1) Why had Volvo lost its way in the years leading up to the takeover? Volvo started to manufacture and export cars to foreign countries since the mid-1950s. The company set up plants in Torslanda, Sweden, in 1964, followed by plants in Belgium and the Netherlands. Before Volvo was sold to Ford Motor Company in 1999, they had a joint-venture partnership with Pininfarina SpA of Italy. (Volvo Car: 2007 company profile edition 2, 2007, pp. 9-11) Volvo is a premium brand; with market shares of 1.5% and 0.6% in the EU and US respectively (Wang 2011). Volvo faces competition and threat from Premium brands like Mercedes Benz, BMW and Audi, who have increased product offerings. While the competing premium brands increase their product offering, Volvo markets 10 models under Brand categories S, XC, C and V.
This gives the competing premium brand an advantage over Volvo, therefore enabling them to grasp a bigger market share then compared to Volvo. The company’s market shares are further threatened by the growing invasion of the Asian car manufacturers. (Volvo Car: 2007 company profile edition 3: SWOT analysis, 2007, pp. 12-13). During the recent years, a rise in cars manufactured by the Asian market has been affecting the automobile industry. Asian car manufacturers have the advantage of producing cars at the cheaper cost compared to cars from the US and EU regions. This enable them to export cars to foreign market at a cheaper rate. Thus, apart from competing premium brands, Volvo faces increasing competition from emerging Asian car manufacturers.
One of Volvo’s major competitor, Daimler’s Mercedes-Benz car division have implemented a strategic initiatives to run the cost down and revenues up by reduction in costs of materials, fixed cost, improved efficiencies and overall improvement (Volvo Car: 2007 company profile edition 3: Competitor analysis, 2007, pp. 6-8). In comparison, Volvo’s high cost of premium cars is a result of cars being made in Sweden and then imported. “This makes the Volvo brand cars expensive when compared to the others, which enjoy strong regional production and distribution operations.” (Volvo Car: 2007 company profile edition 3: SWOT analysis, 2007, pp. 12-13). Volvo is also affected by the increasing prices of steel, and other raw materials which eventually threatens the company’s margin and profitability (Volvo Car Corporation: 2006 company profile edition 2, 2006, pp. 12-13).
When compared to Asian car manufacturers, the competition enjoys cheaper labor costs and plant facilities that have been set up in the developing countries. Apart from export costs and increasing prices of raw materials, Volvo also has to take account for their higher labor cost when compared to the Asian Market. Volvo did not show growth in the market share, making it a small player. Volvo’s markets were generally focused on the US and the Swedish markets. However, other EU countries have shown growth. The recent years have also shown growth in the Chinese market. Volvo have less market exposure compared to the other premium brands as well as the Asian brands. “Volvo has been losing money for a continuous period of 4 years” (Wang, 2011, p. 24).
The reduction in sales is the major reason for Volvo’s financial problems. Volvo was hit financial crisis in second quarter of 2006 making a loss in the global operations. After the losses, Volvo decided to cut costs in all areas, this was the reason behind the reduction in employees. “Tough currency exchange rates and an aged product line have hammered Volvo revenues, forcing a second round of employee cutbacks” (Rechtin, 2006, p. 3). After the financial problems, Ford decided to sell Volvo. Volvo have been affected by the growth of its competitors and their market expansion, eventually leading to its fall.
2) What are the risks for Geely in trying to turn around a premium brand such as Volvo? This acquisition has been the subject of heavy speculation by the media, as it went against the norm of the acquirer being better off than the acquired. The first risk that Geely being a Chinese company and Volvo being a Swedish company will face is that the, differences in work culture and environmental culture would be prominent. The Swedish and the Chinese are very different in terms of work and environmental cultures.
The risk of Geely trying to impose Chinese culture upon the Swedish based company might impact the merger negatively. One such internationally criticized union was Daimler’s acquisition of Chrysler. It was reported that, “this clash was intrinsic to a union between two companies which had such different wage structures, corporate hierarchies and values” (Finkelstein, 2002, p. 4). While Daimler established a hierarchical company with a chain of command, Chrysler was team-oriented. Differences also existed between the products begin offered. While Chrysler had car models which displayed reliability for competitive prices, Daimler-Benz had cars offering quality at any cost. Geely-Volvo also have differing products; Volvo being recognized for its quality, safety and premium brand, Geely, on the other hand, produces lower, cost effective range of cars. Integration of the two companies would be risky as it would be difficult to merge management styles.
Using an example from the Daimler-Chrysler union, Chrysler was known for “its assertiveness and risk-taking cowboy aura, all produced within a cost-controlled atmosphere.” (Finkelstein, 2002, p. 5), while Daimler is known for its German engineering, quality and precision. Similarly, Volvo is known for its’ quality and safety. “Over the years Volvo’s design and production have been closely integrated with Ford’s, so much so that it will take years to unstitch them” (Devolving Volvo, 2010). This poses as a challenge for Geely to be able to manage Volvo from its’ style of management that has been adopted from Ford. “Acquirers often under-estimate the scale of integration.” (Pearson, 2013). BMW acquired Rover without completely estimating the scale of integration that would be needed. “BMW acquired Rover in a hurry, and never got to grips with the business before selling it at an estimated loss of Euro 4.1bn.” (Pearson, 2013).
