Volvo Urges Localization Behind the Scenes to Reduce Costs by RMB 1.5 Billion

Geely Automobile has been purchasing Volvo for a year and a half. The most tangled is the realization of Volvo's localization.

A few days ago, Geely finally gave up the fight for Volvo’s local brand identity, chose “foreign capital” status, and set up a joint venture company through 50% of Geely Automobile and Volvo Cars. Like other joint venture factories, the Volvo joint venture plant will also launch joint ventures and new energy vehicles.

Yang Xueliang, director of public relations at Geely Holding Group, told Investor that the key to reducing costs for Volvo is to increase the localization of parts procurement. In addition, Volvo's first domestic car will be available in 2013. Industry insiders told the "Investor" reporter that for Geely, the most urgent is to achieve Volvo's localization, and the official brand of Volvo Volvo has already waited.

Jiwo joint ventures each accounted for 50%

Recently, Li Shufu, chairman of Geely Automobile Group, said that Volvo has applied for a joint venture with Geely as a foreign brand. Volvo Cars and Geely Holding Group set up a 50:50 joint venture company and plans to launch a joint venture own brand.

Since Volvo was formally acquired by Geely Group in August 2010, Volvo has been delaying the construction of new factories and domestic products due to unclear identification of local brands or foreign brands. In order to ensure smooth domestic production next year, Volvo has applied for a joint venture with Geely as a foreign brand and plans to establish a joint venture with its own brand.

In fact, the future of Volvo is in China. In an interview with the media after the acquisition of Volvo, Li Shufu once said that Volvo’s plan is to sell 200,000 vehicles in the Chinese market in five years, achieve profitability within two years, and increase global sales to 800,000 units within 10 years. In 2009, Volvo sold only 335,000 vehicles worldwide, of which only 24,000 were sold in the Chinese market. By 2011, Volvo China sales increased by more than 54% year-on-year to 47,100 units.

Volvo China has long had a plan to build a factory, but it has yet to obtain final approval. In August 2011, two vehicle production plants were settled in Chengdu and Daqing, and the R&D center was located in Jiading, Shanghai. At present, the Volvo Chengdu plant has been publicly disclosed. Among Volvo's investments in Chengdu, Daqing and Shanghai, the Chengdu project has the largest investment scale with a total investment of 4.2 billion yuan, including 1 billion yuan for parts and components supporting the Chengdu plant. Yuan investment.

In fact, it seems natural that Volvo's factory will first fall in Chengdu. When Geely bought Volvo, the Chengdu government supported Geely’s low-interest loans of RMB 3 billion. The Chengdu Branch of the China Development Bank and the Chengdu Bank each provide 2 billion yuan and 1 billion yuan. Geely only pays about one-third of the interest within three years and repays it discretionarily after three years. This 3 billion yuan loan accounted for a quarter of Geely's acquisition of Volvo funds.

For Li Shufu's hope that Volvo's goal of reaching 200,000 units of annual sales in 2015, it hopes to target two factories in China. According to the EIA report, the total planned production volume of Volvo's two vehicle plants is 198,000. Only the planned production of these two factories almost reached the sales target of 200,000 units in 2015.

How does local procurement save 1.5 billion yuan each year and how to solve the problem of reducing costs? Yang Xueliang told the "Investor" reporter: "Improve the proportion of purchases for the localization of parts and components." He said that at present, the proportion of Volvo's spare parts for local procurement is negligible, and almost all of it depends on imports.

In order to control costs, after Geely acquired Volvo, it had already planned to increase the proportion of procurement in China. The specific plan is to increase the proportion of localized purchases by 8% each year, which will exceed 40% after five years. According to this plan, it will also be able to drive exports of parts and components worth US$4 billion every year, and the purchase cost will be reduced by at least US$1.2 billion (about 7.5 billion yuan) in five years, and the average annual purchase cost will be reduced by 1.5 billion yuan.

In fact, the cost of compression is mainly to lower prices and increase sales. At present, the "Investor News" reporter observed that since 2010, Volvo has conducted a large area of ​​promotional activities, terminal prices are often two or three percent. Although the Geely Group insists that price reduction is a behavior at the dealer level and does not represent company strategy, it seems to reflect the change Volvo has to face, namely, to obtain sales at a competitive price.

Industry insiders told the "Investors" reporter: "Volvo's pricing is taking into account the market demand, and hopes to expand the market through low prices and increase the market share of the company." He explained that for the Volvo brand, R & D And the manufacturing cost is quite high. Only the sales volume can be increased to dilute the cost. At the same time, after the sales volume reaches a certain scale, the bargaining power of the entire vehicle company to the supporting manufacturers will also increase. In the future, Volvo will be more competitive in terms of price than the traditional German luxury brands.

Shanghai Zhizhi Enterprise Management Consultant Automotive Marketing Expert Zhizhi Zuo told reporters: “Geely’s early acquisition of Volvo’s price cuts is an early adjustment and has no effect on Volvo’s high-end brand image. However, this price reduction is undoubtedly a squeeze on profit margins. This is not a sustainable strategy. If Volvo can really achieve domestic production, its manufacturing costs will naturally be much lower."

"Volvo's spare parts purchases are also constrained by sales volume." The industry insiders told reporters that Volvo sold only 40,000 to 50,000 vehicles in China, which is too small for parts and components companies. However, at present, Changan Volvo parts are also overseas procurement, and maintenance and replacement parts also use imported accessories. This virtually increases the cost of maintenance after sales.

Three major barriers to brand, talent and culture Volvo achieve localization, will it affect its brand image? Yang Xueliang said: "After localization, it will not change the mutual independence between Geely and Volvo."

Li Shufu also repeatedly stressed that "Geely is Geely, Volvo is Volvo" and its intention is to protect Volvo's "high car descent." Recently, Li Shufu reiterated: "The Geely Holding Group is only one of Volvo's investors. Geely Automobile does not have any capital-related relationship with Volvo."

In fact, the blood of Geely Automobile and Volvo Car is the common shareholder – Geely Holding Group. Geely Automobile is a listed company in Hong Kong, Geely Holding Group is its largest shareholder, and the acquired Volvo Group is jointly owned by Geely Holding Group, Shanghai Municipal Government and Daqing City Government.

Localization of Volvo also faces talent challenges. Shen Hui, president of Volvo China, revealed that at the level of the staff team, Geely is preparing to build a team of nearly 1,700 employees before the end of the year. Industrial System Construction and Recruitment Training High-quality personnel and corporate culture construction are these important tasks for Geely.

Not only that, it is expected that after Volvo's localization in the future, the expansion of production volume will require Volvo's distribution team to follow suit. At present, Volvo has nearly 140 dealers. According to introduction by Shen Hui, the goal is to reach 200 by 2015, which will lay the foundation for the localization of new cars in the future.

On the level of cultural construction, Li Shufu also said more than once that cross-cultural cooperation has always been the focus of work. The most obvious example is the ongoing "2011-2012 Volvo Ocean Race." As early as September 2011, Geely organized the Zhejiang Geely Symphony Orchestra to go to Italy, Austria, the Czech Republic, Germany, Belgium, and Sweden to tour the six countries to bring Symphony closer to the West. This is called the 2011 PR classic case of the auto industry.

Looking back at the case of mergers and acquisitions of cars, whether it was the acquisition of Rover by BMW, the acquisition of Chrysler by Mercedes-Benz, or the acquisition of South Korea's Ssangyong by SAIC, they all failed because of cultural estrangement. Geely won the new opportunity for Volvo will be homegrown, the future of cultural integration task is arduous.