THERE are many roads to local production in China's car industry. Swedish automaker Volvo has decided on one that keeps its hands on the steering wheel.

Almost two years after being fully acquired by Chinese auto company Geely, Volvo has finally resolved an identity crisis that delayed its entry into Chinese production.

After numerous failed attempts to be recognized as "Chinese company" by authorities, Volvo has chosen to enter the market as a foreign investor.

According to Li Shufu, chairman of Geely Group, Volvo has submitted an application to form a joint venture with its parent that will see them take equal shares in the new company.

Like other foreign carmakers in China, Volvo may face red tape getting approval for the venture amid new policies favoring domestic carmakers. But the decision to maintain its Swedish identity may be a sound one in the end.

Under Chinese law, an overseas-registered company like Volvo has to retain its foreign status even after its acquisition by a Chinese company. That rule proved insurmountable, delaying plans to build three Volvo production plants on the mainland.

That's not to say Chinese officials haven't welcomed the Volvo takeover or the plans to build cars for the mainland market in mainland plants.

During a visit to Volvo's headquarters in Gothenburg, Sweden, on April 24, Chinese Premier Wen Jiabao hailed the combination of Geely and Volvo as an "example of success" in commercial ties between both nations. He was talking not only about capital formation but also cooperation in the transfer of technology, management and marketing prowess.

On the same day, Volvo formed a strategic partnership with China Development Bank, which will fund the carmaker's research and development of efficient energy technology as well as production facilities in China.

Geely's involvement should not be underestimated. The Chinese government seems to have had its fill of international carmakers forming joint ventures with Chinese partners, raking in the benefits of the tie-ups while hoarding their own foreign technologies. The government now says it will approve new foreign-invested auto industry projects only in cases where foreigners are willing to share their know-how.

New rules

No doubt Volvo is well aware of the new rules. Nearly two months after Geely and Volvo signed a technology transfer agreement in March, a car platform for Volvo's SUV XC90 was said to be en route to a Geely factory as a sign of that goodwill.

The agreement between Geely and Volvo will allow the Chinese low-cost car producer to upgrade its product portfolio by using technologies developed by the Swedish premium car brand. The platform could also support the development of a new model co-owned by the two.

Their joint-venture blueprint also promises to focus on cleaner-burning engines and other green technologies, including electric, hybrid and plug-in vehicles.

Volvo's success in pursuing this route to local production doesn't depend only on the attitude of authorities. It will also rely on the ability of local suppliers to provide the components needed to maintain Volvo's quality reputation as a solid and safe vehicle, Freeman Shen, director of Volvo China, once told Securities Times.

Volvo officials said the company is already screening candidates to supply parts for vehicles to be made in China. It said it will introduce the most advanced production lines to China, install a quality control system covering the entire manufacturing process and train its Chinese workers to be the most professional in the industry.

According to a five-year business plan released last year, the first Chinese-made Volvo is expected to roll off the production line in 2013, and the brand's annual sales will reach 200,000 units by 2015. That would represent about a 20 percent share of the premium car market in China.

Volvo sales of imported cars in China rose 54 percent last year to a record 47,000 vehicles, making the mainland the company's fastest-growing market. But the Swedish brand is not yet a force to be reckoned with in a segment dominated by the 80 percent market share held by the German trio Audi, Mercedes-Benz and BMW. Each chalked up sales of more than 700,000 units last year.

Long road ahead

To achieve its ambitions, Volvo has a long road ahead.

First, it has to expand its product portfolio in China from the current six models. Already, 10 new vehicles are scheduled to arrive in the next six years, ranging from spacious and premium SUVs to medium- and small-sized hatchbacks like the Volvo V40.

But it needs to introduce new products faster. China has already have something like 94 brands and 475-plus vehicle models available in the market, and the Beijing Auto Show last month was a reminder of the competition coming through the pipeline even before Volvo has started production in China.

When it comes to new offerings, energy-efficient vehicles like electric, hybrid, and plug-in models cannot be ignored as they start to turn into market hot spot. And Volvo's signature Scandinavian simplicity may have to give way to more flashy design elements to be in tune with the luxury so many Chinese consumers crave in their cars.

Talent pool

All these visions cannot be realized without a strong, local pool of talent. Volvo has already established a research and development center in the Shanghai auto hub of the Jiading District. There, a team of 10 people is expected to quintuple in size in the next five years, with more specialists to be recruited, such as digital model designers and clay model engineers, according to Shen of Volvo China.

Volvo also needs a stronger sales network to leverage its local production presence. By 2017, the number of Volvo's dealerships in China will be raised to 220 from 125 last year, Shen said. He admitted the company has been in touch with a number of big American car retailers but didn't give any details.

To compete in China as a latecomer, Volvo has its work cut out. The identity dispute with authorities has kept the company's foot on the brakes.

To paraphrase Deng Xiaoping, it doesn't matter whether Volvo is "foreign" or "domestic" as long as it catches consumers with well-built cars. If the company stays locally relevant and active, no one will question its Chinese identity down the road.

Volvo seems to have carefully considered its position and taken the right step in accepting foreign status so it can get on with its work in China.