Volvo’s Painful Settlement in China

volvo’s plan of localizing its production in china, which has been under heavy query for years, finally saw some progress.

In the Guangzhou Auto Fair starting on November 21, 2011, Shen Hui, senior vice president of Volvo and board chairman of Volvo China, said that Volvo’s plant in Chengdu would be put into production in the coming future. The Chengdu Plant is one of Volvo’s factory of integrated vehicles in China while the other one is located in Daqing, Liaoning. Shen Hui also said that which type will be produced in the Chengdu Plant has been decided as well.

But a problem haunting Shen Hui remains unsolved. Though the project in Chengdu has been fixed, Volvo has to wait for the government departments to assess and approve the project. Right now the approval procedure was stuck in the process of environment protection. Both the projects in Chengdu and Daqing, in addition to the engine plant in Shanghai, have not been approved by China’s National Development and Reform Commission.

Experts believe that the difficult approval process can affect Volvo’s development in China.

Power Up in Chengdu

“According to our internal plan, we will deploy the production of middleand large-sized vehicles in Chengdu and the production of compact cars in Daqing,”Shen Hui cautiously told the journalists of Volvo’ localized production in China without revealing more details. Meanwhile, he also said: “We hope that the factory in Chengdu will be put into production at first.” In February 2011, Volvo published its five-year development plan in China, defining the plan of building factories of integrated vehicles in Chengdu and Daqing as well as a research and development center in Shanghai.

In spite of Volvo’s expectation of the early opening of its Chengdu Plant, the environment protection assessment for its Daqing Plant is already far ahead the Chengdu Plant. The plant in Daqing passed the environment protection assessment while the same assessment is still being implemented over the Chengdu Plant and the engine factory in Shanghai. When they will get the approval remains unknown.

Though the Chengdu Plant has fallen behind the Daqing Plant in assessment, Volvo does not want to change the plan of launching the Chengdu Plant first. Moreover, Shen Hui has already given the definite roles to the two plants with middle- and large-sized vehicles produced in Chengdu and compact cars produced in Daqing. This put an end to the guesses about the types of vehicles that will be produced in China. This is one of the most important issues for Volvo China, because the ascription of Volvo’s SUV XC60, the best selling product of Volvo in China, decides which plant is more important.

According to Shen Hui, each plant of Volvo has several platforms of models and will have new products launched. Presently Volvo’s research and development center in Shanghai is working on two new models. This means that no existing products of Volvo will be produced in Chengdu and Daqing in the initial period.

It is known that Volvo has several platforms of models, of which P1 is peculiar to compact cars and it will be put into use in Daqing if nothing out of expectation happens. Chengdu Plant will be equipped with the P2 platform for the middle- and large-sized vehicles. Even the SPA platform can be used as well. The SPA refers to Scalable Platform Ar- chitecture and can be used to produce all types of vehicles of Volvo.

Late Approval

The order of production in different factories and the product deployment have been fixed. The following problem is to get the approval. It is also the most urgent problem for Volvo.

In the Global Auto Forum in October 2011, a director of Chengdu Economic Development Zone, where Volvo’s Chengdu Plant was located, said that the first batch of products of Volvo China will be launched in the second half of 2012. But the current progress has already fallen behind the schedule. So the first batch of products will come out in the first half of 2013.

Even this schedule is not within the control of neither Volvo nor the Chengdu government. Shen Hui said:“Volvo’s three plants need to be assessed and approved by several departments, including the Ministry of Environment Protection, National Development and Reform Commission and the Ministry of Industry and Information Technology. The government supported us but the assessment and approval really took a long time. Maybe we are too impatient.”

An expert familiar with the assessment and approval process of the auto industry said the environment protection assessment is only a part of it. Other departments will be involved in the process as well and the whole process will take several months. It is known that the assessment and approval for Volkswagen’s plant in Foshan, Guangdong cost three years. “The government is implementing stricter rules than before. It is of no use for Volvo to lose its patience.”

Obviously, the long-term assessment and approval are testing Volvo’s patience.

Presently, Volvo’s S40 and S80 are produced and assembled in the Chongqing plant of Chang’an Ford. The sales of these two models only amounted to 12 thousand units in the first ten months of 2010. It is obvious that the domesticmade cars are far from the main role in Volvo’s plan of selling 50 thousand units in China in 2011.

The mission of sales can be solved by imported cars. But the plants in Chengdu and Daqing should be established timely in order to help Volvo finish the goal of selling 200 thousand vehicles in 2015. Shen Hui said: “We can only see our sales increase in China when our domestic-made autos are available.”However, if the plants are not approved timely, Volvo’s grand plan in China will be affected.

The current situation means that Volvo has to wait for at least one year for the plants in Chengdu and Daqing to be put into production. This is far behind the schedule of Volvo and the local governments and therefore Volvo’s outlook in China became uncertain.

Capital Test

The stagnant process of assessment and approval is thought to be the Heaven’s will. But he also said that the stagnancy does not necessarily mean bad things. “Volvo has enough time to build and improve the distributor network and service system, in addition to accelerating the deployment in second- and third-tier cities. Moreover, the research and development center in Shanghai is given more time to develop better vehicles.”

Shen Hui is still worrying about the furious competition in the Chinese auto market. “The plan is nonsense if it is not implemented,”said Shen Hui. “Our plan of building three sites simultaneously seems to be radical. But the fact is that we have fallen behind our competitors for such a long time that it might cost us several years to catch up with them.”

Nevertheless, apart from the problem in assessment and approval, the capital needed for these projects is a bigger problem.

It is known that the initial investment in Volvo’s plant in Daqing is 4.576 billion yuan (USD 719.3 million) and the investment in Chengdu amounted to 3.2 billion yuan (USD 503 million). In addition to the project in Shanghai, the total investment reaches 12 billion yuan (USD 1.89 billion).

In spite of the huge amount of capital, Volvo’s very confident in the capital source and does not consider it as a problem. Volvo’s parent company Geely does not reveal the detailed sources of capital. Experts doubt whether Volvo is free from capital problems when the tight credit policies prevail in China and the European debt crisis is deteriorating.

When the Chinese luxury auto market in increasing, all Volvo could do is make fast progress regardless of the doubts. “Before we get all the approvals we need, we should consummate our things,” said Shen Hui.