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Why Volvo Cars’ Chinese Owner Is Betting Big on Volvo Trucks

Do cars and trucks belong in the same corporate garage? By bringing the two Volvos closer together again, Chinese car giant Geely is betting they do.

The privately owned Chinese company, which bought Volvo Cars from Ford in 2010, announced Wednesday that it is acquiring an 8.2% economic stake in truck maker Volvo AB, which sold its car brand to Ford in 1999. The seller is Cevian Capital, Europe’s largest activist investor.

Cevian gets a surprisingly profitable exit on a decade-old investment that long struggled. For years the European truck market was sluggish; in 2015 U.S. truck orders plunged, hitting Volvo’s Mack Trucks unit. This year conditions have finally been buoyant on both sides of the Atlantic, and Volvo AB shares have risen by almost 50% as analysts have upgraded profit forecasts. Moreover, Geely is paying roughly $ 3.9 billion for Cevian’s stock—roughly 19 times expected earnings for 2017 and some 20% more than the market rate.

In exchange Geely gets the largest share of Volvo AB’s equity, but only the second-largest share of its voting rights, after Swedish holding company Industrivärden, given the company’s dual share classes. If that sounds expensive—a world away from the company’s bottom-of-the-market acquisition of all of Volvo Cars for just $ 1.8 billion—there are two broad justifications.

First, Geely may be able to use its networks to sell Volvo trucks in the vast Chinese market, which is currently dominated by local manufacturers. Confusingly, these include a joint venture between Volvo AB and Chinese state-owned car manufacturer Dongfeng Motor; where the cheaper Dongfeng trucks will fit into a Geely-influenced Volvo strategy is unclear.

Second, the new technologies upending the car industry—electric powertrains and robot-drivers—are potentially even more transformative for the truck industry. If Geely can use the technology it has been developing with Volvo Cars to accelerate Volvo AB’s transition to a self-driving future, it could give the truck maker an edge over smaller rivals.

This year the idea of separating car manufacturers from other, more highly valued businesses has gripped automotive investors. Analysts have looked at Volvo AB’s soaring share price and calculated that German groups Daimler and Volkswagen could unlock billions of dollars in value by hiving off their truck units.

Geely’s strategy seems to run in the opposite direction. Its latest deal is an expensive bet that the old-fashioned cars and trucks conglomerate will enjoy a new lease of life as technological disruption looms closer.

Write to Stephen Wilmot at stephen.wilmot@wsj.com

Appeared in the December 28, 2017, print edition as ‘Why China’s Car Giant Geely Is Betting on Volvo Trucks.’

WSJ.com: Markets

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