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Dongfeng-Volvo: an alliance based on trust and understanding

Dongfeng Motor Group Co., Ltd. (DFG) and AB Volvo held an inauguration ceremony in Shiyan, Hubei Province on January 26, 2015 to celebrate the establishment of Dongfeng Commercial Vehicle Co., Ltd. (DFCV). The two companies signed a strategic cooperation agreement exactly two years ago to establish the joint venture based on the former wholly-owned medium- and heavy-duty truck subsidiary of DFG. The inauguration of the DFCV marks the start of an international journey for Dongfeng brand heavy-duty vehicles.

A new JV

The new JV will manufacture products in Shiyan and conduct R&D in Wuhan, where DFG is headquartered. Besides general assembly, welding, painting and stamping plants, it will establish an engine plant in Shiyan as well.

The company will focus on the R&D, production, purchase and sales of medium- and heavy-duty trucks and chassis, medium and large buses and chassis, special-purpose vehicles (including engineering trucks), engines, transmissions and other key components. The company will also cover technology consulting and service as well as aftersales service of logistics transport and company operational projects.

DFCV has a seven-member board of directors, four coming from DFG including the chairman and three from Volvo. DFG also nominates the president for the JV.

DFCV announced its strategic vision at the inauguration ceremony, which is to achieve the transformation from Chinese Dongfeng to global Dongfeng in three phases.

The first step is to remain a leading truck brand in China, the second is to develop a solid presence in key growing markets abroad, and the third is to enter mature markets and become a recognized and respected brand globally.

“The Dongfeng-Volvo alliance is an alliance based on trust and understanding,” said Tong Dongcheng, a board member of DFCV, at the ceremony.

The two parties conducted business visits and negotiations repeatedly in the past two years and improved understanding and consensus among top-level executives and deepened understanding of the entire value chain, which laid a good foundation for smooth operation of the JV after establishment, according to Gary Huang, president of DFCV.

“The two companies conducted numerous preparation works in the past two years while waiting for government approval,” said Huang. “For example, staff from Volvo blended into the JV smoothly and it can start production right away after the inauguration.”

According to Huang, the JV will develop new policies and processes. DFCV has already launched a full range of State-IV emissions-compliant trucks. The company will keep its existing product range and develop new ones with Volvo in the future.

“Volvo will provide support in all aspects to DFCV and the first is in technology. For example, technology for the heavy-duty transmission to be produced in Shiyan,” said Olof Persson, president and CEO of Volvo Group.

As to the possible rivalry and competition between DFCV and Volvo Trucks in the global market, Persson commented that the global truck market is very big and the JV will be more of a complement to Volvo. “It will be a win-win tie-up,” said Persson.

A win-win tie-up

“DFG does not have enough resources in the passenger vehicle sector, and we need to rely on commercial vehicles to step into the world market. The commercial vehicle is still the core of DFG’s business,” said Zhu Fushou, chairman of DFCV, at the ceremony.

China’s heavy-duty truck market, however, has withered since sales reached a historical peak in 2010.The country sold 742,600 heavy-duty trucks in 2014, down 4 percent from 2013. The lingering implementation of the State-IV emissions standards and the overall demand decline of the energy industry all led to the year of negative growth.

While DFCV took up 16 percent of China’s medium- and heavy-duty truck market share, its vehicle sales also declined in 2014. The solution of DFCV facing the downturn is to make quick breakthroughs in technology and it plans to jointly develop Dongfeng brand heavy-duty engines that comply with State-VI emissions standards or above with AB Volvo and introduce and develop Dongfeng brand medium- and heavy-duty transmissions, according to the long-term planning of the JV.

Dongfeng is in urgent need of SCR technology of Volvo after the implementation of the State-IV emissions standards starting from January 1. The share of manufacturing and supplier resources as well as international sales channels will also improve the overall production level of DFCV and accelerate its expansion in the overseas market.

DFG released the “Qian” D300 Plan in 2011 and claimed to sell one million commercial vehicles in 2016. The company also released the “DH310” Plan, which is to have its export volume take 10 percent of its total sales in 2016, or 300,000 units. The exploration of overseas markets has never been so important for Dongfeng.

DFCV will transfer from whole vehicle and auto parts export to capital and technology export based on the acquisition of Volvo technology.

AB Volvo unloaded its aerospace business in 2012 to focus on heavy-duty truck business and set up good brand and market foundation in Europe, the U.S. and South America. The long-term goal of DFCV is to expand into the overseas markets based on Volvo’s technology, brand and distribution channels.

The “One Road One Belt” Asia-Pacific economic circle and China-aided foreign projects will all stimulate commercial vehicle export, and Dongfeng has been building its brand image and awareness around the world.

As the second largest heavy-duty truck maker in the world, Volvo has not performed well in the Asian market, said Zhang Zhiyong, an industry analyst. Volvo has to turn to China, the largest emerging market of commercial vehicles given the economic depression of other markets. DFCV has established intensive sales networks in different tiers of the market, and the mature and strong market advantages will bring numerous benefits to the localization of Volvo.

“China is the largest truck market around the globe with a scale equal to the EU and the United States combined,” said Persson at the ceremony. There is no doubt that Volvo will be looking for cost reduction and competiveness improvement through localization.

Dongfeng, China’s top commercial vehicle manufacturer, becomes the ideal candidate of Volvo’s Chinese partner. “DFG is an old friend of Volvo’s and we admire the professional management team and strong product range of the company,” said Persson. “This is a very exciting venture that will combine the best of two worlds, strengthening the positions of the Volvo Group and DFG and offering excellent opportunities to both parties. Combining DFG’s strong domestic position and know-how with Volvo Group’s technological expertise and global presence will offer DFCV excellent potential for growth and profitability in and outside China.”

This transaction will significantly strengthen Volvo Group’s position in medium trucks while the Group will become one of the world’s largest manufacturers of both medium- and heavy-duty trucks.

For both DFG and Volvo, the tie-up will help share resources in China and globally, reduce cost, achieve better economies of scale and increase profitability.

Challenges ahead

With DFCV already as China’s largest heavy-duty truck maker and Volvo the world’s second largest heavy-duty truck maker, DFCV is believed to be well positioned to not only grow market share in China but globally as well.

However, challenges remain.

One of them will be how to resolve different priorities of the two partners in vehicle development, technology upgrades, sales in China and overseas, and profit anticipation. It would not be surprising to expect the two partners maneuver and even fight for their respective priorities and interests down the road.

Moreover, both partners must face the reality of a declined and growingly more competitive heavy-duty truck market in China since all major domestic truck makers, except FAW, already have foreign partners such as Daimler, MAN and IVECO. The alliance of Dongfeng-Volvo further proved that China has become a key part of global commercial vehicle makers.

However, the “market for technology” strategy has proven to be a failure in passenger vehicle JVs since Chinese enterprises have never obtained core technologies. Such failures should be prevented in commercial vehicle JVs in the future, said auto analyst Chen Zhidong. Chinese manufacturers should focus more on the improvement of brand image, R&D localization and seize core technologies. 

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