Until the ink dries on Geely’s $1.8 billion takeover of Volvo Cars from Ford, announced last weekend, the supply chain and logistics implications remain uncertain. However, early speculation suggests that the Sino-Swedish partnership should open wider the door into China for Volvo and its supply base, while at the same time leading to a significant exchange of technology and material flow. Such entry and exchange would mean opportunities for Volvo’s logistics providers, in particularly its primary 3PL, Volvo Logistics.
While Geely’s ability to invest and improve Volvo’s model line-up will be paramount to any success, analysts nevertheless see the main benefit of the acquisition as a fast track to the world’s most important vehicle market. Along with its local sales network in China, Geely, China’s largest private carmaker, is in good standing with the Chinese government. More than half of the $2.7 billion of funding that Geely raised for the purchase and subsequent investment has come from government-related sources and investment programmes, and it is believed that Geely may eventually help Volvo secure important public contracts. “Geely gives Volvo a significant advantage with its great in-market contacts in China, whether public sector or with big fleet customers,” said Michael Tickle, of PA Consulting Group.
Anil Valsan, global director of research for automotive and transport at Frost and Sullivan, also saw Geely’s ability to “really take Volvo into China” as the major benefit for the Swedish carmaker. Logistics opportunities, for production and finished vehicles, will hence follow. Valsan noted parallels with Tata’s acquisition of Britain’s Jaguar Land Rover from Ford, which has led to both investment in European production as well as moving the brands more forcefully into India and emerging markets.
Expanding logistics flows into China
Volvo sold about 335,000 cars last year, down from a peak of 458,000 in 2007, with its major markets still the US (61,400 units) and Sweden (42,000). Although Volvo nearly doubled sales in China in 2009 to 22,400 units, about 15,000 of which were assembled from kits in the Chang’an Ford Mazda Plant in Chongqing, it has been slow to penetrate Asian markets. Volvo, like parent Ford in the region, trails far behind VW, GM and Toyota as well the premium German brands. Audi sold around 130,000 units in China last year.
Geely’s chairman, Li Shufu, has likened Volvo to a caged tiger that needs to be “liberated”. He wants Volvo sales of 600,000 by 2015, with most growth in China. Geely has said it will build a Volvo plant in China with 300,000-unit capacity per year to meet domestic demand. It has, meanwhile, made long-term commitments to Volvo’s European plants in Sweden and Belgium, which will serve traditional demand in Europe and North America.
Tim Lawrence, who leads the global supply chain team for PA Consulting, does not see an immediate threat or change to Volvo’s European production, although Valsan notes that there is less long-term certainty about the future of these plants.
If Geely were successful in accelerating growth in China quickly, it would bring an increase in both kit imports and finished vehicles into China prior to the launch of a new plant. While Geely did not respond for comment, it is expected that–at least for now– assembly of Volvo S40 and S80L will continue to be assembled at Chongqing, as well as the S60 beginning in 2011, until current agreements expire (although Valsan notes that Ford will be glad to have the extra capacity back).
Opportunity or threat for Volvo Logistics?
Under current logistics arrangements, these import and production increases would be good news for Volvo Logistics, which is responsible for inbound and outbound logistics, as well as packaging for Volvo Cars in Chongqing; it also handles vehicle imports from Europe to China. As a part of the Volvo Group conglomerate, together with Volvo Trucks and others, Volvo Logistics is not financially linked with Volvo cars, however the carmaker represents a sizeable proportion of the 45% of revenue Volvo Logistics earns outside of the Volvo Group.
Even prior to the agreement, Geely officials have said they would integrate the distribution networks, including for logistics, of both companies. As Geely’s commitments thus far have emphasised, the importance of maintaining European production and management for Volvo, there is little to suggest immediate changes to the relationship with Volvo Logistics, although what may eventually happen in China, where Western logistics providers have been slower to gain business with Chinese OEMs, is less certain.
Viking Johansson, global account manager for Volvo Cars at Volvo Logistics, said it was too early to predict the impact of the sale for either Volvo Logistics’ commercial relationship with Volvo Cars under Geely’s ownership, or whether the deal offered a future opportunity for the service provider to grow in China with Geely. But he said that gaining a foothold in China and Asia was currently the main challenge for Volvo Logistics and the wider automotive logistics sector. He maintained that the LSP would continue to develop its operational and management resources in China to best serve the future needs of the group and Volvo Cars.
“We have been developing our service concept in China for ten years in support of the Volvo Group primarily and also Volvo Cars, and of course with this [change in ownership] we will accelerate building that capability even more,” he told Automotive Logistics News.
Sourcing more from China
There is also speculation as to the extent to which a Chinese-owned Volvo will change its European supply base. Both PA’s Tickle, and Frost and Sullivan’s Valsan, suggested that Geely will increase the amount of components sourced in China for European production, again similar to how JLR has begun sourcing more parts in India. In the other direction, Geely production and the new Volvo plant in China will offer opportunities to European suppliers to move into the market. In both cases, Tickle emphasised that Volvo Logistics and other logistics partners will need to have a high competence on these logistics routes.
Tickle, however, who has himself worked for Ford and JLR, suggested that Volvo has a strong emphasis on “total cost decision making”, which may lead to a more cautious approach to global sourcing for its European plants.
“In my experience, Volvo is led much less by material-cost-only decisions, and looks carefully at all factors, including risk, customs, duty and logistics. I would say Volvo is stronger than Ford had been as a whole on total landed cost,” he said, although he added that it had been five years since he worked inside Ford.
Valsan added that logistics cost would be important for material moving in either direction. “Logistics will play a significant role, especially with oil at a fairly high price and likely to rise,” he said.
As Geely hopes that its purchase of Volvo will accelerate its path toward exporting to western markets, Valsan suggested that Geely should also learn something from logistics from its purchase by building on the 3PL relationship in China. “The strength of Volvo Logistics is that it is managing a fairly global supply chain for a very premium brand, so Geely would be wise to actually leverage that expertise for a more efficient supply chain in China,” he said.
Pictured: Li Shufu, chairman Zhejiang Geely Holding Group and Lewis Booth, CFO Ford Motor Company, on the signing of a stock purchase agreement that Zhejiang Geely will purchase Volvo Cars from Ford
