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Question 3: Following the Volvo acquisition, Geely built a new, wholly owned factory to produce Volvo cars in the United States. Why was a direct investment strategy preferred to other ways of growing the U.S. market, such as through exporting or licensing the Volvo brand and designs to another producer?
Answer: Geely’s decision to build a wholly owned factory in the United States for producing Volvo cars, rather than relying on exporting or licensing, was strategic for several reasons:
1. Closer Market Access: Establishing a local production facility allowed Geely to produce vehicles closer to one of its key markets. This reduced transportation costs, import tariffs, and potential trade barriers associated with exporting cars from China or other production hubs. Manufacturing in the U.S. helped Geely compete more effectively in the American market by offering locally made vehicles, which can be a selling point for U.S. consumers.
2. Control Over Quality and Brand Identity: By investing directly in a U.S.-based factory, Geely maintained full control over Volvo’s production standards and brand image. Licensing or outsourcing production to another company could risk inconsistencies in quality, which might damage Volvo’s reputation for safety, elegance, and reliability. A wholly owned facility ensured that Volvo’s strict quality standards and brand identity were preserved.
3. Adaptation to Local Preferences and Regulations: Local manufacturing allowed Geely to adapt more readily to U.S. market demands and regulatory requirements, such as safety and environmental standards. A factory in the U.S. enabled Geely to tailor its production processes and vehicle models to meet local regulations and consumer preferences more effectively.
4. Long-term Commitment and Trust Building: Building a factory demonstrated Geely’s long-term commitment to the U.S. market. This investment could enhance the brand’s trust and credibility with American consumers, showing that Geely and Volvo are serious about creating jobs and contributing to the local economy.
5. Enhanced Responsiveness and Supply Chain Efficiency: A local production facility improved Geely’s responsiveness to changes in demand within the U.S. market. This proximity to customers allowed for better inventory management, quicker response times to market trends, and a more flexible supply chain.
6. Incentives and Economic Benefits: By investing in the U.S. economy, Geely could potentially benefit from government incentives, tax breaks, and subsidies that are sometimes available to foreign investors who create jobs and boost local economies. This investment would not only be economically beneficial for Geely but also align with U.S. economic interests.
In summary, Geely’s decision to build a wholly owned factory in the U.S. was a strategic move to establish a strong market presence, maintain control over Volvo’s brand and quality, adapt to local demands, and capitalize on economic incentives, thus providing a competitive edge in a key market.