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Once viewed as an also-ran at home and abroad, the auto maker is leveraging foreign technology to become a force internationally

Two decades ago, technicians at a little-known Chinese motorcycle company called Geely launched their quest to start building cars by stripping down their boss’s beloved Mercedes-Benz, piece by piece.

They were unable to put Li Shufu’s Mercedes back together again. But they did figure out how to make the company’s first automobile, the 1996 Geely No. 1, a Mercedes knockoff.

Studying Mercedes is once again central to Geely’s strategy. Mr. Li announced Feb. 24 that he had snared a 9.7% stake in Mercedes parent Daimler AG worth around $9 billion, making him the German auto maker’s biggest shareholder.

The move takes Hangzhou-based Zhejiang Geely Holding Group Co. one step closer to becoming China’s first global auto maker. China manufactures more cars than anywhere else, but no Chinese company has yet succeeded in making a car good enough to compete on the world stage. Geely, thanks to its growing international footprint and ability to absorb foreign technology, is poised to make that leap.

“Three years ago nobody would have thought it could be Geely,” said Hakan Samuelsson, chief executive of Sweden’s Volvo Cars, which Geely bought in 2010. “But today it’s a good guess.”

Mr. Li has been predicting his own success since at least 2001, when he declared in an interview with Chinese state-run television that “American auto makers like General Motors and Ford will definitely collapse” while Geely and other newcomers will rise.

For a long time, that looked like an empty promise. Geely sales were lukewarm in China until very recently, plateauing at 500,000 cars a year or less. The company’s first attempt to market itself abroad at the 2006 Detroit Auto Show led to humiliation, with Car and Driver magazine branding its cars as “hopelessly outdated.”

Geely began laying the groundwork for future success with its 2010 acquisition of Volvo from Ford Motor Co. , which put it in a class of its own among Chinese auto makers by enabling it to tap directly into advanced auto technology, said Michael Dunne, a Hong Kong-based auto consultant.

Last year was a milestone. Sales of Geely Auto, the company’s main domestic line, nearly doubled to 1.25 million, making it the best-selling Chinese local brand. Its Hong Kong-listed shares tripled in value. With new acquisitions and brand launches, Geely’s portfolio now spans from trucks to supercars, with no parallel in China’s auto sector.

Its expanded roster includes Malaysia’s Proton, in which Geely took a 49.9% stake last year, British race-car legend Lotus, and the London EV Co., maker of the iconic black taxicab.

In 2017 Geely and Volvo also co-launched two new brands: Lynk & Co., and Polestar. Lynk went on sale in China last fall and targets young urban buyers with built-in mobile internet apps. Polestar is a premium electric-car company designed to take on Tesla Inc., and is set to hit the market in 2019. Geely has even invested in Terrafugia, a Woburn, Mass.-based startup developing flying cars.

Geely group sales volume, at nearly 2 million last year, still lags far behind industry giants Volkswagen AG , Toyota Motors Inc. and General Motors Inc., which sell about 10 million vehicles annually. It’s yet to be seen whether Mr. Li’s Daimler swoop will get him access to Mercedes know-how that could help Geely close the gap, and Mr. Li told German media Wednesday that gaining a seat on Daimler’s supervisory board wasn’t his priority.

What’s more, despite improvements in quality, Chinese cars are still regarded skeptically—even in China, where scores of local auto makers are kept alive by government support. Foreign marques manufactured in joint ventures still outsell domestic brands.

At Geely’s helm is the 54-year-old Mr. Li, the company’s controlling shareholder, ranked by the wealth-tracking Hurun Report as China’s 10th richest man, with a $17.4 billion fortune.

A farmer’s son, he worked in high school as a photographer in his eastern China hometown before realizing he could make more money extracting silver from photo-development chemicals than he could selling pictures, according to his official biography. In the 1980s he founded a refrigerator company and later started Geely, which initially produced aluminum plates before shifting to motorbikes.

Private-sector auto makers weren’t allowed in China then, but Mr. Li clung to his dream of building cars even after the government ordered him to stop making his Geely No. 1, the Mercedes clone, on safety grounds. Mr. Li, who declined an interview request, later wrote of his lonely crusade in one of his many poems.

“There were but a few sincere, wise, brave children who walked barefoot on the ice in order to realize the dream of a Kingdom of Cars,” he mused.

After exploring ways to skirt the rules—including making cars at a prison factory through a company called Geely Boeing Auto that drew complaints from the U.S. aerospace giant—Mr. Li finally received clearance to produce cars in 2001, becoming the first private-sector auto maker in China.

Geely started making a name at home for its bargain-priced cars, but the calamitous trip to Detroit in 2006 showed Mr. Li that his company needed to focus on quality, as well as cost. He had a plan: Acquire to improve.

Mr. Li returned to the Detroit show the following year, undeterred, and walked up to executives at the Ford booth. “I’m Li Shufu from Geely, a Chinese car company: I’m interested in buying Volvo,” Mr. Li said, according to Geely Vice President Victor Yang.

The Ford people had no idea who he was. They told him politely that Volvo wasn’t for sale.

Then came the global financial crisis, and Ford, desperate to raise cash, remembered the Chinese businessman who’d come calling and unloaded loss-making Volvo to Geely, Mr. Yang said. The price, $1.8 billion, was a fraction of what Ford had originally paid.

