs).
    "If traditional OEMs ... didn't invest in new technologies
and trends, we would die. But if each OEM simply made huge
investments by itself, we would also not survive," Geely Holding
Chief Executive Daniel Li told Reuters. "We have to make those
investments in a smarter and more collaborative way."
    That thinking was behind yet another gamble by Li Shufu.
    
    "CIRCLE OF FRIENDS"
    He identified Daimler AG, a firm with roots dating back to
the world's first gasoline car in 1886, as a key candidate for
his "circle of friends." But the Geely boss knew that if he
knocked on Daimler's front door he would not be taken seriously,
two Geely sources said.
    So, starting in October 2017, Geely began discreetly
building a stake in Daimler, as Reuters has previously reported
https://reut.rs/3qD9uTX.
    Using Hong Kong shell companies called Tenaciou3, Miroku and
Fujikiro, as well as derivatives, bank financing and carefully
structured share options, Geely stayed in the shadows until the
following February. Then it stunned the auto world by announcing
it was Daimler's biggest shareholder, with a 9.69% stake that
cost roughly $9 billion.
    Asked where Geely got the cash, a person familiar with the
matter said it bought some Daimler shares and used them as
collateral for a loan to buy more, a point Reuters couldn't
confirm. Li Shufu said in an interview posted on the People's
Daily website at the time that Geely had used only "offshore"
funds to execute the deal.
    The move aroused alarm in Germany, where the government was
wary of Chinese firms' interest in domestic champions and their
technology. A group of Geely executives led by Li Shufu launched
a four-day diplomatic tour to calm the waters.
    Meeting Daimler's top brass, government officials and
lawmakers in Berlin and Stuttgart, the Geely team said they were
seeking synergies, not domination, Daniel Li said. Their
interest in Daimler wasn't about economies of scale, they said,
but about the pressing need for legacy automakers to form joint
ventures and divvy up the cost of developing new technologies.
    In some of the meetings, Li Shufu floated his idea of using
hundreds of proprietary mini, low-orbit satellites as a more
accurate global positioning system for self-driving cars, Daniel
Li said.
    Daimler and Germany's economy ministry declined to comment
on those meetings. Germany has since lowered the threshold for
screening purchases of stakes in German firms by non-Europeans;
last year it blocked the takeover of a satellite and radar
technology company by a state-controlled Chinese missile maker
 urn:newsml:reuters.com:*:nL8N2IO3MX.
    Following the trip, Daimler initially offered to let Geely
buy its troubled Smart brand of tiny urban cars outright. Li
Shufu wanted more. 
    In September 2018, at a lunch at the Mercedes-Benz museum
with Chief Executive Dieter Zetsche, the two agreed to form a
50-50 joint venture to transform Smart into a network of
electric urban transporters, two people familiar with the
meeting said. Zetsche declined to comment for this article. 
    Geely and Daimler have since agreed several joint new
investments: a premium ride-hailing service in China called
StarRides; a super-efficient gasoline engine for hybrid cars;
and stakes in German electric flying taxi startup, Volocopter.
Geely is also sharing its electric vehicle platform
technologies, supply chains and factories with Daimler while
using the German brand name and sales network to market new
Smart models.
    Making cars is only one source of revenue Geely is
targeting. Another will be non-traditional vehicle sales such as
car subscription services, which will enable car-owners to make
money from the loan of their vehicles when they aren't using
them, Li Shufu and Daniel Li told Reuters.
    As a first step, Geely is already rolling out a subscription
model in Europe this year for its hybrid Lynk & Co SUVs. Throw
in ride-hailing, battery charge-and-swap services that are
already in operation, as well as selling the software to operate
electric vehicles, and Geely aims to have an array of
alternative revenue streams.
    
    NEW SENSITIVITIES
    As Li Shufu ventures into the age of self-driving autos, he
also enters more sensitive ground. The still-nascent area is
delicate - because passenger safety is not yet assured, and also
because the technology crosses over into areas with national
security implications.
    "You may ask why Volvo and Geely are not aggressively
promoting their self-drive technology by now?" Li Shufu said.
"If you are to uphold Volvo safety traditions and standards, we
can only call it autonomous self-drive technology when people
can close their eyes and doze off in a self-drive car with 100%
safety guaranteed." 
    To beef up the slow, inaccurate connectivity and vehicle
positioning capability of current cars, Li Shufu wants to use
low-orbit satellites: He said the technology should be able to
position and navigate a car with a margin of error of a few
millimetres.
    To be fast enough for safety, the satellite technology would
need to be augmented by others including 5G cellular signals,
radar and digital cameras, said William Malik, a cybersecurity
expert at Trend Micro Inc.
    When developing satellite technology, Geely may also face a
U.S. ban on the export of space and satellite technology to
China. The United States is increasing trade restrictions on
Chinese tech businesses. 
    Geely said it doesn't comment on political issues. 
    But Li Shufu says he thinks global companies should go ahead
and pursue global integration. "We can do business together and
maximise synergies within an industry," he said. "That's why I'm
all against cutting off ties."

 (Additional reporting by Kevin Yao in Beijing and Michael
Nienaber in Frankfurt; Edited by David Clarke and Sara Ledwith)
 ((Norihiko.Shirouzu@thomsonreuters.com;))