How much was that Volvo?


Pricing used cars is an age-old recreation that appears to have universal appeal. No matter where you go around the world, you'll always find a group of guys (mostly guys) speculating on how much they could buy "that car" for, and swapping stories about "the one that they found in pristine condition in an old couple's garage - hardly ever driven - and bought cheap."

The recent $1.8 billion (actually $2.7 billion if you add in the restoration work required) that Zhejiang Geely Holdings paid for that Volvo they just bought reminded me of how difficult it is to actually assess the value of such purchases. And the now seemingly-aborted effort of Sichuan Tengzhong Heavy Industrial Machines Company to buy the Hummer vehicle from General Motors for an estimated $150 million, raises even more provocative questions about corporate worth and valuation.

Let's take China, for example. Who are China's most valuable companies, and what does this list tell us?

Last year, if you relied upon Forbes Global 2000, the most valuable Chinese companies by market capitalization were (in order from most valuable down):

1. Petro China
3. China Construction Bank
4. Bank of China
5. SinoPec
6. China Life Insurance
7. China Shenhua Energy
8. Ping An Insurance
9. Bank of Communication
10. China Telecom

A cursory review suggests that these companies share a number of common characteristics.

a) They are all are "old-economy," companies;
b) The are all, by virtue of the industries that they are in, heavily state-influenced;
c) They are all are primarily domestic-market oriented.

None of this is surprising given the level of evolution of China's market economy. Although you might argue that banks and insurance companies are high on service and customer centricity, the reality is that they are not fast-moving-consumer-goods companies; and they are not primarily in what we typically think of as customer-centric organizations, either.

What about foreign economies? Using the same source, if we consider the top 10 American firms by market capitalization, the 2009 Forbes list looks like:

1. Exxon Mobile
2. WalMart
3. Microsoft
4. P&G
5. AT&T
6. Johnson & Johnson
7. IBM
8. Berkshire Hathaway
9. Chevron
10. Google

While there are similarly a number of old-economy companies in the list, there are also a smattering of high-tech/new economy players; as well as several large but extremely entrepreneurial organizations. In addition, it would be hard to argue that any of the American players were predominantly domestic-focused, and many of them really do have customer-centricity in their corporate culture's DNA.

Does either list provide us with unambiguous insights? Of course not! Are there major systemic messages to be read from such lists? Yes, indeed! For example, the questions that naturally arise in my mind are: "Which list would you bet on for the future, and why? And, are we even looking at the right lists?"

Before we jump to conclusions, let's remember that "value lies in the eye of the beholder" [to paraphrase an old Western adage regarding beauty] and lists such as those we cited above are drawn from the market capitalization [price of shares x total volume of shares available for trading] of traded firms because of the assumption that their stock prices represents not only present performance, but the investors' beliefs about their future performance as well.

Is this the best way to measure value? Perhaps not. It certainly is biased against small firms and entrepreneurs [unless your name is Warren Buffett]. But what would be a better way to measure value, other than to utilize what investors are willing to pay for something?

An alternative, but more restrictive, way to assess value might be to look at brand power., for example, has recently reported China's Most Valuable Brands for 2009.

1. Haier (est brand value of RMB 81.2 bn)
2. Lenovo
4. Wuliangye
5. China FAW
6. Midea
7. TCL Corporation
8. Kweichow Moutai
9. Tsingtao Brewery
10. Chongqing Chang'an Motors

It's an interesting list, which not surprisingly shows the power of well-entrenched brands in "longer-lived" industries, such as: moutai, beer, and the motor industries. Here, however, there are also signs of "newer economy," technically innovative, firms such as Haier, Lenovo, and TCL.

Business Week magazine's listing of Interbrand's top 100 Global brands, reveals that the top 10 U.S. brand valuations for 2009 (taken from the Global 100 list, none of which were Chinese in origin, probably because the methodology requires that at least 1/3 of corporate earnings come from "foreign" markets) included:

1. Coca-Cola
2. Microsoft
3. IBM
4. GE
5. Intel
6. McDonald's
7. Disney
8. Citi [Bank]
9. Hewlett-Packard
10. Marlboro

This list shares a predilection for longer-lived industries [which reflects that brand-building does not occur over-night] and has a diverse mix of FMCG, technology, and even creativity (i.e Disney).

But interestingly, two of the most popularly-regarded "creative" U.S. firms are not on the list: Google, which was ranked 15 and Apple, which was ranked 24, suggesting that brand power is about more than just creativity alone.

But, what about pure "creative" valuation? What about ranking innovativeness? If we look at the World International Property Organization's [WIPO] patent filings for 2008, what we see is that China's Huawei is the most prolific patent filer in the world for that year; followed by ZTE, which is in 38th place worldwide.

The most prolific US patenter in that same year was Qualcom (11th worldwide); 2. Microsoft (14); 3. Motorola (15); 4. IBM (17); 5. 3M (18); 6. Hewlett-Packard (23); 7. Proctor & Gamble (27); 8. Intel (31); 9. University of California system (34); 10. Honeywell (35).

A "broader" definition of the term "innovative," one that considers both "the potential of innovative ideas and creative execution," underlies Fast Company's "Most Creative Companies" list for 2010.

On this list Huawei is the highest ranked Chinese company in 5th place; second is BYD at 6th place; third is. Alibaba (29) and fourth is Huayi Brothers (42).

Among U.S. companies, the leaders were: 1. Facebook (#1 overall); 2. Amazon (2); 3. Apple (3); 4. Google (4); 5. First Solar (6); 6. Pacific Gas & Electric (7); 7. WalMart (9); 8. Hewlett-Packard (10); 9. Hulu (11); 10. Netflix (12).

The similarities between the two lists of patenting and "innovativeness" are striking. While stalwarts such as Huawei, P&G, and HP are on both, the power of entrepreneurship comes shining through in so many of the younger, more dynamic, "new economy" organizations that are just emerging.

So, how do you value a purchase of Volvo, which is not on any of these lists (because it has been a part of a larger corporation)?

What we see here is that value is much more than just "book value" or accounting numbers. It really is as much about potential as it is about accomplishment. It's about capabilities, plus brand, plus aspirations; plus leadership; and for most of these dimensions, the certainty of numbers simply are not available.

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About The Author

Bill Fischer
Bill Fischer

Bill Fischer is Professor of Technology Management at IMD, the leading global business school based in Lausanne, Switzerland.