Chinese Automaker Geely faces an exploding debt problem after Volvo takeove

[Korean]

China's Geely saw its debt explode from $0.753 billion to $11.19 billion before and after Volvo takeover, because Geely didn't have the cash to buy Volvo and had to take a high-interest loan from Goldman Sachs to make the purchase, then turn to other US financial institutions for even higher interest loans to payback Goldman when the debt matured. This is on top of Geely's declining sales in China, as Geely, along with fellow Chinese champion brands BYD and Chery are losing Chinese domestic market share against foreign brands in the slowing Chinese domestic market.

Chinese thought they could compete against foreign world-class automakers through foreign acquisitions, but are learning the lesson the hard way that they could not.

Chinese carmaker Geely mired in financial quagmire: magazine

Chinese carmaker Geely mired in financial quagmire: magazine
Staff Reporter 2011-11-15 16:48 (GMT+8)

Geely, China's biggest car maker, needed to borrow funds to complete last year's purchase of Volvo. As it tries to repay them, funding sources are becoming harder to find.

Overseas high-interest loans are strangling the operation of Zhejiang-based Geely, a major Chinese automaker, after its acquisition of Swedish carmaker Volvo and the company is having difficulty accessing funding sources, according to a report from a Chinese magazine.

The Chinese-language Capital Week, however, reported that Li and Geely Group have been stuck in a financial rut. Geely has reportedly started to contact private domestic and overseas equity funds, such as Carlyle and TPG, for fresh funding, in order to repay Goldman Sachs for high-yield bonds. Most of these private equity funds are cautious about the request, due to their concern over Geely's ability to repay.

The financial pressure is the result of Geely's acquisition and management of Volvo. From 2008 to 2010, the group's liabilities soared from 4.78 to 71 billion yuan (US$753 million to US$11.19 billion), 73.4% of its total assets. Geely, which listed its shares on the Hong Kong bourse, announced that it possesses good repayment capability and that its debt-asset ratio is within reasonable limits.

The acquisition of Volvo cost Geely US$2.7 billion, including US$1.8 billion for Volvo's assets and US$900 million for subsequent liquidity funds. In addition, Geely reportedly has to repay US$3.5 billion in debts owed by Volvo to Ford.

According to the Geely financial statements, as of the end of June 2008, the group racked up fixed assets of US$579 million and liquid assets of US$789 million, totaling US$1.368 billion. It is clear that Geely did not have the capacity to acquire Volvo and had to rely on various loans, leading to a rapid increase in its liabilities and bringing heavy pressure and risk on its management.

 

[Götterdämmerung]

Funny though, yesterday I just read something completely different. Volvo is going to create 10,000 new jobs in China as sales of Volvo has jumped from 374,000 to 440,000 cars y-o-y.

Volvo will 10.000 neue Jobs schaffen | heise Autos

 

[Korean]

Funny though, yesterday I just read something completely different.

That shows how little you know about China.

 

[Götterdämmerung]

That shows how little you know about China.

You know more than German media, particularly German car magazines that spares no efforts to badmouth all foreign cars. Guess why!

You should read some articles about Korean cars. They are more than unflattering.

 

[no_name]

That shows how little you know about China.

Make up your mind bro, is china going bottom up, or should they be saints and bail out the euro?

 

[beijingwalker]

China lacks many things,true.but what China doesnt lack is money.

 

[Korean]

China lacks many things,true.but what China doesnt lack is money.

Then why does Geely have to burrow billions of dollars from the likes of Goldman Sachs, Carlyle and TPG?

 

[Korean]

The problem with China's domestic brand automakers is that they compete exclusively in sub-100K yuan low-price segment, where the average profit per model is $500 or less. With a profit of $500 or less per car, it becomes impossible to accumulate the cash needed to fund new research and engineering, so Chinese brand automakers resort to cloning foreign brand cars and build them with poor-quality cheap parts. Which in turn destroys the reputation of Chinese brand models in China and push Chinese consumers toward foreign brand models.

When Chinese brand automakers try to improve the situation by moving upmarket, they have to compete with the likes of Camry, Sonata, Accord, and Passat. Of course it is not possible for Chinese brand models to compete with these foreign models in the 150K~200K yuan price range, so the Chinese brand automakers are forever stuck in the sub 100K yuan market segment, turning out more cheap cars that foreign automakers don't care for.

 

[conworldus]

The problem with China's domestic brand automakers is that they compete exclusively in sub-100K yuan low-price segment, where the average profit per model is $500 or less. With a profit of $500 or less per car, it becomes impossible to accumulate the cash needed to fund new research and engineering, so Chinese brand automakers resort to cloning foreign brand cars and build them with poor-quality cheap parts. Which in turn destroys the reputation of Chinese brand models in China and push Chinese consumers toward foreign brand models.

When Chinese brand automakers try to improve the situation by moving upmarket, they have to compete with the likes of Camry, Sonata, Accord, and Passat. Of course it is not possible for Chinese brand models to compete with these foreign models in the 150K~200K yuan price range, so the Chinese brand automakers are forever stuck in the sub 100K yuan market segment, turning out more cheap cars that foreign automakers don't care for.

Apparently you have never heard of Hongqi (Red Flag), the oldest Chinese car brand. It makes cars in the 400k yuan range.

 

[S10]

I would say majority of Chinese automakers are more interested in playing financial games than making a good product. You will see alot of them investing in stock market, real estates and other areas. So far they have failed to emulate their Japanese/Korean counterparts.

---------- Post added at 08:33 PM ---------- Previous post was at 08:31 PM ----------

Then why does Geely have to burrow billions of dollars from the likes of Goldman Sachs, Carlyle and TPG?

Banks like Goldman Sachs are known to make risky loans that may not be possible with Chinese government banks. 2008 CDO crisis forgotten already?

---------- Post added at 08:34 PM ---------- Previous post was at 08:33 PM ----------

Apparently you have never heard of Hongqi (Red Flag), the oldest Chinese car brand. It makes cars in the 400k yuan range.

It's not very profitable and Hongqi is being supported by government cash.

 

[FairAndUnbiased]

The problem with China's domestic brand automakers is that they compete exclusively in sub-100K yuan low-price segment, where the average profit per model is $500 or less. With a profit of $500 or less per car, it becomes impossible to accumulate the cash needed to fund new research and engineering, so Chinese brand automakers resort to cloning foreign brand cars and build them with poor-quality cheap parts. Which in turn destroys the reputation of Chinese brand models in China and push Chinese consumers toward foreign brand models.

When Chinese brand automakers try to improve the situation by moving upmarket, they have to compete with the likes of Camry, Sonata, Accord, and Passat. Of course it is not possible for Chinese brand models to compete with these foreign models in the 150K~200K yuan price range, so the Chinese brand automakers are forever stuck in the sub 100K yuan market segment, turning out more cheap cars that foreign automakers don't care for.

I guess they're good enough to sell in Australia, one of the richest countries in the world. And this is just Great Wall, a relatively small company.

Great Wall counts Australia as its global gateway

Maybe when Koreans graduate from low value added industries like automobiles and start moving into things like satellites, rockets and biotech, we'll have a talk.