China’s Geely Invests $9B in Daimler: Alliances in the Changing Automotive Industry

On the afternoon of February 24, German auto giant Daimler released an investor relation announcement on its official website welcoming new long-term shareholders. The announcement disclosed that China’s Geely Holding Group Chairman Li Shufu has acquired 103.6 million shares of Daimler stock, accounting for 9.69 percent of equity.

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Details of Stock Purchase

Li completed the deal through a company called Tanaclou3 Prospect Investment Ltd. The transaction amounted to $8.975 billion USD (7.299 billion euros or 56.929 billion Chinese yuan). Geely confirmed that the company is Geely Group’s overseas enterprise. The deal will allow Geely to overtake Kuwait Investment Authority, BlackRock and Renault-Nissan Alliance, which holds 6.8 percent, 6 percent and 3.1 percent of Daimler equity, respectively, to become Daimler’s largest shareholder. Geely has pledged to hold its stake for the long term.

Daimler said in a statement that it welcomes and appreciates Li Shufu, a Chinese visionary and entrepreneur, and looks forward to constructive discussions on future development strategies.

Reasons for the stake

This afternoon Li responded to Geely’s Daimler stake purchase. “The global auto industry faces tremendous changes. There are opportunities for change. Opportunities are huge and challenges are huge,” Li said. “How can we seize the opportunity? We must develop together and scale the heights of technology, especially in digital technology and online technology. This requires the enterprise to have a sense of crisis, and to seek collaborative partners.”

Li predicted that in the future, only two to three companies will survive in the traditional automotive industry amidst such change. Only companies that have the most advanced technology can survive to the end. In Li’s view, Daimler is the global automotive leader, leading in electric, intelligent, unmanned and shared travel. Partnering with Daimler, Geely and Volvo could produce a synergistic effect, which was a major reason for Geely’s stake purchase in Daimler.

Investment Funds

In 2010, Geely bought Volvo. In order to meet Ford Motors’ requirement of “at least $1.5 billion in liquidity to operate Volvo”, Geely raised a total of $3 billion including $1.3 billion in cash to acquire Volvo. The funds came from a number of banks in China, US, and Europe, and the governments of Sweden and Belgium offered low-interest loan guarantees for acquisitions. When asked about funding sources for the $8.975 billion investment in Daimler, Li said that Geely’s overseas company raised capital abroad and not from China. Geely insiders disclosed that Societe Generale and Morgan Stanley were responsible for raising funds for this deal.

Does Li Shufu or Geely Hold the Stock?

Li had denied media reports that stated that the investment consists of his personal shares. The stock was bought by Geely Holding Group, and there are no personal shares belonging to Li Shufu.

Impact of Stake Purchase

The world’s mainstream car companies cite “CASE” as the four major evolutionary trends of the automotive industry in the future, namely connected, autonomous, shared & service, and electric drive.

Geely’s investment in Daimler could be summed up in one word: synergy. The partnerships between Renault and Nissan, NIO and JAC, and Chang’an and Guangzhou Automobile Group are all based on synergy. Li had repeatedly emphasized the importance of industrial alliances and synergies, and Geely had also been practicing this principle.

• On March 28, 2010, Geely acquired Volvo after signing an acquisition agreement in Gothenburg, obtaining 100 percent of Volvo equity and related assets including intellectual property rights.
• On June 23, 2017, Geely signed an agreement with Malaysia’s DRB-HICOM to acquire a 49.9 percent stake in PROTON and 51 percent stake in luxury sports car brand Lotus.
• On November 13, 2017, Geely purchased Terrafugia, a startup developing flying cars.
• On December 27, 2017 Geely acquired a 8.2 percent stake in Volvo Group, becoming Volvo’s largest shareholder with 15.6 percent equity.

Why did Li purchase so much stake on a global scale? On August 4, 2017, Geely and Volvo set up a joint venture to both own 50 percent stake of the new company. The two sides shared Volvo’s four-cylinder engine technology and jointly developed next-generation pure electric vehicle technology. In the future, both sides will jointly undertake research and development costs and procurement costs, and the new technologies will be available to all Geely brands.

