Volvo Trucks; Penetrating the U.S. Market Essay
Volvo Trucks; Penetrating the U.S. Market
Volvo Trucks; Penetrating the U.S. Market
Competition in the world heavy truck industry increased significantly during the 1990s. Volvo was one the top three heavy truck competitions in the world in 2000. In 1975, Volvo had been attempting to penetrate the U.S.S heavy truck market. Volvo acquired the bankrupt U.S. truck manufacturer White Motor Corporation in May 1981, and the heavy truck division of General Motors in 1988. In spite of these efforts, Volvo had never achieved more than a 12% market share. In 2000, Volvo management was considering what need to be done to make the North American business viable. Truck could be divided in three groups: light, medium and heavy trucks. Manufacturing; Truck manufacturing bore a resemblance to producing automobiles, with assembly line methods and just-in-time deliveries of components. Assembly was a complex operation involving tens of thousands of parts. Engine the leading European truck manufactures were integrated into drive-train components.
In The U.S. most manufacturers were assemblers and made their own cabs, using components from outside suppliers. There were differences in terms of the degree to which each company fit the “American Concept” Freighliner and Paccar operated only as assemblers. Ford and Navistar manufactured some drive-train components, while Marck produced about 95% of its own engines. Volvo Truck Group; Volvo was founded in 1925 to produce cars, trucks were added in 1928. Over the years Volvo evolved into a diversified industrial group, with a wide range of products from cars, trucks, buses, to marine and jet engine. Under the leadership of GEO Peher Gyllenhammar Volvo diversified further and became a conglomerate during the 1980s, entering such disparate industries as financial services, processed food, matches and pharmaceuticals.
In the mid-1990s the conglomerate strategy was reserved and Volvo refocused on vehicles and heavy equipment. By 1998 sales had reached $27 billon. Cars had been the most important source of profits for Volvo, accounting for 48% of the total in 1998 versus 28% for trucks. After the worldwide car business was sold to Ford in 1999, Volvo became manufactured of transport solutions for commercial use, including five separate business groups: trucks, buses, construction equipment, marine an industrial power systems, and aerospace engines. Volvo was one of the world´s leading manufacturers of heavy trucks, serving 180 markets and delivering 81,000 medium and heavy trucks in 2000. The company held 14.9% of the European market and about 10.6% of the North America market that year. In the Asian market was weak. New marketing programs had been in China, India and Pakistan, together with Eastern Europe and Mexico in the 1990s. Volvo was fully integrated, developing and producing all major drive-train components, the vast majority of the trucks produced by Volvo were in the heavy segment, accounting for 90% of Volvo´s total production. Volvo´s trucks were known for high reliability, state-of-art safety features, and good comfort. Volvo Trucks began exporting trucks as early as the 1930s, over the years the company established major centers in; Sweden, Belgium, Brazil and U.S. Plants producing drive-train components were concentrated in Sweden and Brazil.
Smaller assembly plants with some minority holding were located in Latin America, Africa and Asia. In 1978, Freightliner decided to end its sales corporation with White Motor Corporation. Freightliner assumed responsibility for the U.S. distribution and service of Volvo Trucks. The U.S. market peaked in 1979, and Volvo registered sales of 1,998 units. The market then sharply declined, and Freightliner encountered difficulties and was put up for sales. Whit Volvo unwilling to meet the asking price, Daimler-Benz acquired Freightliner. Without a partner Volvo decided to acquire the White Motor Corporation in 1981, one of the oldest and best known U.S. truck manufactures, with a market share of about 20% in the 1950s. The energy crisis in 1973 coincided with the investments in capacity and products to wipe out profits. White´s, market share shrunk from 15.9% in 1970 to 8.6% in 1974. In the late 1970s proved to be the last straw, leading to a bankruptcy filing in 1980. White had modern assembly plants in Utah and Virginia. Cab production, located in Orrville Ohio, was in need of an upgrade. Other offices and parts warehouses were located in Detroit, Cleveland and Chicago. The first strategy decision of the formed Volvo White Truck Corporation was to improve dealer and costumer relations.
The president and CEO of Volvo Trucks went to the U.S. immediately after the acquisition and spent a full year leading the integration process. Traditionally the relations between manufacturers and dealers in the U.S. had been quite adversarial, and Volvo sought to establish closer ties. Volvo decided to maintain the White/Autocar nameplates and made only minor changes in the exterior of the trucks. In 1983 was a subtle way of signaling both the changed ownership and the fact that the quality of White trucks was now up to Volvo standards. Volvo decided to close White´s Utah assembly plant and move all assembly to Virginia, with cab production remaining in Ohio. By 1987 Volvo White had only managed an overall market share of 8% to 9%, comparable to White´s share just prior to its bankruptcy in 1981, and unexpectedly high demand for trucks in 1987 and 1988 led to problems in meeting orders, especially in 1987 which held down share somewhat. In 1988 Volvo acquire GM´s heavy trucks business, GMC held about a 3% share of the U.S. market, with a plant in Michigan producing 4,600 trucks in 1980.
Headquarters were consolidated at Volvo headquarters in North Carolina. A new brand was created, WHITEGMC, sold alongside the GMC brand for a period of time. An explicit objective of the new combined company was to be costumer´s business partner, based on a more cooperative relationship, including dialogue about product development. Volvo consolidated he dealer network by dropping dealers in areas with both GM and Volvo White representation, in other areas new dealerships were added. The Michigan plant was closed and the Virginia plant was expanded and a new assembly plant was built to the cab plant in Ohio. The U.S. heavy trucks market grew in the early 1990s, Volvo decided to increase production capacity in 1995 to support sales of over 30,000 units per year. Volvo´s $500 million investment program in 1995 covered production, marketing and organizational changes to prepare for the 1996 launch of the new VN series. One of the main objectives of introducing the VN series was to raise the number of Volvo engines and other in-house components sold in the U.S. market.
By 1996, 18% of the trucks sold in America had a Volvo engine, up from 9.5% in 1993, but still far of the objective 40%. Volvo management argued that increasing the production of Volvo engines in Volvo trucks could improve profitability in three ways: 1.- The value of the engine was 25% of the total truck so a higher profit could be made on each sale; 2.- After-sale service and spare parts revenue could be increased; 3.- Costs could be reduced in engine production through increasing economies of scale. Volvo´s launch was spoiled by a 15% decline in industry volume. Volvo performed even worse, sales dropped by 38% to 16,800 trucks, resulting in a record loss of $240 million.
Volvo´s U.S. management was replaced in Augusto 1996. The new president Marc Gustafsson recruited from Mack. Volvo considered its product quality and features as well as its manufacturing process to be on par with industry standards, and its safety and environmental performance as world-leading. U.S. market share and probability were unsatisfactory. Management was considering ways to enable Volvo to finally break 12% market share on the way toward 20%, and to raise profitability.