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China's Geely has global auto ambitions

Dexter Roberts From businessweek.com| July 18 , 2008

With the automaker's winning affordable-car formula under pressure at home, Chairman Li is pushing hard for a breakthrough on the world stage.

As a boy growing up in rural China, Li Shufu was fascinated by cars. The son of rice farmers in the southeastern province of Zhejiang, Li started making model autos when he was only 8 years old. "I used mud to make cars and tires, big ones," says Li, 44. That boyhood hobby paid off well for Li, who grew up to become the founder and chairman of one of the most important automakers in China, Zhejiang Geely Holding Group.

Now Li has an even loftier goal: Transform Geely into a force in the auto industry, not just in China but worldwide. With gasoline well over $4 a gallon in the U.S., he figures the timing may be right for American consumers to consider inexpensive, fuel-efficient Chinese-made names like Geely. While Detroit giants like General Motors (GM) are losing billions of dollars, slashing jobs, and shutting factories, Geely is taking advantage of solid growth in its home market, the world's second-largest, to expand into new markets. Last month, for instance, Li announced tentative plans to open a $500 million plant in Mexico to produce vehicles for the U.S. and Latin America.

Not bad for a company that is only a dozen years old. While a teenager, Li heeded Deng Xiaoping's call to help reform the country by opening a photo shop with his brothers in his hometown of Taizhou, Zhejiang. He went into the refrigerator components business in 1984, began manufacturing wall- and floor-boarding materials a few years later, and in 1994 started making motorcycles. In 1998, Li produced his first car, the Geely HQ hatchback, a hit that keeps selling.

China's Geely has global auto ambitions

A changing Chinese car market

Li's company has succeeded largely by keeping costs down and offering the most affordable cars in China. For instance, Geely's best-selling four-door sedan, the Free Cruiser, retails from $6,300 to $6,900. Last year, Geely sold 217,000 passenger cars in China, making it the No. 2 domestic producer with a 4.1% market share. The biggest Chinese automaker is state-affiliated Chery, which last year held a 7.1% market stake (BusinessWeek.com, 7/11/08). That compares to GM's 10.1% share of the passenger market and Volkswagen's 17.5%.

Geely's winning formula is under strain at home, though. Chinese car buyers are becoming wealthier, making higher-end models more practical for many consumers. At the same time, brands such as the Chevrolet Spark, Volkswagen (VOWG.DE) Golf, and Hyundai Elantra are pressing Geely at the low end. The company's unit sales rose only 6% last year, vs. 21% for passenger vehicles overall.

Confronted by tougher competition in China, Li isn't sitting still. He plans to roll out an additional 15 models, including a hybrid, by 2010. Along with his plans to open the overseas manufacturing plant in Mexico, Geely has assembly operations in Indonesia, Russia, and Ukraine. And things already are looking up for the company, with sales surging 27.2% to 107,000 cars in the first half of the year (faster than the overall sedan market, which is up 16.7%), driven in part by exports of the Free Cruiser as well as the Geely KingKong ($7,500-$10,100), a four-door 1.5- to 1.8-liter sedan, and Vision ($9,700-$15,300), a 1.8-liter four-door sedan.

Lofty sales goal

Li also has pushed for a reorganization of the company. On July 1, the Shanghai-listed subsidiary acquired five operating associates from the privately held parent company. That should allow the publicly traded part of the group to consolidate numbers in its financial results, better reflecting Geely's overall business. "The acquisition should significantly enhance the group's corporate structure," a spokesman said in a statement, "thus resulting in a more streamlined operation with much improved operating efficiency and much better transparency."

Restructuring at home might help, but cracking the American market will be a vastly longer-term project. Chinese automakers don't have much of a track record selling in the U.S., and even the likes of Toyota (TM), Honda (HMC) and Hyundai struggled at first to win over skeptical American consumers. Still, Li intends to sell 2 million cars by 2015, and he's confident he can thrive against global competition. "Geely's technology, quality, and service are not that different from Toyota, Honda, GM, or Ford," he boasts, "but the price of our cars is 50% cheaper."

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