Volvo Car Corp. and Geely Automobile Holdings Ltd. GELYY -3.69% said Wednesday that they would combine their engine and transmissions business but backed away from a full-blown merger of the Chinese and Swedish companies that are owned by Chinese billionaire Li Shufu.
The move highlights a trend, increasingly favored by investors, for companies to sharpen their focus rather than become entangled in larger conglomerates that often dilute the value of their constituent businesses.
The agreement leaves the two auto makers as stand-alone entities under the umbrella of Mr. Li’s Zhejiang Geely Holding Group. It allows Geely Auto to move forward with plans to raise the equivalent of nearly $3 billion through a share listing on Shanghai’s STAR Market for growth stocks. The decision also renews speculation that Volvo could seek an independent stock-market listing.
The two companies said last year that they were holding talks that could lead to combining their businesses. In the end, they said they feared that a merger would present integration issues and distract them during a period of industrywide transformation in the shift to electric vehicles.
“A full merger would be too much internal focus and organizational disputes and power plays,” Volvo Chief Executive Officer Håkan Samuelsson said in an interview. “I think that’s number one, to really maintain full focus on growth, especially since we have been growing a lot on the Geely and the Volvo side and don’t want to jeopardize anything there.”
Mr. Samuelsson said that the companies realized during the past year’s discussions that the bulk of savings they could achieve together would come from sharing software, rather than conventional savings from using common hardware components such as chassis and powertrains.
“The top-line growth, and that synergies in the future should be more focused on software, is a new thing that we learned during this process,” he said.
The preference for deep cooperation over a full merger also highlights a growing trend favored by investors, who have been pushing large automotive companies to spin off individual businesses. Daimler AG , for example, decided last month to split its luxury car maker Mercedes-Benz and its Daimler Truck business into separate companies, a move that investors cheered.
An Conghui, president and CEO of Geely Auto, raised the matter during a news conference, saying that a merger would dilute the value of the individual companies in the eyes of investors and said that concern was one reason Volvo and Geely opted not to combine.
Mr. Samuelsson, addressing speculation about whether Volvo would now seek its own listing, said no decision had been made but it remained an option.
“For Volvo to have a very bold agenda to electrify and develop autonomous driving is not credible internally or externally if we would not have the ability to approach the equity market to finance this,” he said. “The possibility is definitely there, now that we have proclaimed to be a stand-alone company.”
The collaboration with Geely will see the companies combine their powertrain operations into a new stand-alone provider of internal combustion engines, transmissions and next-generation, dual-motor hybrid systems for use by both companies as well as other manufacturers.
The agreement will also see Volvo and Geely expand the use of shared modular systems for electric vehicles, enhance their collaboration in autonomous and electric drive technologies and combine for joint procurement to cut purchasing costs.
Both companies will retain independent corporate structures, but the collaboration will be overseen by a new governance model supported by Geely Holding, the lead shareholder in both companies.
Chinese-Swedish auto maker Lynk & Co., owned by Geely Auto, will expand globally by using Volvo’s distribution and service network, they added.
Write to William Boston at [email protected] and Dominic Chopping at [email protected]
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