Volvo Makes a Fresh Start in China

After its failure in the field of commercial vehicles in China, volvo has already turned its focus to the development of construction equipment.

For Volvo Group, the world second largest commercial vehicle group, China is place that gave it mixed feelings. It was one of the first foreign companies that got into China’s commercial vehicle field but it failed to see fruitful development in this country (In China, commercial vehicles refer to vehicles used to transport goods and passenger vehicles with more than nine seats).

From failures in cooperation with China National Heavy Duty Truck Group (Sinotruck) to the pale performance of Dongfeng Nissan Diesel Motor Co., Ltd. (DF-Nissan Diesel), Xi’an Silver Bus Corporation (Silver Bus) and Sunwin Bus Corporation (Sunwin), Volvo only had bitterness and losses in the commercial vehicle market in China.

The drastic development of Chinese domestic commercial vehicles and the low-end market needs of China are the biggest challenges for Volvo and the other high-end foreign commercial vehicle companies. It is hard for them to take control of the joint venture companies they funded with Chinese partners. In addition, they must make use of flexible product strategies.

“Our business focus in China has been shifted,” said Leif Johansson, CEO of Volvo Group when he attended the World Expo on May 21. Forced by the unchangeable situation in China’s commercial vehicle market, Volvo has chosen to move to the field of construction equipment in China.

Leif Johansson said it was “very pitiful” for the failure to continue cooperations with Sinotruck. He also considered investing in Shandong Lingong Construction Machinery Co., Ltd. (Shandong Lingong). Volvo’s experiences and lessons in China have significant reference value for the other foreign automobile companies.

Behind the Failure in Huawo

Volvo was the front-runner in setting up joint ventures in China’s commercial vehicle market. In June 2003, Volvo and Sinotruck together announced their plan to cooperate in Beijing in a high profile. Both sides contributed to the foundation of Jinan Huawo Corporation (Huawo), whose registered capital reached 600 million yuan (USD 87.8 million). Huawo’s main products are the towing vehicles and loaders equipped with 12-liter engines. This was the first joint venture company specializing in heavy trucks that has been approved by China’s National Development and Reform Commission.

However, Volvo’s high-end commercial vehicles, which are very popular in Europe, could not be fully realized in China. The European customers usually require the commercial vehicles to be as comfortable as the passenger vehicles, thus making these commercial vehicles very expensive. However, the customers in China, which are less developed than the western countries, attach importance to the cost performance of vehicles instead of their comfort levels. Therefore, the market in China mainly consists of low-end commercial vehicles.

A former senior executive of Volvo who was present at the foundation of Huawo said that Sinotruck hoped that Volvo could lower the product prices in order adopt to the Chinese market. However, Volvo didn’t agree with. The annual sale of Huawo vehicles was kept at a low volume of hundreds of units.

In 2004, Sintotruck developed the “Howo” truck similar to the Huawo products. This new truck was priced at 200,000 to 400,000 yuan (USD 29.2 thousand to 58.5 thousand) per unit, which was much cheaper than the 800-thousand-yuan Huawo vehicles. Since it met the market demand, the annual output of Howo trucks quickly increased to 10,000 units.

Then a dispute about intellectual property started. Volvo accused Sinotruck of “stealing its technology”. Finally this dispute dissolved without being settled. Both sides went further and further away from each other. Volvo refused any further investment into the joint venture company. A source said: ‘The total amount of Volvo’s investment in Jinan Huawo was less than 300 million yuan (USD 43.9 million).”

Afterwards, Sinotruck began to look for a new partner. On June 19, 2009, Sinotruck announced its cooperation with Germany-based MAN Group the third largest commercial vehicle group in China. MAN Group spent 5.3 billion yuan (USD 775.9 million) acquiring 25% of the shares of Sinotruck. As for its cooperation with Volvo, Sinotruck’s board chairman Ma Chunji said that it will be ended. At the end of 2009, Volvo secretly “divorced” from Sinotruck.

According to a source who once worked for Volvo, the Sweden-based company lacked strategic sights into China and looked down upon the Chinese market, which were the major reasons for the company’s failure. The source said that Sinotruck once wanted Volvo to acquire 50% of its shares with 4 billion yuan (USD 585.6 million) but Volvo rejected this proposal.

