March 22, 2013 / 9:59 AM / 5 years ago

Volvo Car clears key hurdle to starting production in China

SHANGHAI (Reuters) - Swedish auto maker Volvo has cleared a key hurdle towards winning full government approval to produce cars in China, a source of growing worry over its ambitious global turnaround plan, according to two individuals close to the company.

Volvo Car Corp’s leadership believes sales in China are likely to gain momentum when production begins in June at one of the two vehicle assembly factories Volvo and its parent, Zhejiang Geely Holding Group Co GEELY.UL, plan to open soon in the south-western Chinese city of Chengdu, the sources said.

That plant, which has been under construction and is already nearly completed, will have capacity to produce 125,000 cars a year.

Volvo is also seeking to open an engine factory in China.

The two sources close to Volvo asked for anonymity because of the sensitivity surrounding the plant approval process in China, which involves several Chinese ministries and agencies and ultimately the State Council, China’s cabinet.

They said the two vehicle assembly plants and the engine factory did not yet have approval from the State Council, though they said that was expected.

Volvo announced ambitious plans early in 2011 to use China’s appetite for premium cars to help it nearly double its annual global sales to 800,000 cars by 2020, from 422,000 in 2012. That goal suffered an early setback when the company reported a first-half net loss in 2012 and its chief executive, Stefan Jacoby, departed soon thereafter.

An 11 percent slide Volvo reported for last year’s vehicle sales in China also fanned concerns about the Swedish brand’s ability to revive its business.

But a senior Volvo executive told Reuters this week that last year’s sales slump in China was caused by widespread falsifying of retail sales volume figures by dealers gaming the company’s incentives programme.

A Volvo logo is seen behind a fence at a dealer's shop in Beijing March 21, 2013. REUTERS/Kim Kyung-Hoon

Sales volume, when adjusted for the falsifying, actually rose in 2012, by 15 percent from a year earlier, they said.

The sources said China’s central government has given a green light for Geely and Volvo to start production at the three planned factories. Volvo and Geely originally announced in 2011 its plans for producing engines and vehicles in China.

They said the vehicle assembly plants in Chengdu and the north-eastern city of Daqing received official approval in October and February, respectively.

The engine plant, in the city of Zhangjiakou near Beijing, which will have capacity to produce 300,000 engines a year, received a green light from the Chinese government in February.

“The final say is in the hands of the State Council and we believe the State Council supports Volvo Cars’ development in China,” Volvo Spokesman Per-Åke Fröberg said in an emailed statement.

“Volvo Car Group strictly follows the Chinese industry policy to apply and complete the licence approval process.”

Though neither Volvo nor Geely has announced what models they plan to produce in Chengdu and Daqing, the sources said the Chengdu factory was likely to produce the long-wheelbase version of the Volvo S60 sedan it developed especially for Chinese consumers.

The plant is expected to officially open in June and would likely aim to reach full production before the year’s end. Volvo has already produced about 40 of those long-wheelbase S60s in “pilot” production to verify and improve quality.

The Daqing plant is slated to begin production by the middle of next year. The plant is expected to produce sport-utility vehicles such as the XC90.

One insider said the XC90 would undergo a full redesign soon, but the Daqing plant was likely to produce the current XC90 model. Volvo is likely to ship the redesigned XC90 into China from Sweden, he said.

Reporting By Norihiko Shirouzu; Editing by Alex Richardson

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