I have, for some time, had an interest in Chinese acquisitions of Western firms (see Hurdles to Chinese Investment). I have been following the recent spate of Chinese acquisitions in the auto industry, and especially, the acquisition of Volvo by Geely (see Chinese Acquisitions in the Auto Industry).

With that in mind, I was delighted to see an in-depth look at the Geely-Volvo deal that recently appeared in the Wall Street Journal (see Chinese Begin Volvo Overhaul). The article details the difficulty that Geely has had trying to shift Volvo’s image from a safety-oriented brand an ultra-luxurious brand.

When Volvo Car Corp. debuted its newest design recently, it turned heads with an edgy look that departed from the staid style that has been its hallmark. The upscale sedan has sleek curves and pale purple LEDs in its grille in a bid to plant the Swedish company more firmly in the luxury segment.

The car represents a compromise between competing visions of Volvo’s future. On one side is Volvo’s European chief executive, Stefan Jacoby, and on the other, the company’s hard-charging new Chinese owner, Li Shufu.

In the nearly 10 months since the acquisition was completed, Mr. Jacoby and Mr. Li have worked to reconcile their visions and differing management styles…One central area of contention: Mr. Jacoby wants to focus on safety and fuel-efficiency with smaller cars, while Mr. Li believes Volvo must expand aggressively into luxury cars to compete with BMW, Mercedes and Audi.

“Volvo and Mr. Jacoby can take the moral high ground and stick with the company’s tradition of understated, more modest style,” Mr. Li said in a March interview, but [Mr. Li believes] the brand has no future in China unless it caters to flashier tastes.

I’m not entirely sure I agree with Mr. Li on this one.

Personally, I think it will be very difficult to try to reposition Volvo to compete head to head with BMW, Mercedes, Audi, and Lexus. Not only do the latter brands all share a reputation for the highest quality among the mass market brands, but they have a stranglehold on the market in China (together they account for 90% of the luxury market).

What has traditionally made Volvo unique (from a strategy perspective) is its ability to differentiate as a niche producer of high-end (though not ultra-luxurious) family saloons with a reputation for safety.

Does Volvo’s portfolio need a styling facelift? Absolutely! But trying to overhaul the entire organizational image and reposition the company to compete in the ultra-luxury segment of the market is a high risk proposition. This is especially so because it comes at a time when Volvo’s operations are troubled to begin with, and they operate in a segment of the industry plagued with overcapacity.

In addition to Geely’s plans for Volvo, the WSJ article provides a remarkably candid account of the post-acquisition management clashes in both organizational, and national, culture that typically occur in cross-border deals of this type.

Friction between Geely and Volvo was evident early on, at a meeting in spring of last year at Volvo’s headquarters in Gothenburg, Sweden…About 40 Geely executives were there to get an overview of the Swedish company. One senior Geely executive felt the information Volvo was providing was insultingly simplistic. “Do you think we’re a bunch of amateurs?” he exploded, before storming out of the room, and taking the next available flight back to China, according to a personal familiar with the matter.

…distrust lingered. In September, on the eve of a trip to Sweden for his first Volvo board meeting, Mr. Li told a Journal reporter in Beijing that Geely planned to quickly build as many as three assembly plants in China to jumpstart Volvo sales. At the time only a small number of Volvos were made in China, at a Ford joint-venture plant. By the time Mr. Li arrived in Gothenburg, the resulting article had set Volvo executives and directors on edge, fearing that their new owner was adopting a risky, overly-aggressive approach.

The Volvo executives expressed their concern in a meeting with Mr. Li. Mr. Jacoby, fearing the situation could spin out of control, brought Mr. Li and a translator into his second-floor corner office. Mr. Jacoby pressed the point that Volvo needed to proceed judiciously in building manufacturing capacity in China to preserve its quality and its image. “We solved this very much on a one-on-one basis,” Mr. Jacoby said in a recent interview. “We didn’t want to do this in a big public setting and embarrass one or the other.”

Although it seems that Geely and Volvo have been able to work through their differences thus far, I remain somewhat skeptical of the prospects for success of this deal. I therefore continue to stand by my comment from the related blog post (see Chinese Acquisitions in the Auto Industry) where I mused:

…given the auto industry’s ills, I wonder whether these Chinese acquirers will be able to derive value from their tired, beaten, and battered Western subsidiaries

Only time will tell…

Interesting article in the NY Times summarizing a recent Asia Society report about the prospects for Chinese direct investment in the United States (see Chinese Investment Bypasses U.S.).

Flush with capital from its enormous trade surpluses and armed with the world’s largest foreign exchange reserves, China has begun spreading its newfound riches to every corner of the world — whether copper mines in Africa, iron ore facilities in Australia or even a gas shale project in the heart of Texas.

[A new study]…forecasts that over the next decade China could invest as much as $2 trillion in overseas companies, plants or property, money that could help reinvigorate growth in the United States and Europe.

But the report…also warns that the United States risks missing out on a large share of the Chinese investment boom because of politics, a growing rivalry between the two nations and deep-seated perceptions that Chinese investments are unwelcome in America.

Chinese firms engaged in about $5 billion in direct investment in the U.S. in 2010 (see the Asia Society Report on Chinese Direct Investment), representing 10% of China’s total outward direct investment of around $50 billion.

With China’s vast reserves, my expectation, consistent with the conclusions of the Asia Society report, are for that figure to grow exponentially in the next few years. Of course, that’s from a very low base – Chinese outward direct investment currently accounts for only 5% of global outward direct investment flows (by comparison, the U.S. accounts for 25% of such flows).

Insofar as political meddling in Chinese direct investment into the U.S. is concerned, I am generally against political interference in cross-border M&A and greenfield transactions. If a transaction truly raises national security concerns then I see a reason to examine the deal more closely; however, such transactions are extremely rare. My hunch, though, is that politicians (on both sides of the aisle) feel compelled to weigh in on deals when they ought not to, …largely for the purpose of scoring political points.

Some of the high-profile Chinese deals that were politically overly-scrutinized include Lenovo’s acquisition of IBM’s PC business and CNOOC’s attempted acquisition of Unocal. In fact, CNOOC walked away from the Unocal deal, one which did not pose much of a security risk, because they felt that the political hurdles were too great.

In this sense then, I agree with the findings of the Asia Society report that the U.S. should openly encourage Chinese direct investment. In addition, the inward direct investment process should be safeguarded from undue political interference and/or influence.

Inward investment (not just from China, but from any country) brings jobs, tax receipts, and an increase in consumer welfare; it provides an alternative investment outlet for Chinese reserves; and it affords Chinese firms an opportunity to learn valuable skills and capabilities from their acquisition targets (see Chinese Acquisitions for more on this topic).

To me, all the political posturing toward Chinese investment into the U.S. is reminiscent of that which took place in the 1980′s when Japan was the investment scapegoat of choice. As it turns out, many Japanese investments had a positive impact on the U.S. economy (think automakers like Toyota and Honda opening assembly facilities in the U.S.). In some cases, however, Japanese investors ended up buying high only to eventually sell low (think Rockefeller Center and Pebble Beach).

I, for one, wouldn’t be surprised if many Chinese investments followed that latter path…