Volvo's Government Ownership

http://www.futureofcapitalism.com/2010/11/volvo-government-ownership

One of best free-market-oriented journalists out there right now is Yang Jian, the managing editor of Automotive News China. His latest dispatch is about Volvo:

Geely President Li Shufu, the proud new owner of Volvo Car Corp., couldn't have raised the money to buy the Swedish carmaker from Ford Motor Co. without generous financial backing from two municipal governments.

Now he's discovering the high price of that generosity.

After Li completed the $1.7 billion (11.3 billion yuan) Volvo deal in August, we learned that two local Chinese governments helped bankroll the deal. The government of Daqing, an oil city in northeast China, supplied 3 billion yuan while the government of Jiading, a district of Shanghai, pledged 1 billion yuan.

But nothing is free in this world. By putting up the money, both governments expect Geely to build a Volvo plant on their land. ...

To achieve economies of scale, Li would prefer to build Volvos in one very large plant - most likely Chengdu. But he does not have that luxury. Instead, Li must build two additional plants in Shanghai and Daqing. Three Volvo plants in three different locations will certainly lead to a waste of capital and inefficient manufacturing.

Does Li have any choice? He does not. He must honor his agreements with the local governments. That's the price a private Chinese company like Geely must pay to do business in China.

It gets better: Why did Geely have to get financing from the municipal governments? "The big banks in China are still controlled by the state, and those institutions are still reluctant to lend to private businesses," the article says.

by Ira Stoll  |  Nov 11, 2010 at 2:09 pm Related Topics:  Auto Industry, China, Government ownership receive the latest by email: subscribe to the free futureofcapitalism.com mailing list