Li's plans to increase synergies and avoid product overlaps are logical. But his brands require significant investment, and several of them are loss-making or have high debts, or both. — Reuters
SHANGHAI: After a decade-long buying spree, Chinese car tycoon Li Shufu has begun streamlining his globe-spanning Geely empire to cut costs.Given that his fondness for engineering encompasses both the financial and automotive kinds, minority shareholders may find themselves passengers taken on a rough ride.
His plans to increase synergies and avoid product overlaps are logical. But his brands require significant investment, and several of them are loss-making or have high debts, or both. Nurturing weaker assets without harming stronger ones is a difficult balancing act.
In response to questions, Zhejiang Geely Holding Group said it “remains financially disciplined with a strong balance sheet with a healthy debt ratio”, adding that it has “no plans to decrease its existing holdings” and its strategy “will create shareholder value for all investors long term”.
Li has come a long way since starting out as a photographer in the early 1980s, before pivoting to making refrigerators, motorcycles and, eventually, cars.
Geely has been cheaply acquiring and patiently fixing Western automotive assets such as Swedish carmaker Volvo Cars and British racing icon Lotus, while incubating new electric brands such as Zeekr and Polestar.
It announced in September plans to more closely integrate its sprawling portfolio, which sold a combined 2.8 million vehicles in 2023.
While this confederation already shares factories and technology, many of its brands are subscale. Several are exposed to European and US tariffs, as well as the slower-than-expected uptake of electric vehicles (EVs) in Western markets.
In November, Zeekr said it would acquire a controlling stake in Lynk & Co – a hybrid and EV manufacturer and car subscription firm whose headquarters are in Sweden – by acquiring shares from Geely Holding and Volvo Cars (which founded Lynk in 2016 with Geely Auto).
In cash terms, the winners of this complicated reshuffle are Li’s Geely Holding, which receives around US$1.3 billion in proceeds, and Volvo Cars, which gets US$750 million.
The benefits for Zeekr are less obvious. Until now, the Chinese electric brand has emphasised its premium credentials and asset-light business model, whereas Lynk has several factories and caters partly to the mid-market.
Zeekr’s shares initially sank 30 per cent following the transaction’s announcement, before recovering more than half of those losses.
The reaction indicates that Li should think carefully before merging other brands, and it is not the only example of his ambitions meeting resistance in the capital markets.
In May, Zeekr’s US initial public offering raised only US$441 million, and much of that came from existing investors, including Geely Auto.
Shares of Volvo Cars, Li’s prized asset, are close to a record low and heavily shorted by hedge funds.
Along with Volvo’s lack of scale and weak cash generation, “ownership and governance remain concerns for a number of investors”, Jefferies Financial Group Inc analyst Philippe Houchois told clients recently.
Geely has sold stakes in several investments since the start of 2023, including Daimler Truck Holding AG and truck rival Volvo AB.
It can certainly use the cash. Including 2024’s estimated outflow, Polestar is on track to have burned around US$4 billion in the last three years. Because its revenues are not expected to grow in 2024, the Swedish EV-maker has warned about breaching a revenue covenant underpinning almost US$1 billion in syndicated bank borrowings, which form part of US$2.5 billion of total bank indebtedness.
In theory, creditors could call the club loan at the end of 2024, but Polestar said in November that together with Geely Holding, it is in “constructive” dialogue with lenders who remain “supportive”.
While Volvo Cars this year vowed it would not provide further funding to Polestar – somewhat contrary to Geely’s overarching desire for closer cooperation – Volvo is still owed around US$1 billion by its EV offshoot and retains an 18 per cent stake.
Elsewhere in Li’s empire, his privately owned London EV Company, which makes a plug-in version of the iconic black cab, lost more than £100 million in 2023, which it blamed in part on a fall in taxi-driver numbers in the British capital, according to these accounts.
Lotus Technology, which is majority owned by Li and Geely affiliates, has lost US$667 million so far in 2024, after slashing sales expectations in response to tariff threats and tepid demand for luxury EVs.
The Chinese-British group now expects to deliver just 12,000 vehicles in 2024 compared with its original forecast of 55,000.
Little improvement is likely in 2025 as it pivots to selling extended-range hybrids alongside electric models.