Volvo's China export plans mark new phase in Geely strategy

BEIJING Tue Jun 17, 2014 4:17am EDT

Workers assemble parts of a Volvo car at an assembly line of the new Volvo automobile manufacturing plant in Chengdu, Sichuan province, June 5, 2013.  REUTERS/Jason Lee

Workers assemble parts of a Volvo car at an assembly line of the new Volvo automobile manufacturing plant in Chengdu, Sichuan province, June 5, 2013.

Credit: Reuters/Jason Lee

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BEIJING (Reuters) - Volvo Car Corp's plans to turn China into an export hub shows parent company Zhejiang Geely Holding Group Co [GEELY.UL] is out to disprove pessimists who have cast doubt on Chinese companies' ability to manage global consumer brands.

A senior Volvo executive said the Swedish automaker would start exporting Chinese-made sedans, a long-wheel-based version of the S60 called the S60L, to the United States and the XC90 utility crossover to Russia as early as the end of next year.

Volvo is also aiming to beat its 2014 sales target for China by at least 13 percent as it opens more showrooms in the world's biggest auto market, according to the executive, who requested anonymity because he is not authorised to speak with reporters. Geely's strategy for Volvo is being closely watched as a possible model for other Chinese companies that have had limited success digesting and managing major consumer brands, following multi-billion-dollar foreign acquisitions in recent years.

Geely's purchase of Volvo from Ford Motor Co four years ago surprised many in the auto industry, who doubted that a relative newcomer could turn around the loss-making 87-year-old Swedish business while protecting its famous brand.

But Yale Zhang, head of Shanghai-based consulting firm Automotive Foresight, said Volvo's outlook under the ownership of Geely and its founding chairman Li Shufu now looked "impressive", as Chinese demand for entry-level luxury cars soared.

"Chairman Li has been so patient with Volvo and it's finally paying off," he said.

Investors in other Chinese firms that are struggling to manage foreign consumer brands are intensely interested in how Li, dubbed the Henry Ford of China, handles Volvo.

Lenovo Group Ltd, for example, had trouble maintaining market share for years after its 2005 purchase of IBM’s personal computer business, though the company is faring better recently.

Another cautionary tale is SAIC Motor Corp, which bought roughly half of South Korea's Ssangyong Motor Co in 2004 but had to sell its stake after Ssangyong's business slumped in the wake of the financial crisis of 2008.

CHANGING GEARS

Volvo eventually would export about 10,000 S60Ls and a few thousand XC90s each year from China, the executive said. The company sold about 62,200 vehicles in the U.S. market last year, all made in Europe.

Volvo felt it could minimise foreign exchange risks by adding China as a production base, despite consumer concerns about the quality of made-in-China products, the executive said.

"The dollar and the yuan have the best relationship, a more stable relationship than the euro and the dollar," he said.

Volvo aims to use two assembly plants in China to export to the United States, Russia and possibly other markets such as Southeast Asia.

One plant in the southwestern city of Chengdu began producing the S60L sedan late last year, and the second is ramping up production of the XC90 in the northeastern city of Daqing.

Volvo global head of media relations David Ibison confirmed that the company would start exporting from China although he said the timing and target markets had yet to be decided.

Ibison said that although Volvo's China sales had grown 35 percent year-on-year so far this year, selling 90,000 cars in 2014 could be "a step too far".

The carmaker's focus is to make sure "our growth is profitable and sustainable," he said from Volvo headquarters in Gothenburg.

On the sales front, the senior executive said Volvo sales in China were likely to jump by almost 50 percent on-year to more than 90,000 vehicles in 2014, making the country its biggest market ahead of the United States.

That is well above the 80,000 cars Volvo initially projected to sell this year. The company sold a total of 427,840 vehicles globally in 2013, up 1.4 percent from 2012. "We are satisfied with the progress we've made so far in China," the executive said.

Volvo's two plants in China should be able to achieve full capacity of about 250,000 vehicles a year by about 2018, helping to drive domestic sales, he said.

(Editing by Stephen Coates)

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