A Chinese carmaker is following the lead of the Japanese and South Koreans in the 1960s and 1980s.
UNLESS you have an addiction to cars you might have missed the news that China’s Geely group last week took formal control of Sweden’s Volvo, an event which points to the car industry becoming an early test for Australia’s next government as it struggles to manage our two-speed economy.
Geely, a name not widely known here yet, is China’s biggest privately owned car maker, and while it might be easy to dismiss the Volvo move as a waste of money on a worn-out brand of lacklustre vehicles there is method in Geely’s madness, with Volvo just one example how it plans to grow.
Cost of production, and smarter design, is the key to what’s about to happen at Volvo, with the Chinese on the verge of doing what the Japanese did to the global auto industry in the 1960s, a process the South Koreans copied in the 1980s.
Coming soon to a showroom near you, perhaps as early as next month, will be Geely branded cars. Perth’s ‘Mr Cars’ himself, John Hughes, is a Geely fan, having negotiated a deal similar to the one he struck with Hyundai in the 1980s when that company hit the local market with astonishingly cheap cars that improved in quality over time into sector leaders such as the current favourite, the award-winning i30.
Look back at what Hyundai did to the Australian market and magnify the effect of Geely, and other Chinese car brands such as Great Wall, which is already here.
It was the Hyundai invasion which helped trigger a series of government-funded emergency rescue packages for Adelaide-based Mitsubishi, and came close to forcing the closure of Ford and General Motors (Holden) manufacturing plants in Australia.
Geely has the potential to repeat that process because it is not what most Australians imagine a Chinese carmaker to be. It is a high-tech company run by one of China’s richest men, 47-year-old Li Shufu, who has the same dynamic approach to fixing business problems as the best in the West.
Ten years ago, when faced with a shortage of engineers and other technical experts, Li solved the shortage by building his own university on the outskirts of Beijing. Today, Geely U has 30,000 students in 20 colleges and ranks as China’s biggest private university – and all to feed skilled workers through to Li’s auto-building empire.
There are other surprises in store, not least being that Li is not just using cheap Chinese labour. His car plants have state-of-the-art assembly lines complete with robots, in-house car design studios, and world-leading car propulsion systems including one that is a solar-gas hybrid.
If Geely’s Li, backed by his personal $2 billion fortune, reckons he can do the impossible and revive the moribund Volvo, which suffered 10 years of Ford ownership, then winning a big chunk of the Australian market for his Chinese cars should be chicken feed.
And if that assumption is correct then whoever wins government on August 21 will face a repeat of history – how to save the car industry of Melbourne and Adelaide (again).
If Labor returns to power it’s a no-brainer to imagine fresh government subsidies with money earned in the mining states of Queensland and Western Australia diverted to the rust-belt of Victoria and SA which, if the polls are correct, are remaining faithful to the hand that feeds them.
If the conservatives win the hand-outs might still come, but with demands attached, including modernisation and a plan for the states involved to do something competitive rather than face a future eking out a living as charity cases.
Private equity shocker
KATHMANDU’S shock profit downgrade is a source of two critical business and investment lessons. First, never buy anything after it has been milked dry by private equity investors. Second, always respect the business acumen of an owner-driver.
On the first point Kathmandu was the brainchild of Jan Cameron, a woman who sold out in 2006 to a private equity consortium, trousering a cheque for $400 million, and heading off to Tasmania to cuddle wild creatures – until her return last year as the owner of a chain of discount retail stores.
Retail Adventures, which includes Crazy Clarks and Go-Lo, has 380 shops around the country and appears to be undergoing a born-again revival under Ms Cameron’s very hands-on, cost-conscious leadership.
Meanwhile, over at Kathmandu, the private equity consortium has walked into the sunset with hundreds of millions of dollars in profit from re-selling the business in last year’s float, which included a number of forecasts – the ones that have just been downgraded.
To say it is a disgrace to ‘miss’ prospectus forecasts little more than a year after floating is stating the obvious.
It is also stating the obvious to say that investors who took up shares offered in the float should have known better after the equally disgraceful performance of the re-float of Myer.
Moral of the story: trust owner-drivers, like Jan Cameron and John Hughes. They know how to run a business from the sales floor up. Beware of private equity buy-outs because investment bankers, who know nothing about running the business they’re selling, will not leave any value for the next owner – you.
China goes for gold
FASCINATING contradictory economic signals are coming out of China these days, with reports of a crackdown on bankers lending too heavily to property speculators at the same time as the national gold holdings are being expanded.
The move on property is said to include internal ‘stress tests’, which ask banks to factor in a 60 per cent fall in property values in cities that have boomed over the past few years.
The move deeper into gold includes new rules, which allow more banks to trade in gold, ensuring that Chinese buying of the metal will underwrite its future price.
Last year was a good example of how the gold market is being driven by Chinese investors, who bought 75 tonnes of bullion (compared with just 18t in 2007), matching gold buying attributed to the Chinese central bank.
“We use ideas merely to justify our evil, and speech to conceal our ideas.”