How the Volvo-Geely Deal Plugs Into the Green Car Race

Volvo Electric C30
Volvo Electric C30

Zhejiang Geely Holding Group has just gone where no Chinese automaker has gone before: buying a major global car brand. Under an agreement announced on Sunday and slated to close in the third quarter of 2010, Geely — a company known for its low-cost compacts — will buy the loss-making luxury brand Volvo for $1.8 billion from Ford Motor (s F).

In a statement about the deal, Geely noted that the board and management of Volvo, which will operate as a separate unit based in Sweden, “will have a mandate to develop Volvo Cars’ leadership in safety and clean environmental technologies.” In terms of technology for greener cars, Volvo’s electric vehicle initiatives have “hardly been at the vanguard of the industry,” as Lux Research senior analyst Jacob Grose put it to us today. So how does Geely’s acquisition of the tech and brand play into China’s larger role in the nascent electric vehicle market?

Opening Doors for EnerDel?

Despite its relatively conservative approach to electric vehicles so far, Volvo has laid out plans to launch a 50-car test fleet of its first all-electric model, the electric C30 (pictured), in early 2011. And it signed on EnerDel, the battery making subsidiary of Ener1 (s HEV), to supply lithium-ion batteries for the initial run (check out our video interview with Ener1 CEO Charles Gassenheimer.)

This week’s deal comes on the heels of another agreement in which an overseas automaker decided to buy one of the Big Three’s loss-making brands — Dutch specialty car maker Spyker agreed in January to buy struggling General Motors subsidiary Saab for $74 million.

Battery maker Boston-Power at the time had just joined with Saab and several partners in Sweden for the first demonstration of its vehicle batteries, and Saab’s shaky status cast uncertainty around the project. By February, however, Boston-Power CEO Christina Lampe-Onnerud told us the project was plowing “full steam ahead” and the startup was “thrilled with Spyker coming in.”

According to Pike Research analyst John Gartner, EnerDel might also have reasons to be, if not thrilled, at least a beneficiary of the sale of one of its EV partners — but it will take time to see how it shakes out. Gartner emphasized that EnerDel has a very limited supply agreement with Volvo, and that, “It’s often the case that auto manufacturers switch battery suppliers when going from pilot to production.” (Just ask A123Systems and Advanced Lithium Power.) Still, he said EnerDel, “is likely to receive greater consideration for any higher performance Volvo vehicles that it would produce for the Chinese market.”

China’s Electric Transition

That high-end segment, which is Volvo’s niche, could hold sizable opportunity in China in coming years. According to forecasts cited by the LA Times today, China’s luxury vehicle segment is on track to double in size within five years. And Frost & Sullivan anticipates China’s vehicle fleet will begin a minimum 10-year transition to plug-in hybrids and battery-electric vehicles as early as this year.

All of this comes amid, “unprecedented cooperation between Asia, Europe and American companies in the automotive industries in producing electric vehicles,” Gartner told us on Monday, attributing the trend partly to a recognition among car companies that it’s “necessary to produce the widest variety of electric models in price, size and performance as the market ramps up during the next five years.”

Pike Research expects China to become the largest market for electrified vehicles (including all-electric and plug-in hybrid or “PHEV” models), with sales reaching 310,000 vehicles in 2015. By comparison, Gartner said the firm anticipates U.S. sales will reach only 284,000 plug-in vehicles in 2015 and in Western Europe they’ll hit about 222,000 that year. While China’s government and 10 largest automakers (by sales) have launched major efforts to develop and build electric vehicles and components, Pike predicts that batteries as well as high performance cars and luxury vehicles “are likely to be imported into China from Europe, Japan and the U.S.”

Hurdles for Geely to Sell Volvo EVs at Home

Not everyone holds a rosy outlook on the future of EVs in China. Lux’s Grose pointed out that China-based (and Warren Buffett-backed) BYD has seen “disappointing” initial sales of its plug-in hybrid model. “Our forecast for the Chinese PHEV and EV markets is pessimistic due to the ultra-low costs of competing internal combustion vehicles in that country combined with the national policy of subsidizing gasoline,” he explained.

As a result, Geely could face an uphill climb finding much of a market for plug-in models under the Volvo brand, no matter what battery maker gets in on the deal. Grose said, “I don’t think another potential PHEV entrant, especially one that would be competing on quality, would unlock this difficult market.”