The failure in the cooperation with Sinotruck nearly despirited Volvo completely. Leif Johansson said that the Chinese auto industry policies have negative influences upon Volvo’s development in China. According to the “Automobile Industry Development Policy” measured in 2004, the Chinese partner should not hold less than 50% shares of the joint venture company founded with the foreign automakers. Therefore, the shares of all the Sino-foreign joint venture auto companies, producing either passenger vehicles or commercial vehicles, are halved by the two sides.

The contest for controlling the joint venture companies producing commercial vehicles is much more intensive than the one for the passenger vehicle companies. In the 1950s, the Chinese people already produced Jiefang, Dongfeng trucks, which took most of the market shares. Unlike the passenger vehicles, the commercial vehicles have already gone through self-motivated development before the foreign companies got into it. Therefore, it is hard for the foreign companies to gain control of the joint venture.

In addition to Volvo, Daimler Group, the largest commercial vehicle company and its German peer MAN Group also suffered failures in China. Daimler once invested 95.5 million US dollars in cooperating with a Jiangsu-based company to produce middle- and large-sized buses. But the cooperation was ended in 2007 without any significant fruits. MAN Group contributed 320 million yuan (USD 46.8 million) with Henan-based Yutong Bus Corporation in 2002 to found a joint venture in Henan in producing middle- and high-end buses and components. However, the company never saw profits after its foundation and at the beginning of 2009 MAN Group was forced to withdraw its investment. Then MAN Group learned from its previous failure and chose to invest in Sinotruck by buying shares. Daimler Group also came from the cold it announced the cooperation with Beijing-based Foton Automobile Corporation to develop new products for the Chinese market.

Currently, Volvo’s three other joint venture companies in China also failed to see positive results. DF-Nissan Diesel can only produce 10,000 units each year. The annual unit sales of Silver Bus and Sunwin can not reach the Top 10 either.

In the past ten years, no successful cases have risen in Sino-foreign joint venture companies in the field of commercial vehiclesin China. Li Chunbo, an auto industry analyst from CITIC Securities, attributed this to the particularity of the demand structure of Chinese market as well as the solid bases of domestic commercial vehicle manufacturers. “The foreign companies should give up the will of controlling and provide some technologies and products needed by their Chinese partners,” said Li.

A fresh start in china

“Our core business in China indeed went through a change,” said Leif Johansson. Confronted with the irreversible situation in the commercial vehicle field, Volvo decided to find another way.

In December 2006, Volvo spent 327.5 million yuan (USD 47.9 million) in acquiring 70% shares of Shandong Lingong, stating its entry into China’s construction equipment industry. One year later, the company increased its shares to 85% in a low profile.

When investing in the commercial vehicle industry, Volvo tried every means to gain the control of the joint venture companies. But it chose a different way in the construction equipment industry a more flexible double-brand strategy. The “Lingong” brand is controlled by Shandong Lingong. In addition to that, Volvo has introduced the “Volvo” brand and is planning to increase the two brands into the Top 3 in China in the next five years.

There is no special restriction about shareholding in the construction equipment industry. Therefore the foreign companies have an advantage. Apart from Volvo, other famous construction equipment companies, like Caterpillar and Komatsu, have also settled down in China.

Compared to Caterpillar and other competitors, Volvo has some advantages in products and technologies. In addition, the products of Volvo and Shandong Lingong respectively target both the high-end and low-end markets. Products of both sides are complimentary with each other. This is an important factor to the success of Volvo and Shandong Lingong.

The construction equipment industry has already become Volvo’s core business in China. According to its public data, Volvo and Shandong Lingong takes 11% market shares in China, which was ranked No. 4 in this country. In 2009, the sales of Lingong construction equipments took 45% of the Volvo’s whole sales volume in the world.

“But it is hard to say that Volvo has already gone out of the dilemma in China,” said Li Chunbo. When all the major commercial vehicle companies are craving for development in China, Volvo must realize a breakthrough in the commercial vehicle field in addition to the wonderful performance in the construction equipment industry.