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ACADEMY OF ASIAN BUSINESS REVIEW ISSN: 2384-3454 / 18 / $10.00
Vol. 4, No. 2. DECEMBER 2018 ⓒ Academy of Asian Business 2018
Geely Automobile Holdings:
From ‘Zero’ to Chinese Automotive Industry ‘Hero’1
Sarah Laouiti, Markus Andreas Sodar,
Methus Detchusananart, & Linn Bieske2
1 This case was selected as an award-winning case from the Top 10 best cases based on World Asian
Business Case Competition (WACC) 2018.
2 Sarah Laouiti is a MSc Business Analytics, Imperial College Business School
(email: [email protected])
Markus Andreas Sodar is a MSc Advanced Aeronautical Engineering, Imperial College London
(email: [email protected])
Methus Detchusananart is a MSc Business Analytics, Imperial College Business School
(email: [email protected])
Linn Bieske is a MSc Business Analytics, Imperial College Business School
(email: [email protected])
This case study aims to explore the meteoric rise of Geely Automobile
Holdings, a privately-owned automotive manufacturing company and the largest
privately held company in China when measured by the volume of sales.
This analysis will be undertaken in three successive parts. To begin, the period
from inception to date will be summarised and characterised into the three key
milestones, seen as definitive to Geely’s current standing. Second, the
underpinnings of Geely are investigated. This part of the analysis will look both
internally and contextually at factors that are both distinctive to the company and
the broader cultural background. Finally, Geely’s present positioning and outlook
will be analysed from both a micro and a macroeconomic perspective. This will
be complemented by a discussion about the challenges Geely faces today and
in both the short and long-term, as well as potential solutions. The conclusion will
aim to consolidate the knowledge obtained from dissecting Geely’s success
story.
Geely’s commitment to research and development has contributed to the
narrowing of the technological gap it has experienced with Western counterparts.
They also overcame Chinese brand prejudice in garnering their large global
consumer base. Understanding the underpinnings of how Geely has navigated
through and surmounted these challenges can prove a valuable guide for
emerging Asian manufacturing enterprises with both technological and brand
image issues but a desire to globalise.
Keywords: Asian, Automotive, Brand Strategy, Corporate Culture, Engineering,
and Manufacturing
Since 2009, China has claimed and maintained the title of the largest
automobile producer in the world, surpassing the US, Japan and Germany, once
behemoth players of the industry (Statista, 2018). When considering the state of the
Chinese automotive industry around the early 1990s where foreign brands
dominated both global and domestic markets, it was unimaginable to enter this
market without foreign resources or government ownership. Geely, however, dared
to enter this unwelcoming terrain where large western companies had been
operating in for decades.
Geely, which translates to “lucky”, is a multinational car manufacturing company
based in Hangzhou China. In fact, it is the first Chinese privately-held automotive
company. After receiving governmental approval for automotive production, Geely
went from strength to strength as is highlighted by its continuously increasing
revenues and profits (See Figures 1 and 2). Its foothold in the automotive industry
was reinforced by horizontally and vertically diversifying its processes and
offerings through its numerous acquisitions (See Figure 3). The most notable of
which being whole ownership of Swedish giant Volvo, and more recently a 9.7%
stake in Daimler Benz. Geely now boasts 7 brands within its family and exports its
cars to 27 countries located in Africa, Asia, Australia, South / Middle America and
Europe.
Figure 1
Revenues of Geely in million RMB from 2006 to 2017
Source: Geely Annual Reports 2006-2017
Geely Automobile Holdings 107
Figure 2
Net profits of Geely in million RMB from 2006 to 2017
Source: Geely Annual Reports 2006-2017
Figure 3
Geely Company Structure
Source: Geely Annual Reports
This case seeks to elucidate the underpinnings of Geely’s rags to riches like
trajectory and identify the lessons to be learnt from its success. Understanding how
Geely has navigated through and surmounted the challenges it has faced can prove
a valuable guide for emerging Asian manufacturing enterprises with both
technological and brand image issues but a desire to globalise. Internal culture for
fostering innovation and talent, its customer-centric strategy and its flexibility in
adapting to a constantly changing market are but some of the drivers of its success.
As an initial phase of analysis, the period from inception to date will be
summarised and characterised into the three key milestones, seen as definitive to
Geely’s current standing. This will be followed by a depiction of both internal and
contextual factors that are both distinctive to the company and the broader cultural
background. The analysis will culminate with Geely’s present positioning and its
outlook will be analysed from both a micro and a macroeconomic perspective. This
will be complemented by a discussion about the challenges Geely faces today and
in both the short and long-term, as well as potential solutions. The conclusion will
aim to consolidate the knowledge obtained from dissecting Geely’s success story.
The analysis overarchingly attempts to provide insight into the capabilities of an
Asian brand in staking a claim in its respective global industry market. Initially, we
will look at the context in which Geely operates.
