Geely, Ford Sign Volvo Deal

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China's Zhejiang Geely Holding Group Co. bought Volvo cars from Ford Motor Co. on Sunday for $1.8 billion, a landmark agreement designed to elevate the Chinese company's profile onto the global automotive stage.

Geely's acquisition of Volvo offers the latest illustration of how China's economic rise is reshaping large swaths of global business, as its huge market and increasingly powerful companies play a growing role in industries from cars to natural resources to telecommunications equipment. The Volvo deal, which comes after China surpassed the U.S. last year as the biggest auto market, puts a Chinese company for the first time in charge of a major global car brand.

'I think Volvo is a Tiger,' said Li Shufu, chairman of Geely, who confirmed that Geely will build a Volvo plant in China. 'To liberate the tiger we need to think on how to uncover the value in Volvo.'

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The sale also marks the latest milestone for Ford Chief Executive Alan Mulally, who has pushed the Dearborn, Mich., auto maker to shed noncore brands in an effort to return Ford to sustainable profitability.

Under the deal, Ford will get $1.6 billion in cash and a $200 million note from Geely. Ford, however, will still be obligated to cover some preexisting pension plans and other debt, according to Ford Chief Financial Officer Lewis Booth. The companies didn't detail the timeline for the transition period.

'We think it's a fair price for a good business,' Mr. Booth said at a Sunday press conference at Volvo's headquarters in Gothenburg, Sweden.

Ford must use about half of its sale proceeds to help pay down the $23.5 billion in debt the company secured in 2006, but Mr. Booth said it was still unclear what the total proceeds of the sale would be until the transfer is complete.

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The purchase agreement still needs government approvals, followed by an official transfer of the Gothenburg, Sweden-based company before the end of the third quarter-a push back from the original deadline to close the deal by the end of June.

Mr. Li's vision for Volvo is to radically slash the Swedish brand's costs for some of its primary activities, such as product-development and manufacturing, by tapping the relatively cheap labor available in China, people familiar with the situation say. On Sunday, Mr. Li said at a joint press conference he doesn't plan to merge Volvo and Geely. Volvo would remain as an independent brand, and Mr. Li would retain Volvo's current management team for the time being, he said.

Geely, one of China's biggest privately owned auto makers, is expected to face tough challenges in absorbing Volvo. It has little experience selling cars outside China, let alone running major manufacturing operations in a country as far away and as different from China as Sweden. Geely's lack of global stature, and its past reputation for making low-end vehicles, could be a drag on Volvo's reputation for quality and performance.

Despite their growing heft, Chinese companies have had limited success with overseas acquisitions. Even the biggest Chinese companies generally lack extensive international management experience, and they tend to have highly centralized corporate cultures that don't mesh easily with those of foreign companies. Lenovo Group Ltd., for example, struggled to integrate the personal-computer business of International Business Machines Corp.'s after it bought the operation in 2005, in what was then China's highest-profile overseas acquisition.

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For Ford, a challenge will be pulling Volvo out of its operations, having deeply integrated the two since Volvo's purchase for $6.4 billion in 1999. In China, for example, Changan Ford Mazda Automobile Corp.-a joint venture among Ford, Mazda Motor Corp., and the Chongqing Changan Automobile Co.-produces the Volvo S40 and the S80 sedans.

'The intellectual property agreements are between Ford and Volvo,' Mr. Booth said, adding that other uses of the technology, evidently for Geely, would be limited.

Mr. Booth said that Ford and Geely signed separate agreements covering intellectual property to aid Volvo's current business plan. But it was largely designed to address a fear that jointly developed technologies by Ford and Volvo will soon be in the hands of a Chinese company expected to become a direct Ford competitor in Europe and North America.

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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. Early last year, after months of speculation, Ford officially reported Volvo was for sale, and it recognized a pretax impairment charge of $650 million related to its total investment in the Swedish company.

As Ford neared the completion of the Volvo sale, the brand has been able to stem its losses, which had grown to more than a $1 billion in recent years. Volvo lost $934 million in 2009, down from $1.6 billion loss in 2008.

Volvo sales have suffered in recent years amid a downturn in the U.S. and Europe markets. Volvo sold 324,000 cars around the world in 2009, down 10% over 2008 figures. But Volvo expects the market to rebound and is scheduled to build 390,000 vehicles this year, according to Volvo Chief Executive Stephen Odell.

In the first two months of this year Volvo sales in the U.S. are up 40%.