Volvo's Transformation under Geely: No Smooth Ride in the US?

Case Code: BSTR494
Case Length: 20 Pages
Period: 2010-2015
Pub Date: 2016
Teaching Note: Available

Price: Rs.600
Organization: Zhejiang Geely Holding Group, Volvo Car Corporation
Industry: Automobiles
Countries: China, the US
Themes: Overseas Mergers & Acquisitions, Turnaround

Abstract Case Intro 1 Case Intro 2 Excerpts

Abstract

The case discusses the transformation of Swedish-run luxury car brand, Volvo Car Corporation (Volvo), under its owner, Chinese multinational automotive company, Zhejiang Geely Holding Group (Geely).

Ever since Geely acquired Volvo from the American automaker, Ford Motor Company (Ford) in 2010 for US$ 1.8 billion, the company had been tackling the challenge of reviving Volvo. The Swedish company had recorded pre tax losses of US$ 934 million for the year 2009, attributable to the global economic downturn. To revive Volvo's fortunes, Li Shufu (Li), chairman of Geely, devised a turnaround plan under which he proposed to make Volvo profitable by expanding its sales in China to nearly 1 million vehicles a year, set up a low-cost manufacturing plant in China with an annual capacity of 300,000 vehicles banking on China's inexpensive labor and market potential, and produce more cars out of Volvo’s European factories. In addition to this, Geely's Hong Kong listed unit, Geely Automobile Holdings Ltd., planned to add two or more luxurious car brands in a bid to boost Volvo’s global sales. Industry analysts expressed skepticism over Geely's ability to turn around the loss making Volvo as the ailing brand had a very niche market. Moreover, they felt that Geely had no experience in selling luxury car brands and was known for manufacturing cheap cars with a short history and questionable quality and poor safety while Volvo had a long history of being recognized as a luxury car brand and was known for its quality and safety standards. Some critics also pointed out that several Chinese companies had a relatively poor record in integrating their foreign acquisitions and Geely could also face issues related to cross-cultural management.

Despite analysts' concerns, Geely went ahead with the turn around plan and in 2012 announced a five-year strategic plan to revive Volvo with an investment of US$ 11 billion for technology upgrades, strengthening research and development, and setting up a new engine factory. Geely's revival efforts for Volvo showed signs of success when the latter recorded a net profit of US$ 149.7 million for the year 2013, attributable to growing sales in China and cost-cutting. Even as Volvo was growing on account of its sales in China, the economic slowdown in the country began to make its impact felt on the sales of automakers in China. In a bid to offset this challenge, Volvo started focusing on the US auto market. In a bid to revive its ailing brand in the US auto market, Volvo aimed to launch new products and planned to increase its marketing spend to raise awareness about its brand in the US. Analysts pointed out that it was difficult for Volvo to crack the US auto market as the brand neither had a strong marketing muscle nor a powerful brand image compared to that of its rivals in the US. In addition to this, some critics stated that Volvo also had to deal with the perception that it could not make good cars. However, Volvo remained optimistic about its revival in the US. In 2015, it started constructing a new manufacturing plant in South Carolina to sell 100,000 cars annually in the US auto market. With this new plant, Geely had ambitious plans to launch Volvo cars in the US and thus challenge Germany’s luxury car makers BMW AG and Mercedes-Benz.

Analysts felt that it would be difficult for Volvo to challenge these car makers in the US considering the dominant position they enjoyed in the US luxury car market. Moreover, they felt that Volvo would face an uphill task in convincing choosy American buyers to buy cars made in association with Geely in China. Analysts suggested that Volvo would have to rebuild its brand in the US through advertising to gain visibility among American consumers and ensure them that their products were free from quality glitches. Some analysts also raised doubts over Volvo’s ability to sell 100,000 cars annually since they felt that the new plant in South Carolina would be able to produce that many vehicles only after 2018. It remained to be seen how Geely would overcome these challenges and succeed in creating a significant presence for Volvo in the US market.

Issues

The case is structured to achieve the following teaching objectives

Analyze the effectiveness of Geely's efforts to revive Volvo in the US auto market
Formulate strategies for Volvo to successfully compete in the US auto market and sell 800,000 vehicles globally by 2020

Tapping China's Luxury Car Market

Looking Ahead

Exhibits