Global and Domestic Industry Backdrop
Geely’s success has not occurred in a vacuum and as such, it is important to
depict the state of affairs of the macro environment in terms of the broader global
automotive industry in which Geely competes. The development of the global and
domestic passenger car market is of high interest when analysing Geely itself.
China underwent a number of reforms from early 1980 as it implemented its
open-door policy. This change in approach was typified by China joining the WTO
in 2001. This policy relaxation coupled with expansionary fiscal policy promoted
the impressive growth which resulted in China becoming the leading global player
in terms of production and sales volume (Marukawa, 2011). Throughout the period
2009 – 2016, the Chinese market accounted for between 22 % and 30 % of the
global market (See Figure 5). Its significance within the last 10 years is also
visible in the broader global market. It grew from ~52 million produced units
(2008) to ~73 million (2017) within the last 10 years, the only exception to this
relatively constant growth rule is synchronised with the financial crisis (See Figure
4). Since, Geely has implemented a global strategy and could benefit from this
positive trend found in the automotive industry. Before looking ahead, however,
Geely Automobile Holdings 109
Geely’s historic journey to become the powerhouse it is today is outlined in the
next section.
Figure 4
Production of passenger cars worldwide from 1998 to 2017 (in 1,000 units)
Source: OICA in Statista
Figure 5
China's share in global vehicle production from 2008 to 2016
Source: OICA in Statista
Trajectory to Victory
This section seeks to depict three historical occurrences which were focal to
Geely’s development into the successful auto giant it is today. Figure 6 further
outlines these milestones with additional events which contributed or are part of
these achievements.
Figure 6
Timeline of Geely’s Milestones
The Tipping Point
The Chinese automotive industry in the 1990s was largely dominated by joint
ventures (JV) between foreign car makers and domestic, mainly state-owned,
companies. The reason for this was that the Chinese productive capacity was
relatively underdeveloped and lagging behind its Western counterparts (Marukawa,
2011). The gap has been widely attributed to the ‘closed door policy’ run for
decades by previous Premiers (Yao and Wang, 2014). The product of these
partnerships, however, did not cater to the masses given the hefty price tags
rendered much of the stock unaffordable to the average Chinese consumer (Yao
and Wang, 2014). Geely entered the market as a privately-owned automobile
company with the aim of solving this problem - they would make a “people’s car”.
In 1998, despite their honourable vision, Geely’s first production attempt was
deemed to be of unsatisfactory quality and was subsequently halted. It has been
suggested that the structure was broken from the top down - the lack of experience
within the automotive industry amongst the board members. To remedy this
deficiency in skill and technology, Geely focused on three main areas. The first
was the copying of existing popular models. Geely’s Mr. Li, the founder and now
Geely Automobile Holdings 111
chairman, made no effort to hide their reverse-engineering approach to automobile
production, with Geely’s first product notoriously based on the “Xiali”. The second
was the employment of well-qualified engineers. In an effort to break into the
market, Geely hired the former president of Daewoo Motor Research lab and a
former Daimler Chrysler engineering executive (Fairclough, 2007). The third and
final focus was the outsourcing of key components (Marukawa, 2011). Geely
bought various parts from German engineering companies such as fuel-injection
systems and interior elements to be used in domestic brands (Fairclough, 2006).
Achieving these three targets was fundamental to the accomplishment of the
initial phase of Li’s strategy. His vision was simple: to swiftly capture the markets
of China's west and the rural areas before considering the urban demographic. This
two-step process was of particular importance as targeting the urban areas relied on
successfully gaining approval from the masses and the rural areas offered that
opportunity. These regions had potential; their economies were moving toward
enterprise and Li took advantage of this growth (SinoCast China Transportation
Watch, 2005).
A Change in Direction
A company’s profit-making ability is dependent on its positioning within an
industry. The source of such abnormal profitability in the long-run is a sustainable
competitive advantage. The two main types of competitive advantage are: low-cost
and differentiation (Porter, 1985). The early direction of Geely’s strategy was
largely focused on penetrating its various markets through competing on price.
Though, the ultimate global vision Li Shufu had for Geely remained on the cards.
To make this dream a reality, however, several obstacles which mired the way had
to be surmounted. Particularly, their global competitiveness was hindered by
underdeveloped technology which prevented it from reaching quality and
reliability standards expected from Western markets (Fairclough, 2006) and more
broadly, brand perception. The latter issue principally alludes to the negative
country of origin effect associated with Chinese manufactured products which
supposedly convey poor-quality perceptions. As the chief creative officer of Nissan
articulated with regards to influential factors of passenger car purchases: “brand
and other value-added factors weigh heavily in a buyer's purchasing decision"
(Blanchard, 2005). Thus, despite advances in technological capabilities through
mostly organic evolution over the period of their lifetime, one thing was clear:
Geely was in serious need of branding (Tan, 2006).
In 2007, Li explicitly articulated his desire to change Geely’s strategy from
competing on a price basis to fostering a differentiation competitive advantage.
