Renewed Volvo Aims High in China

Chinese auto company Geely already finished the acquisition of volvo one and a half year ago. Now the biggest problem is none other than the localization of Volvo.

After several fruitless tryouts, Geely finally gave up its efforts in localizing the brand of Volvo and put on a foreign mask over it. It set up a joint venture in China, of which Volvo and Geely halved the capital contribution and shares. Like other joint ventures, the Volvo-Geely joint venture is going to launch self-owned brands and new-energy autos.

Yang Xueliang, PR director of Geely Group, said that the answer to Volvo’s plan of lowering its cost is to increase the proportion of purchas- ing local components in China. In addition, the first localized car of Volvo is expected to be launched in 2013. “This is the order of the day. We cannot wait for the issuance of approval for our localized brands from the government,” said an insider from Volvo.

New Joint Venture and Its Shareholding Structure

Li Shufu, board chairman of Geely Group, recently stated that Volvo had already submitted the application of founding a joint venture with Geely as a foreign brand. The new joint venture, once approved, will see its shares halved by Geely and Volvo. The cardinal task of this joint venture is to develop and launch self-owned brands.

After being acquired by Geely in August 2010, Volvo’s identity became a confusing question –whether it is a Chinese local brand or a foreign brand– which led to the pending new plants in China and its stagnant localization. In order to make sure the localization plan could bear fruits next year, Volvo chose the identity as a foreign brand and formed the plan about joint venture in China.

In truth, Volvo’s future lies in China – this is what Li Shufu believes in. After completing the acquisition, Li Shufu told the media that Volvo planned to increase its sales in China to 200 thousand units in five years and see profits within two years. In addition, the global sales are expected to increase to 800 thousand units within ten years. In 2009, Volvo sold 335 thousand units in the world with only 24 thousand of them sold in China. In 2011, Volvo sold 47.1 thousand vehicles in China with a 54% year-on-year increase, but it was still far from the goal.

Volvo’s plan of building factories in China is not a random thought. The long-brewing plan still vainly waits for the approval of Chinese government. Chengdu and Daqing were chosen as the destinations of Volvo’s two new plants in China early in August 2011 and the R&D center will be established in Jiading District, Shanghai. The Chengdu project is the largest among the three. Its total investment amounted to 4.2 billion yuan, including a 1-billion-yuan component supply project for the plant.

Volvo’s eagerness to set foot in Chengdu before other cities could be explained. When Geely acquired Volvo, the Chengdu government lent the Chinese automaker 3 billion yuan with a low interest rate. The loans are respectively provided by the Chengdu branch of National Development and the Bank of Chengdu – both are governed by the Chengdu government. According to the current agreements, Geely only needed to pay one third of the due interest in three years and the rest could be paid in the next three years based on the situation. It is worthwhile to mention that the 3-billion-yuan loans accounted for a quarter of the capital Geely acquired Volvo.

The two plants play the leading role in realizing Volvo’s ambition of selling 200 thousand cars per year by 2015. According to the research report, the two plants’ annual production capacity reaches 198 thousand units, nearly equal its goal of sales by 2020.

Local Purchasing Can Save 1.5 Billion Yuan Each Year

How to solve the problem of lowering cost? The answer is to increase the proportion of purchasing components from local suppliers, Yang Xueliang said. According to him, the present proportion of components purchased from local suppliers is so tiny that can be ignored. “Nearly all the components are imported from foreign countries.”

In order to lower the cost, Geely put forward the plan of increasing the purchasing of components from local suppliers when it acquired Volvo. Geely planned to increase the proportion by 8% each year and raise it to 40% five years later. If the plan is carried out successfully, the purchasing cost will drop by 1.2 billion U.S. dollars or 7.5 billion yuan in these fives (1.5 billion yuan per year), plus the 4-billion-USD income from exporting the components.

Lowering the cost finally serves for the goal of lowering the price and increasing the sales. Volvo launched a big-scale sales promotion campaign from 2010, during which a 70%-80% discount in price was quite common. Though Geely stated the price decrease was launched by the distributors instead of the company, this could still reveal the changes Volvo had to face, which was to increase sales with competitive products.

Experts said: “Volvo’s lowering price is based on the market demand. It hopes to expand its market share and increase the presence of Volvo’s cars with lowered prices.” The R&D and manufacturing cost for Volvo is very high and can only be amortized by increasing the sales. Meanwhile, the increasing sales could improve the bargaining ability of the car manufacturers in the negotiations with component suppliers. An insider from Geely confirmed that Volvo could be more competitive in price than the Mercedes Benz, Audi and BMW after being localized.

Zuo Zhiying from a Shanghai-based auto marketing consultancy company said that the decreasing price of Volvo was only a kind of adjustment and had no influence over the high-end profile of Volvo in china. “But lowering the price cuts down the space for profits and is not sustainable. If Volvo could be really localized, the manufacturing will be greatly decreased and so will the price.”

Three Obstacles of Brands, Talents and Culture

Some people worry that the localization of Volvo might have influence over its brand image. Yang Xueliang stated that the localization would not change the fact that Geely and Volvo were two separate brands.

Li Shufu also stressed that “Geely is Geely while Volvo is Volvo”. The last thing Geely wants to see is that Volvo loses its “identity as a luxury car”. Li Shufu always reiterated that “Geely is only the investor for Volvo and except that Geely Auto has nothing to do with Volvo”.

The concern for a disgraced brand is a hurdle for Volvo’s localization. In addition to that, the task is also haunted by the problem of talents. According to Shen Hui, president of Volvo China, Geely Group is planning to build a team consisting of 1700 employees for Volvo. The major task is about the construction of industrial system, recruitment and training of high-end talents as well as the build up of corporate culture.

Moreover, the increasing production capacity following the localization needs the improvement of distribution team of Volvo. Presently there are 140 distributors of Volvo in China and the number is expected to increase to 200 by 2015, as Shen Hui stated.

The corporate culture is another important factor. In Li Shufu’s opinion, the cross-cultural integration is always the core work. The best example is the “Volvo Ocean Race 2011-2012”, for which Geely became a sponsor as well. Moreover, in September 2011, Geely Group organized the Zhejiang Geely Symphony Orchestra, which held performances in Italy, Austria, Czech, Germany, Belgium and Sweden. It a classic smaple of marketing and public relation of auto industry in 2011.

The acquisitions in the global auto industry had already seen several failures – BMW’s acquisition of Rover, Daimler’s acquisition of Chrysler, and Shanghai Auto’s acquisition of Korea-based SsangYong ended with failure because of the cultural difference. Therefore, the cultural combination is of great importance in the future.