Many assumed the takeover would fail—including Mr. Li’s own Geely colleagues, according to Freeman Shen, a former Geely executive who helped manage the deal. As Geely shareholders with much at stake, his senior colleagues made Mr. Li complete the purchase through a company outside the main Geely group, Mr. Shen said.

Convincing skeptical Europeans was even harder. “We were scared,“ says Glenn Bergström, the stocky chief of the local chapter of the IF Metal trade union. ”We had our prejudices. All we knew was that it was a Communist country and everything was state-owned.”

Shortly before the final deal was signed, Mr. Bergström said Mr. Li agreed to sign a statement assuring that Volvo would remain Swedish—while also insisting that the document wasn’t legally binding.

“The Chinese said that signature isn’t worth the paper it’s signed on,” Mr. Bergström said. “But he did so anyway, and it was more than Ford did, when they purchased Volvo Cars in ’99. And until this day, it’s eight years ago, he’s still honoring that deal.”

Starved for investment under Ford, Volvo has gotten $11 billion in capital funding under Geely, according to Mr. Yang—paying for new models, technology platforms and factories.

Volvo sold a record 572,000 cars in 2017, up 72% since 2009, and announced record profits of $1.75 billion. Volvo’s Swedish workforce has nearly doubled to 21,000 and a Belgian plant now employs 5,000 people, up from 2,000.

Geely’s turnaround of Volvo also succeeded partly thanks to Mr. Li’s willingness to let the Swedes to run their own shop, said the chief executive, Mr. Samuelsson. Still, culture clashes do happen, as in 2012 when Mr. Li visited Sweden to discuss plans for a Chinese version of Volvo’s S90 executive sedan.

In a Swedish car “the back seat is where the dog goes,” said Mr. Samuelsson. “Our engineers don’t pay too much attention to the back seats.“ The designs horrified Mr. Li. “’But, guys, you don’t get it: In China the guy who’s paying for the car is sitting in the back” he blurted out, according to Mr. Samuelsson.

For the first time since it was founded in 1927, Volvo has production facilities in the world’s three big automotive markets: China, the U.S. and Europe. That includes Volvo’s first automotive factory in the U.S., a $500 million plant near Charleston, S.C., that will start production later this year.

The takeover was no less critical for Geely itself, as it drew on Volvo’s expertise to help turn its drab Chinese cars into objects of desire.

Peter Horbury, the British ex-head of design at Volvo and at Ford’s premium car unit, was among those shaking things up in his new assignment as Geely’s design chief. That included giving Mr. Li a warts-and-all assessment of Geely’s product lineup.

“You might not like what I have to say,” Mr. Horbury recalled telling a roomful of Geely’s top brass in Beijing. He then launched a withering critique, using a presentation slide likening Geely’s cars to different animals in a zoo with nothing in common. He then projected another slide showing different types of cats. Like the cats, Geely cars needed to become recognizable as members of the same species, he said.

Mr. Li took the criticism on the chin, Mr. Horbury said, and approved a redesign of the entire Geely line, with a distinctive front grille and a new Geely Auto badge. The first of Geely Auto’s reconfigured cars hit the market in December 2014 and sales took off, tripling over the last three years.

With China’s government leading a global push to electric vehicles, Mr. Li is positioning Volvo to ride the wave. Starting next year, Volvo is set to produce only pure-electric or hybrid models. Geely itself wants 90% of its cars to be electric by 2020.

At a November launch party at the Ningbo International Speedway for the new Lynk model, Mr. Li characteristically hung back, avoiding the limelight and leaving his lieutenants to hype up the debut model, which is a mix of Geely and Volvo technology.

Though heavy on Nordic input and design, Lynk is mainly a symbol of China’s newfound auto prowess, Geely executives made clear. “China is reshaping the global automobile industry at the highest level,” Geely president An Conghui said at the launch.

Geely believes it can sell 500,000 Lynks a year in China, Europe and the U.S. by 2020. The Lynk car shares 90% of its underlying technology with Volvo’s compact model, the XC40. It sold the first 6,000 Lynk 01s online within minutes of their release.

“We sold out in 137 seconds and thought, ‘Shit, we should have offered 15,000,’ ” says Lynk CEO Alain Visser.

Though Geely had a stellar 2017, some analysts think that might not last. “It’s Geely right now, but it’s been others in the past,” said Paul Gong, an analyst at UBS. The fast pace of technological change in the auto sector could soon see Geely, and other traditional auto makers, eclipsed by more innovative rivals, Mr. Gong said.

In a written statement, Mr. Li said his investment in Daimler was about securing new “friends, partners and allies” to help meet the challenge of technology disruption.

What Mr. Li intends to do with his Daimler stake also isn’t clear. Daimler already has a Chinese partner, state-run Beijing Auto, to build Mercedes cars there. A Daimler spokesman said the company doesn’t know what Mr. Li’s goals are or why he invested in the company.

For now, Geely’s Mr. Yang said the Chinese auto maker is focused on increasing sales to 3 million annually by 2020, which would likely put it in the ranks of the world’s top 10 auto makers.

That would be rapid progress, he said, for an ex-fridge maker that “started with nothing—no money, no talent, no market recognition, no technology.”