− by Wayne Xing and Amanda Zheng
BEIJING – Swedish luxury car maker Volvo Car Corp. announced on February 25 its China development strategy in the next five years, with an aggressive growth plan to boost annual sales to 200,000 cars in China by 2015 and take 20 percent of the premium car segment, according to the company press conference held in the capital city.
Volvo Car Corp., which was acquired by Zhejiang Geely Holding Group Corp. last August, will build a new plant in Chengdu, Sichuan Province, pending approval of Chinese authorities, and continue to investigate for a plant also to be built in Daqing, Heilongjiang Province.
Meanwhile, Geely-Volvo has decided to speed up construction of its China headquarters and a technical center in Shanghai, according to CEO Stefan Jacoby.
“We regard the Chinese market as the second home market for Volvo Car Corp. and a very important part of the plan to build a successful future for the company,” says Jacoby, who was picked to turn around Volvo six months ago when he was appointed Volvo CEO under the new Chinese ownership.
To fulfill its China strategy, Geely-Volvo has created an entirely new Volvo organization led by Freeman Shen, Senior Vice President and Chairman of Volvo Cars China Operations.
“The successful acquisition of Volvo, has enabled China to own the first of her international luxury brand,” Geely-Volvo chairman Li Shufu told the media. “This is a turning point for the history of China’s luxury car market which has been dominated by foreign brands. It also shows that China is moving from a large to a strong manufacturing country.”
In the coming five years, Geely-Volvo will put full focus on product planning and development, sales and marketing, sourcing, product localization, human resources, etc., according to company plans Besides, it will continue investigation into the world’s biggest auto market to get a good understanding of the needs of Chinese consumers, as well as its competitors like Audi, BMW, and Mercedes-Benz to figure out what products to import into and produce in the country.
According to the announced strategy, the Shanghai headquarters will serve as Geely-Volvo’s administration center in China and the Shanghai technical center will be responsible for the design and research and development of high-end sedans, electric vehicles and new energy vehicles.
Chengdu and Daqing plants
The Chengdu and Daqing plants will cover the western and northeastern markets of China, respectively, in accordance to the country’s policies to “open up the Western areas” and “rejuvenate the Northeastern China’s old industrial base,” Li said.
Geely-Volvo plans to increase its dealers in China to 220 by 2015 from the current 106, train sales consultants and improve customer experience and satisfaction, and further optimize its sourcing network for the global market. The company will also employ new staff to work with product development for the Chinese market and support local production and purchasing.
Intended to begin making cars at the Chengdu factory in China in 2013, Volvo will seek to localize R&D, production and sales to enhance its global competitiveness on the premise that all its “manufacturing and quality systems will be thoroughly implemented,” Jacoby said. The brand’s plants in Torslanda plant in Sweden and Ghent plant in Belgium will serve the mature markets, while its Chengdu and Daqing plants will serve China, along with the emerging markets around the country, he added.
Jacoby said in an interview before the press conference that cars made in China will have a local content of 80-85 percent by the time Volvo rolls out its first locally built vehicle, but would continue to cater to the luxury segment of the market. He noted that the company has taken into account the parts supplier problem earlier on when considering setting up plants in China.
Volvo will make full use of its advantage in resource integration, in particular, local resources and China’s cost advantage in automobile production to ensure a successful operation in China, Jacoby said.
“We continue to uphold our principle that Geely is Geely and Volvo is Volvo,” says Li Shufu, chairman of both Geely Group and Volvo Car Corporation.
Analysts believe that Geely-Volvo faces major challenges in realizing its ambitious strategy in China in the next five years.
Although China has been a rapidly growing market, which offers Geely-Volvo potential for growth, reaching the goal of 200,000 in sales by 2015 and taking up a 20 percent of the luxury car market share will be very difficult to achieve especially considering the fact that the Chengdu factory will not be fully operational until 2013. Volvo sold slightly over 30,000 cars in China in 2010, and the target to increase sales of Volvo cars by close to six folds to 200,000 in five years is almost impossible.
According to Freeman Shen, chairman of Geely-Volvo’s China Operations, the country’s luxury car market may grow at a rate of 18 percent from the 670,000 units sold in 2010, to around 1.3 million by 2015. Out of that total there were a significant number of imported luxury vehicles.
“It may be more realistic for Geely-Volvo to aim at 100,000 cars by 2015,” says a veteran auto analyst who declines to identify himself, “unless Geely-Volvo can succeed in supplying official and institutional demand after it starts to sell locally assembled cars in Chengdu and Daqing in 2013.”
Geely-Volvo does have a chance to tap into the official fleets, especially local provincial and municipal government fleets in Sichuan and Heilongjiang provinces. Both Chengdu and Daqing have a significant investment stake in the two planned assembly plants and are expected to lend full support in local government sourcing of institutional vehicles.
But Geely-Volvo cars will face tough challenges from not only existing luxury brands such as Audi which controls the lion’s share of the institutional and official car market, but also high-end brands from other global players such as GM, Ford, Volkswagen, Toyota, Honda, Nissan, Peugeot-Citroen and even Hyundai. Geely-Volvo will also face the challenge from local car manufacturers such as Chery, FAW, BYD, JAC, etc., that are developing and launching high-end brands to win a piece of the government procurement market.
It will be tough for Geely-Volvo to compete with Audi, Mercedes-Benz and BMW, the world’s leading luxury brands with established operation, brand images and distribution channels in China. The image of “safety, low-key, high-taste” of Volvo cars suggested by chairman Li Shufu may not work in attracting consumers for luxury cars in China, according to another analyst. Few consumers in China purchase Audis, Mercedes-Benz or BMW are of the “low-key” type, wrote analyst Yu Mo in a blog. “The opposite is true: these luxury cars are symbols of success for the owners.”
Geely-Volvo’s targeted 200,000 sales in 2015 in China may include export sales to developing markets according to Geely-Volvo press release. But increased sales of export of Volvo cars assembled in China would obviously impact export sales of Volvo cars made in Sweden and Belgium.
Analysts also worry about the quality of Volvo cars to be assembled in China with 80-85 percent local parts and components despite Shen’s claim that “manufacturing facilities to be built in China will institute the highest production and quality control systems of Volvo’s global operations.” “It is already common knowledge that locally assembled luxury cars in China have compromised their equipment and quality standards compared with imports,” said an analyst based in Shanghai.
If Geely-Volvo meets its 2015 sales goals in China, Volvo cars to be built and marketed in the country may end up being one of the high-end rather than a luxury car brand.