Given their reputation for durability, the boxy station wagons and sedans rolling off the Volvo Group’s production lines here may well be shuttling suburban families and other loyal buyers reliably around for years, even decades to come.
The question now is whether Volvo can last as long.
Despite a recent surge in sales and profits driven by economic recovery in its three largest markets, the U.S., Britain and its home of Sweden, Volvo is facing the stiffest test yet of its ability to survive as an independent company.
As one of the smallest of the major carmakers, and as one of the few not to have been snapped up in the frenzy of consolidation that has swept the European industry in recent years, Volvo increasingly risks being run down by giant competitors in Europe, the U.S. and Asia.
Still, Volvo seems determined to go it alone. Late last year, the company aborted a planned merger of its car and truck operations with Renault S.A. of France, complaining that Volvo’s financial and strategic interests would not be well served by the deal.
Though it continues to work with Mitsubishi Motors Corp. of Japan in developing a small car, Volvo is betting that it can muster alone the efficiency and financial strength it will need to control its destiny.
To help it do so, a new management team under Soren Gyll, who took over as chief executive after leading a successful board-room revolt against the Renault deal, has abandoned the elaborate diversification strategy championed by his predecessor, Pehr Gyllenhammar, and is paring the company back to almost nothing but its car and truck operations.
By selling Volvo’s extensive interests in pharmaceuticals, food and other industries, whose proceeds could total $5 billion over three or four years, Gyll plans to reduce debt and finance development of new vehicles.
At the same time, he is pushing to cut costs further, speed product development and protect the brand’s image as a paragon of safety and reliability.
“A lot of people have questioned our ability to survive,” Gyll said. “So people are working very hard. It’s the Volvo spirit. We are small but we will show everyone that we are good.”
Volvo, however, is far from assured of making it on its own. It sells only two lines of cars worldwide, the big, sturdy 900 series and the slightly sportier 850, plus a line of smaller cars, the 400 series, that is not sold in the U.S.
Because Volvo sells relatively few cars, 311,800 in 1993, or less than 1 percent of the world market, it can afford to develop new cars only at widely spaced intervals. That means that each model must not only be successful, but also remain so for years longer than competing models. Its last entirely new model, the 850, was introduced in 1991.
Despite big improvements, Volvo remains saddled with high costs. It takes about 47 hours of labor to produce a car here, down from around 70 in the late 1980s but still behind the 20 hours or so needed by Japanese automakers.
Volvo also produces cars in Ghent, Belgium, where productivity is higher, and in Born, Netherlands, the site of its small-car venture.
Moreover, Volvo’s leadership in automotive safety, reliability and environmental friendliness-the attributes that have made Volvo so strong in the affluent family market-is under attack from a wide range of automakers that can make valid claims to improved safety and durability.
While Volvo can make it on its own for the medium term, said John Lindquist, a senior vice president at the Boston Consulting Group in London, “there is an issue for the longer term.”
“If they cannot maintain their differentiation in the marketplace, if they cannot maintain cost competitiveness and get much better at development, then they’ll be forced into joining up with someone,” he said. “If they can do all those things and make careful alliances with producers for key components, then they can probably get by. But it’s a tall order.”
Volvo executives acknowledged that they could not afford missteps, especially when it came to developing cars. The expensive process typically runs into the billions.
“We are small,” Gyll said. “Each product has to be good. The pressure on the organization is tremendous.”
Despite the failed merger with Renault, Volvo is pressing ahead not only with the small-car project with Mitsubishi, but also with plans to add to its high-end product lineup, he said. The new small car will replace Volvo’s 400 series.
Though he declined to provide details about the higher-end cars, Gyll said Volvo wanted to expand its reach beyond what he called the family market, which generally means buyers age 35 to 55, and into cars that would appeal to older drivers.
“We want to be stronger in the pre-family and post-family markets,” he said.
In the long run, Gyll said, Volvo cannot rule out alliances or joint ventures with other automakers and component suppliers, or even a merger. But he said he had no doubts about the ability of the company to thrive on its own at least through the end of the decade.
For the first six months of this year, Volvo sold 189,000 cars, 20 percent more than a year earlier, and its market share rose in most countries.
Volvo sold 45,213 cars in the U.S. in the first six months, or 19.1 percent more than in the 1993 period. Its truck business also has been strong, with a new model, the FH series, helping push deliveries up 37 percent in the first half of the year, to 32,400.
Operating profits for the car group were about $197 million, in the first half of the year, compared with a loss of $9.4 million a year earlier. The truck group earned $237 million in the first half, up from $8.2 million.
Helped by divestitures that yielded gains of $550 million in the first half, Volvo reduced its debt by the end of June to about $120 million, from $1.9 billion at the end of 1993.
Volvo also is benefiting from the weakness of the Swedish currency, analysts said. The weak krona makes Volvo’s exports less expensive in terms of other currencies and makes earnings in dollars and other foreign currencies worth more when translated back to kronor.
In the last several years, Volvo has closed two of its three car plants in Sweden, consolidating its Swedish production in Goteborg. Employment in the car division, which peaked in 1989 at 34,607, has fallen by 22.6 percent, to 26,803.
The company is taking steps to protect itself from competition. This year, for example, it is pioneering an advance in safety with the introduction of side air bags in the front seats of the 850.
It is also seeking growth by pushing into new markets, particularly in Asia.
“We’re building on our strengths in the niches where we are strong,” Gyll said.
To a large degree, though, Volvo’s prospects will ride on the company’s success in cutting costs and improving efficiency.
A big portion of the company’s productivity problems have been linked to high rates of worker absenteeism, a chronic problem throughout Sweden.
Absenteeism is running at less than 5 percent a day here, down from 15 percent a few years ago, largely because of new Swedish government policies, including a reduction in sick-pay benefits.
“We’re looking at a whole new degree of competition, in Europe in particular, in terms of trying to match Japanese efficiency,” said Nigel Griffiths, an auto industry analyst at DRI/McGraw-Hill in London. “For Volvo, a lot of their future will come down to their own resilience.”
