Volvo looks to emerging markets to boost profits

GOTHENBURG, Sweden Tue Sep 25, 2012 12:12pm EDT

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GOTHENBURG, Sweden (Reuters) - World No.2 truck maker Volvo plans to cut costs in mature markets such as Japan and push further into emerging markets as part of its long-awaited plans to boost profitability.

The Swedish company is reorganizing its business to lift its operating margin, which has tended to trail domestic rival Scania's, by 3 percentage points from last year's 8.7 percent, a target most analysts see taking several years to hit.

The company fleshed out on Tuesday how it would reach that goal in a plan for 2013-2015, saying it would raise its vehicle gross profit margin per region by 3 percentage points while curbing its cost of sales, and IT and research and development spending.

"This strategy is a fundamental part in achieving our target," Chief Executive Olof Persson told a presentation for media and analysts, adding the strategy could yield a margin boost for the trucks business alone of 6 percentage points.

Volvo even held out the hope that it could improve its overall operating margin by 5 percentage points, though that would exclude the potential impact from economic headwinds.

The company's shares gained on the news, standing 4.1 percent higher at 94.85 crowns by 1412 GMT.

Volvo also said it would reduce its costs by 10 percent in Japan and end production of its Japanese UD brand for the U.S. market due to weak demand and rising regulatory costs.

Those measures would cost the company about 600 million crowns ($91.26 million) in the third quarter, it added.

Volvo, which is launching a new flagship FH series truck, said it would also launch new heavy-duty trucks for emerging markets, which it aimed to produce in India, Thailand and China.

The Gothenburg-based maker of trucks, buses, construction equipment and engines, said it would establish the commercial presence needed to support revenue growth of 50 percent across Asia-Pacific and 25 percent in Africa.

EUROPEAN MARKET GRIM

Volvo is the world's No.2 truck maker after Germany's Daimler. It also competes with German MAN SE and Scania in Europe and takes on U.S. Paccar and Navistar in North America.

Truck makers rode a strong recovery in demand in Europe and emerging markets during 2010 and most of 2011, but have since seen the euro zone's sovereign debt crisis and the related global economic slowdown temper optimism.

Truck markets are highly cyclical and sensitive to swings in the economic climate, leaving much uncertainty about what kind of market manufacturers will encounter as they come out of the customary lull of the European summer vacation period.

Volvo, which makes heavy-duty trucks under the Renault, Mack, UD Trucks and Eicher brands as well as its own name, said demand for trucks was weakening across Europe while pricing for both new and used trucks was competitive.

Volvo said in Tuesday's presentation that new and used truck inventories for the Renault brand were too high, adding that inventories for the Volvo brand were at normal levels.

The company said production overcapacity was also putting pressure on prices of new vehicles in North America but struck a positive note on Brazil, where it said it was seeing signs of improving demand.

Volvo has forecast a 2012 European market of about 230,000 heavy trucks, a decline of about 5 percent, while it has banked on robust shipments during the first half of the year yielding a market of 250,000 trucks in North America, implying growth of about 16 percent.

It did not comment on the forecasts on Tuesday, saying its policy was to update these forecasts only in connection with earnings reports.

(Reporting by Niklas Pollard and Johan Ahlander; Editing by Alistair Scrutton and Pravin Char)