Geely ditches Volvo merger but still needs its partner to go global

Geely has scrapped plans to merge its business with Volvo and will now focus its global ambitions on a joint venture with the Swedish carmaker on connected cars.

China’s largest independent automaker already owns Volvo and operates the Swedish firm as a separate company. But about a year ago, Geely (GELYF) said that it was considering how to bring the two brands together — a merger that would have created the first Chinese automaker with true global reach.

Those plans are now off. Geely announced late Wednesday that the two companies will keep their independent corporate structures, though they will partner on electric and autonomous driving technology.

But the decision does not mean that Geely is retreating from the global stage. In fact, it could signify the opposite.

Geely said Wednesday that it will now seek to boost its tech-focused Lynk & Co. brand, launched as a joint venture with Volvo in 2016. Lynk primarily builds connected cars, which have telematics systems that are always connected to the internet and allow users to control them from their smartphones.

The Geely brand has also been making inroads lately in developing next-generation car tech.

In early January, Geely announced it would team up with Chinese search giant Baidu (BIDU) to build electric vehicles. Days later, it unveiled a partnership with Chinese social media and gaming giant Tencent (TCEHY) to develop features for smart cars, along with autonomous driving tech.

Lynk will aim to leverage Volvo’s sales network to gradually provide more services to customers around the world. Already, Lynk has opened a store in Amsterdam, and is expected to launch another nine locations in Europe, according to analysts at Citi.

“This is the best combination solution,” Geely said.

Geely might also be motivated by the financial health of its flagship Chinese brand compared to Volvo, according to Zhang Chenghang, head of auto research at Guiyang-based Huachuang Securities.

Geely sold 1.32 million cars in 2020, according to statistics it released last month. That’s more than double Volvo’s total sales of about 660,000 cars last year.

“The decision will allow Geely’s listed firm not to be dragged down by Volvo,” Zhang wrote in a research note Thursday.

Talks of the merger were also met with resistance from investors over the past year, the Citi analysts wrote in a Thursday note. They wrote that some of Geely shareholders believed that Volvo is overvalued, and worried that a merger would dilute their shares.

The merger would have also been met with other challenges, including differences of corporate culture, according to the Citi analysts.

Zhang said that ditching a full tie-up might have some negative consequences, though. He pointed out that remaining somewhat separate is “still less cohesive than operating under one management framework, one board of directors.”

But investors appear to be happy with the decision, at least for now. Shares in Geely surged nearly 5% in Hong Kong on Thursday, though they pulled back a little to end the day up 2.7%.