The joint venture shares platforms and technologies, integrates supplier systems, maximizes the cost-saving synergy and economies of scale, and improves return on investment (ROI). It is the ultimate goal of Geely to become Daimler’s largest shareholder in this era of industry changes, when alliances are crucial for success.

Sergio Marchionne, chairman of Fabbrica Italiana Automobili Torino (FCA), is a prime example of an industry representative dedicated to maximizing investment benefits through industrial alliances.

On April 29, 2015, Marchionne delivered a speech entitled “Confessions of a Capital Junkie”, in which he said that the average ROI for carmakers is “dissatisfying” compared to other industries. The automotive industry spends 45 to 50 percent of costs in places the consumer can not see. Many car manufacturers develop similar technologies and platforms, resulting in a huge waste of capital. For example, mainstream car companies such as Volkswagen, Toyota, GM, Ford, Hyundai, Honda, Nissan and PSA all developed three- and four-cylinder engines and five-speed and six-speed transmissions. This has caused a huge waste, decreased profits, and did not bring any additional value to the customers.

Li advised FCA to work with GM, Ford, Volkswagen and other big auto groups. However, these companies declined the proposal.

When the auto industry is in a period of change, the potential benefits of industry alliances are magnified. Matt Tsien, Executive Vice President of GM and President of GM China, said in an interview with 36Krypton that the premise of the investment and transformation of new business (such as electrification and autopilot) is that the traditional business (such as fuel vehicle sales and engine development) is well and sound. This statement speaks to the difficulty faced by car companies: car companies need to aggressively invest in emerging businesses, but the capital investment in new business is dependent on the ROI of traditional businesses whose costs are constantly shrinking.

The differences in the powertrain structures of electric vehicles between different brands will be reduced, and the driving experience will become more similar. The waste of resources caused by repeated development of such technologies will be even more prominent. If traditional car companies form alliances to share platforms and technologies and enhance cost savings, scale up profits and reduce debt, they will be better able to withstand the impact of the intelligent/interconnected/electric/sharing car companies such as Tesla and other new Chinese car makers.

Li’s investment in Daimler was clearly not for pure financial reasons. Li has called on the Daimler board of directors to develop together to scale technological heights. Li will meet with Daimler board members at its headquarters in Stuttgart, Germany, on February 28.

Daimler did not reject this idea of alliance. On November 4, 2017, a fast-charging construction company called Ionity set plans to build 400 350kW fast charging stations in Europe. Such an ultra-high-speed charging network will rival that of Tesla’s. Ionity is supported by Daimler, BMW, Ford, Volkswagen, Audi and Porsche. Daimler also led the series G round of ChargePoint, the world’s largest charging network operator. BMW’s i Ventures also participated in this round of financing.

Daimler’s recent stable, large-scale and systematic transition to electric power may also be an important reason for Li’s investment. On March 29, 2017, Daimler announced its plans to invest 10 billion euros by 2020 in 50 new energy vehicles, including 10 pure electric vehicles.

Daimler has registered a number of EQ/EQA/EQB/EQC/EQE/EQS/EQG/EQX and other pure electric vehicle-type trademarks, covering a wide range of products including compact, medium-sized, large-scale, SUV, and pickup trucks. Daimler plans to promote electrification in China, the United States and Germany, and to establish electric vehicle manufacturing plants in Bremen, Sindelfingen, Rastadt, Tuscaloosa, China, Beijing and France. Daimler has completed construction of power cell plants in Kamenz, Stuttgart, Tuscaloosa, and Beijing.

In 2015, Geely announced a five year strategy for new energy products called “Blue Geely Initiative.” The strategy aims to have new energy vehicle sales account for 90 percent of total revenue by 2020. On July 18 of last year, Geely decided to additionally invest over $4.7 billion (30 billion yuan) in a new energy auto project in Xi’an, capital of Shaanxi Province in central China. Geely had also consulted with Daimler on establishing new energy joint venture in Wuhan, capital of Hubei Province in central China.

Will Daimler, Geely and Volvo transform and become the two or three traditional car companies that will survive in the future? We don’t know, but Li is aware of the impending crisis. Geely’s growth over 20 years as a powerful Chinese automotive holding company is not without reason.