Seeking cost reduction under high leverage, Geely and Volvo's powertrain units might be merged.
On October 7, Geely announced that the possibility of merging the powertrain business with Volvo is under discussion, yet this proposal is still in the planning stage, and will put into effect after a joint agreement, approval from both sides’ labor unions and regulatory departments, as well as due diligence.
In fact, after Geely completed the acquisition of Volvo, it has started to join forces with Volvo for synergetic development such as Compact Modular Architecture (CMA) R&D.
Now, this plan is incubated by the two parties aiming at being a supplier of the next generation's cylinder engine and hybrid power system globally. Successful merger is expected to benefit their operating processes and reduce the expenditure of the group through jointly R&D and production.
During 2018, the Group recognized a total expense of CNY1.9 billion in relation to its research and development activities, including the amortization of intangible assets and R&D costs. According to Geely's 2019H1 financial report, additions to intangible assets by acquisition and capitalization in respect of development costs amounted to approximately CNY2.3 billion in the first half of 2019 (six months ended 30 June 2018: CNY2.1 billion).
Geely and Volvo have both said that the combined engine business will help to push the electrification process. According to Volvo's plan, by 2025, half of all models sold will be pure EV and hybrid, and the hybrid car's power system will be provided by the newly formed business unit.
"At the same time as we fully promote the electrification process, we will continue to increase investment in clean and efficient powertrain and hybrid power systems, and prospectively layout high-end industries and chains, which provide consumers with more competitive products and services while improving the efficiency of our operations", according to Mr. An Conghui (安聪慧) CEO and President of Geely Automobile Holdings Limited.
Hakan Samuelsson, president and CEO of Volvo also said: "Hybrid vehicles require the best engines. This new business unit will integrate resources, teams and expertise with scaled cost advantages to create a leading power system."
Both Geely and Volvo executives revealed that the combined powertrain business release the financial presser by cost reduction. In fact, since 2017, Geely has successively acquired the business of Proton and Lotus, and invested in Daimler to become its second-largest shareholder. Those large buyout activities made the leverage ratio surge.
In this regard, some media have previously questioned that Geely Group's overall liability has exceeded CNY 160 billion, and the debt to asset ratio was higher than the average level of domestic automakers. Li Donghui (李东辉), CFO of Geely Holding Group, clarified that the debt ratio of Geely Group is normal among the world's top 500 companies.
The total liability of Zhejiang Geely Holding Group was CNY 97.47 billion at the end of 2014, and this figure hit CNY184.26 billion by the end of the first quarter of 2018. As of the end of September 2018, Geely Holdings and its subsidiaries had a total of CNY 25.4 billion bonds pending, including USD1 billion, EUR 1 billion and SEK 3 billion. Although Geely can rely on further issuing bonds to supplement the company's operating cash, the financial costs will increase significantly, which will affect the company's profitability.