Academic journal article Journal of Economic and Social Development

The Prospects of International Acquisitions in Car Industry during the Global Economic Crisis - the Case of Geely Volvo

Academic journal article Journal of Economic and Social Development

The Prospects of International Acquisitions in Car Industry during the Global Economic Crisis - the Case of Geely Volvo

Article excerpt

1. Introduction

The globalization process, having been intensified over the last two decades, has had profound impact on the international business environment. One of the most important results of this process is the integration of national economies into global economy. According to some research Chinese economy was the fastest globalized national economy between 1975 and 2000 (Dreher, 2006, pp. 1091-1110). Deregulation of Chinese economy and integration into global economy set the bases for its strong economic growth. Despite the poor starting point, China has become the second world economy for only two decades. China GDP has shot up in the past two decades and was multiplied more than eleven times. Likewise, GDP per capita was multiplied 9.5 times. Some researchers believe that without structural reforms and stimulation of domestic demand China will very soon hit the peak of its economic growth. Global economic crises and falling demand for Chinese products in their main export markets (i.e. European Union) support these ideas. The World Bank's latest research expects Chinese economy to cool off, but in spite of the slowdown it forecasts strong GDP growth rates, compared with developed economies (World Bank, 2012, p. 81).

China's development in the last two decades has been based on strong FDI3 inflow, which rose from USD 4 billion to USD 185 billion. Big MNCs4, usually from developed economies, have used its subsidiaries in China as export-platform FDIs. Strong presence of exportoriented MNCs and deregulation of economic policy have allowed Chinese companies go global. The first wave of the internalization comprised work intensive industries. Nevertheless, in the past few years a number of Chinese companies performing in high technology industries have become global competitors (Lenovo, Huawei, Haier, ZTC, Mindray etc). These companies are still exception rather than the rule, and it seems clear that more players from China will enter the global field in the years to come.

Due to large R&D investments and high market saturation in the global auto industry market, new entrants cannot easily penetrate it. Today's Chinese car industry is not globally competitive, though some companies strive to internationalize their business operations. Several Chinese car companies made international acquisitions to achieve this goal. The last and the most important has been the acquisition of Swedish Volvo by Chinese Geely. This acquisition is estimated to be very risky due to its size, investor's lack of experience in acquisition management, and the differences between national and corporate culture of the investor and the target.

This paper consists of three parts. The first part offers theoretical explanation of horizontal acquisitions. The motives behind the acquisitions of enterprises operating in the same industry will be examined. The second part of the paper gives a review of the present situation in auto industry and its future prospects. The focus will be on the market position and the future role of Chinese car manufacturers. The third part of this paper offers the analysis of the motives behind Geely's acquisition of Volvo, potential benefits and risks involved in it.

2. The role of cross border acquisitions in contemporary business environment

Before the global economic crisis international acquisitions recorded constant, though unsteady growth. In this period both the number and the value of international acquisitions increased. In 2007 the value of international acquisitions was more than USD 1,000 billion and they reached the historic peak, while in the next two years they suffered a sudden downturn, and in 2009 their value was USD 250 billion. In 2010 and 2011 an appreciable growth of international acquisitions was recorded, though its value accounted for something more than the half of its historic peak (UNCTAD, 2012, pp. 177-180). The dynamics of international acquisitions varied from industry to industry. …

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