Being the ninth-largest automobile manufacturer at the time (Marukawa, 2011)
provided Geely with a decent grounding to undertake this change in direction. The
increasingly favoured means for Chinese firms to build competitive advantage was
outward foreign direct investment, particularly in the form of mergers and
acquisitions (Chaisse and Gugler, 2011). Geely undertook an aggressive
international acquisition plan from 2006 which culminated in 2010 with the
purchase of Volvo (Chen et al., 2015). These above-mentioned purchases
undoubtedly served Geely from a technological and general product quality
standpoint. However, a big brand like Volvo, particularly, served a larger purpose.
Geely, a comparatively small-time player in the market growth stage of its life
cycle, was able to purchase the Swedish giant, seemingly at market maturity, for a
fraction of the cost its actual seller, Ford, had payed less than a decade prior ($1.5
billion and $6.5 billion respectively) given the backdrop of an unstable western
economy following the financial crisis (Gifford et al., 2015). The renowned
Swedish brand was anticipated to prove a strategic asset, through positive brand
association which would ultimately improve brand perception. This acquisition
substantiated the newfound “quality first” direction Geely had embarked upon.
How better to convey quality than to buy the “safest car manufacturer in the world”
(Yao and Wang, 2014).
This was particularly important to overcome the negative quality perception and
effective stigma associated with Chinese manufactured products.
In spite of the doubt this uncommon form of merger garnered, Volvo returned to
profitability under the Geely umbrella and Geely in return benefited from the
positive brand association and the “full and mature system of advanced product
development processes and global customer management”, which are prerequisites
for their goal of internationalisation (Yao and Wang, 2014).
Additionally, in tandem with this ‘acquisition spree’, Geely embarked on
developing a “New Geely through Brand Building” starting in 2008. The idea was
to promote a multi-brand strategy “aiming to improve the Group’s overall brand
images and to enable tailored-made services and brand positioning for different
product lines within the Group.” (Geely Automobile Holdings Limited, 2009).
Geely, therefore, underwent concurrent and complementing plans within these five
years to ensure its shift from cost leadership to differentiation was met with success.
Beating the Costs – “One Geely” Strategy
The differentiated strategy undertaken by Geely was effective in its idea of
targeting the various consumer groups within the industry. However, problems
related to cost and coherence of branding arose. Firstly, the company needed to
Geely Automobile Holdings 113
manage over 900 dealers to distribute the 3-brand strategy and this number
increased until peaking in 2013 with a total of 1068 dealers (Geely Auto Group,
2014). Moreover, the company hardly achieved the economy of scales in terms of
its marketing spend. Their messaging was not effectively communicated to the
consumers and were instead confused with the position of each brand and brand
recall for certain models was very low (Yan, 2014).
In response, Geely announced its new brand strategy to consolidate the 3 brands,
Emgrand, Gleagle and Englon under one badge within the Geely brand. Geely’s
expectations for the consolidation were to optimise its dealer and distribution
network, improve marketing activities and communication to the consumers, and
streamline the products portfolio to avoid several products in the same customer
segment (Yan, 2014).
Under this “One Geely” strategy, the company could centralise its resources and
consequently obtain and leverage economies of scale.
Following the shift to this branding strategy, the number of dealers in China
decreased from more than 1000 dealers to just over 800 dealers in 2014, and under
700 dealers by the end of 2015. The strategy proved successful as following the
slump in 2014, Geely’s net profit doubled twice from 2015 to 2016 and 2016 to
2017 (Statista, 2018; see figure 1 and 2). Shifting the focus away from Geely’s
business strategies, we will delve into those not so obvious factors which
contributed to the aforementioned cornerstones, namely the company’s underlying
culture and government support.
Secret to Success
This section aims to pinpoint the contributory factors of Geely’s current leading
positioning. These include internal characteristics: company values, which are at
the heart of the company’s functioning, the customer-centric approach, Geely’s
flexibility, and external features namely the virtuous market and government
support.
Geely Culture – Nurturing Innovation and Talent
In contrast to the individualism promoted by Western, particularly past Neo-
liberal, cultures, Chinese companies are inclined toward an approach rooted in
family values (Hout and Michael, 2014). More broadly, the values promoted are
akin to those seen in village communities (Marquis et al., 2017). It is no different at
Geely, where employees very much buy into the ‘community’. Geely abides by the
‘RenBen’ management style. This method acknowledges the focal role of the
individual in the undertaking of any process, and conversely that the design of the
processes should be mindful of those who undertake them (von Bismarck and
Zheng, 2016). This belief-system generally encourages long-term wealth for the
whole community. Geely’s commitment to community is exemplified by the
benefits provided to their employees: their workforce has the opportunity to live
either for free on-site or to purchase a house nearby the plant at a preferential rate
(Tan, 2006). As is seen throughout Chinese philosophy from antiquity, particularly
Confucianism, the ideology influencing the majority of modern Chinese thought, it
is a principle of many of those holding a position of power to show benevolence
for their subordinates. It is believed that under this structure both harmony and
control can be maintained.