Geely might run the risk of not completely understanding the scale of integration that would be required and the type of business model that is adopted by Volvo. Without understanding the type of company Volvo is, Geely might make the same mistake as BMW. In order to overcome this, Geely will need to develop strong leadership skills and the scale of integration between the two companies needs to be effectively evaluated and implemented in order for this merger to bear fruits. Had BMW looked at the operations and business model adopted by Rover, they would have had a better understanding if Rover’s Problems. BMW would have been better equipped to handle Rover’s problems, similarly, if Geely has a better understanding of Volvo’s operations it will be able to direct it towards success. Another such risk is in the investment that Geely would have to make in order to make Volvo profitable again.
“Turning around Volvo Car needs a large amount of input which will definitely burden Geely in the initial investment period.” (Huihui, 2012, p. 41). Volvo would need a considerable amount of investment if it is going to overcome the reasons it failed in the first place. Volvo needs to broaden its product offerings and increase its market exposure if it is going to compete with other premium brands. Geely and Volvo differ hugely in terms of Cost structure. Geely, being the owner of Volvo, will need to invest heavily in Volvo cars to maintain its quality, premium brand name and its cost structure. Geely on the other hand, will be able to make cars with lesser cost and sell it at a more affordable price. Geely needs to be able to understand the difference in the cost models. Geely will have to overcome differences, invest heavily and be a strong leader in order to make this a profitable take over.
3) In your view, was the purchase of Volvo a brilliant strategic decision, or a mistake? Explain. Based on my view the purchase of Volvo was a good strategic decision made my Geely. Geely has a lot to gain from this take over. One advantage is its access to Volvo’s technologies and expert knowledge on the international automobile industry. Geely will have access to Volvo’s expertise on medium-sized vehicles, the indoor air quality and especially safety. Volvo owns advanced skills on a large range of technology, and is renowned for its safety features. Geely can use this technology to its competitive advantage to improve the quality of its product in the domestic market and international market. Geely has been facing difficulties as it could not meet the safety and emissions standards in those areas. (Wang, 2011).
Apart from access to Volvo’s intellectual property rights, Geely will have also gained access into Volvo’s global marketing network and supplier base. Geely is very ambitious and keen to enter the American and European markets. It can now use Volvo’s network and supply chain to access the international market. The use of the same supply chain will also help Geely minimize its cost, and be more efficient. Volvo is a renowned premium brand, however as discussed above, it lacks market exposure and a diversified product offering base. With proper leadership and management, Volvo can boost its profit and market growth. If Geely is able to provide a good leadership and guidance, it would be able to enjoy the profits that Volvo, as a premium brand, would offer. Volvo, already being an established brand, would only require good marketing, expansion and cost reduction strategy. Geely can reapthe fruits of a globally established brand with much ease.
Geely has made acquisitions that can also benefit Volvo. “The first acquisition happened in 2009 when Geely paid AUS$58 million for purchasing Drivetrain Systems International (DSI), an Australian transmission company.” (Wang, 2011, p. 19). This acquisition of DSI, could be used to help both Geely and Volvo benefit from advanced in-house transmissions that can be produced cost effectively and gain a competitive edge on their competitors. Volvo can gain advantage from Geely offering a more Ccost effective production line. Volvo now has the capability to set up manufacturing plants in China, which will inevitably help them in cost reduction.
Volvo can use Geely’s supply chains in China, which will encourage growth in the Chinese market. Geely is said to “repurposing a nearly completed Geely plant in south-western China to make Volvo cars—part of a turnaround strategy” (Shirouzu, 2010). By using China to manufacture cars, it can be cost effective on it supply chain, as well as cost effective labour. However, on the other hand, this strategic decision might backfire. As discussed above, Geely is taking a big risk by taking over a Volvo. A premium brand like Volvo would require large investments towards their manufacturing to ensure quality, as well as towards market expansion and diversification in product offering. Geely will also have to take into account the investment it would have to put towards research and development.
The challenges Geely will have to overcome to make this an effective decision is “Geely’s lack of global stature, as well as its past reputation for making low-end vehicles, could be a drag on Volvo’s reputation” (Shirouzu, 2010). While Volvo is considered as a premium brand, acquisition by a small Chinese company might tarnish the Volvo brand name. One of the more successful alliance is of the French Renault and the Japanese Nissan. The two companies faced similar problems likes culture differences, language barrier and financial situation.
However, the objective adopted by this alliance is “to establish a powerful automotive group and develop synergies while conserving the corporate culture and identity of each brand” (Wang, 2011, p. 41). Taking an example from this, Geely and Volvo would need to develop a successful strategy if it has to overcome their differences. I believe, the strategic decision can be an effective one, provided Geely demonstrate good leadership qualities as well as develop an effective strategy in order to ensure profitability from both, Geely and Volvo.
Courtney from Study Moose