Geely Reportedly Setting Plans In Motion for Volvo in China

The new parent of Volvo Cars, Zhejiang Geely Holding Group Co., is considering its options regarding expanding the presence of the Swedish brand in China. Sources have told The Wall Street Journal (WSJ) that one of the options being considered is adapting a nearly complete plant in south-western China, to produce Volvo cars in an effort to widen the supply of vehicles. The site in Chengdu has already begun test production of Geely own-brand vehicles on one production line, according to the person with knowledge of the matter, but a "likely scenario" would be the installation of a second production line for it effectively to become a contract manufacturer to Volvo. It added that this would allow production to begin within a year, rather than a couple of years that would be required when building a factory from the ground up. Among the vehicles that could be built at the site is the XC60 sport utility vehicle (SUV).

However, despite these initial moves, Geely is still keen for Volvo to have its own production site in the country, the source added. Shanghai seems to be the location of choice, with the WSJ's source having also suggested it as a site. However, the plans are still being evaluated by both Geely and Volvo, and would require the approval of the Chinese government before proceeding. The source also said that there are also growing concerns within the Chinese government that the country will eventually suffer a problem with excessive manufacturing capacity in the automotive sector.

Volvo V60 Launched

The report has coincided with the launch of the V60 estate model, having released details last month (see Sweden: 6 July 2010: Volvo Unveils New V60 Estate). At the press introduction for the vehicle, its project engineer Tomas Ahlborg told Bloomberg News that, "this will be one of our very most important cars for the European market," and was expected to achieve annual sales globally of 50,000 units, of which 90% will be in Europe. He also said that the vehicle was unlikely to be sold in North America due to the market for sports-estates being "pretty small." The report added that Volvo is aiming to achieve total sales in 2010 of 400,000 units globally.

Outlook and Implications

While still considering how it will proceed with the future of the Volvo brand, it seems that China will be a core part of this strategy, having been one of the stated ambitions by Geely and its chairman Li Shufu prior to the completion of the deal earlier this month (see United States – China – Sweden: 3 August 2010: Geely Concludes Deal to Buy Volvo from Ford). It already has a presence in the country in the shape of both imported vehicles and the S40 and S80L currently manufactured at a plant partly owned by Volvo's former owner Ford. However, imported vehicles have substantial import taxes applied to them, while Geely will also be looking at guiding Volvo's destiny in the country independently from external influences such as Ford. A solely Volvo plant would certainly ensure this, but as mentioned, would require a long time as well as substantial investment. However, contract manufacturing using a Geely brand facility would ensure initial expansion while giving its space to hammer out longer-term objectives, as well as smoothing the approval process with the Chinese government by providing proof of the growth of the brand locally. It would also give it the capability to fulfil niches which are currently booming such as the SUV segment. A vehicle like the XC60 would therefore be especially welcomed, and continue Volvo's global success.

In order to achieve Geely's longer-term targets for Volvo, which include global sales of 600,000 units per annum (upa), of which 150,000 units are expected to come from China, a wholly owned plant by the automaker will be vital. It would give it the capability to build a wider range of vehicles, stretching from its small C3 hatchback to the S80L, as well as possibly fulfilling the Li's ambitions of a Volvo badged rival to Mercedes S-Class and BMW 7-Series. Reports have already suggested that any site would be home to a research and development (R&D) facility, and this could give the brand the ability to include local market tastes and trend in to its vehicles. However, despite its efforts to expand in China, Geely needs to be careful not to take its eye off the ball in Volvo's key markets in Europe and North America, which will continue to make up around three-quarters of the brand's sales even if it fulfils its global expansion targets.