Scary Chinese Experiment Proves: Swedish Cars Can Make Money
Volvo, given up as beyond salvage by former owner Ford, was sold off to China’s Geely in the automotive equivalent of a yardsale at $1.8 billion. Saying no is always easier than saying yes (well, there are certain exceptions), so most augurs said: “This won’t work.” Asked why, they answered: “It was tried it before, and it failed.”
Wonders of wonders, it appears to be working: Volvo Cars reported an EBIT of 600 million kronor (about 93 million U.S. dollars) in the second quarter, 40 percent more than in the same period of the previous year, a statement from Volvo Cars says.
In the first six months of 2011, Volvo Car Corporation has delivered an operating profit of 1.2 billion kronor ($188 million). Not bad for Sweden’s biggest little car company.
“We are gradually returning to sustainable profitability although we have more work to do before we reach our objectives. A good sales increase is evident in many markets as we are working to revitalize the Volvo brand to attract more customers,” said Volvo CEO Stefan Jacoby.
Being owned by a Chinese company did not hurt Volvo at all. Globally, Volvo sold 230,746 vehicles in the first six months, an increase of 20.3 percent compared to 2010. In the EU, Volvo sold a respectable 127,862 units in the first 6 months. I don’t have Volvo U.S. sales for June, but in July they were reported as 41,898 for the first seven months.
Turning a profit on some 400,000 units annually is a chore. If they can get the volume up to say a million (doable with Chinese production), that quirky Swedish company could turn into a nice little business.
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I still think that it was a massive mistake by Ford to dump Volvo but I'm not running that ship. Geely (and all the other owners like Tata) seem to have a good handle on what works. No fast moves, attend to your knitting and keep your course. The biggest issue will be the redesigns. Will the Chinese let the Swedes lead or will they micromange the designs into the ground. So far, so good.
Volvo's current problems can be traced directly to the early 90s, when, for the first time in the company's history, they introduced a completely new platform and engine family at the same time (the 850 series). The cost of the new platform (and its associated 5 and 6-cylinder engines) exceeded two billion dollars, nearly emptying the corporate coffers ... and this caused Volvo's board of directors to panic. At the time they saw the Japanese competition continuing to shorten product cycles and they jumped to the conclusion that they'd never be able to make enough cash off their new FWD platform before they'd be forced to replace it. This fear of future product investment is what chased them into the arms of Ford and the rest is, well, history. Although those worry warts on the BOD were wrong--in that two decades later they're still somewhat successfully spinning product off that platform--I'm still glad I sold my Volvo store in the mid-90s. Mainly due to pricing, Volvo has lost their traditional demographic (in both Europe and North America) and under Ford was never able to successfully target a replacement group of buyers. Why would anyone want to buy a less attractive, less prestigious and lower performing car for the same money as an Audi or BMW?
I think Volvo's gonna be ok. And good for the Chinese that they made something out of a company that us "westerners" basically didn't want anymore.
Ford selling Volvo is like turning down flaming cheesecake for dessert when you are about to throw up. Ford's sale wasn't a judgement call against Volvo - it was just not the right time for Ford to figure out how they are going to get well again and deal with Volvo simultaneously. It was Ford's loss, but they knew that. Volvo is a good company and a good product. It was a great thing for someone interested in having a car company in buying. Geely got lucky and they will enjoy owning Volvo.