Volvo AB (VOLVB)’s bus unit will improve its production system to boost profitability, which has lagged behind that of the company’s truck and construction equipment divisions for years, the head of the business said.
“We have work ahead of us to strengthen our profitability,” Per Carlson, 51, said Aug. 31 in a phone interview. “It’s our conviction and our ambition” that the bus operations will be as profitable as the other divisions, he said.
Olof Persson, who became Volvo’s chief executive officer a year ago, wants the Gothenburg, Sweden-based manufacturer to be at the top of the heavy-equipment industry in terms of operating margins, shifting focus away from sales growth. The bus unit’s operating income was 4.6 percent of sales in 2011, compared with trucks’ 9.1 percent, construction equipment’s 10.2 percent and boat engine maker Penta’s 8.8 percent.
The bus unit continued to trail the other divisions in the quarter ended June, when it posted a 3.4 percent operating margin. Profitability at the division has suffered from lower volumes than trucks, and because most communities buying commuter buses want local versions, making standardized production tougher, said Carlson. He now wants to make production more efficient, including using fewer types of components across various models.
Volvo rose as much as 1.4 percent and was up 0.4 percent at 84.30 kronor as of 10:40 a.m. in Stockholm, outperforming OMX Stockholm 30 Index (OMX)’s 0.2 percent gain and valuing the company at 179 billion kronor ($27 billion.)
“We’re working to get more synergies out of our production system,” said the executive, who became head of the unit on Jan. 1. He’s also trimmed the workforce to match weakening demand. This year, the unit has cut 450 temporary workers, mostly in Europe, culling staffing to a global 8,000.
“It feels like we now have a balance between demand and production,” he said. “But the market situation is still very uncertain, and we have our ear close to the ground to see if further adjustments are necessary.”
Swedish peer Scania AB (SCVB), which doesn’t divulge bus-division profitability, said June 28 that it’s cutting 142 jobs at its plant in Slupsk, Poland, due to weak demand. Daimler AG (DAI), the world’s biggest truckmaker, generated a 3.7 percent operating margin in 2011 for its bus segment.
The economic slowdown will make a turnaround more difficult, said Morten Imsgard, an analyst at Sydbank A/S (SYDB) with an overweight recommendation on Volvo’s shares.
“In this macroeconomic environment there aren’t many municipalities that want to invest in renewing their bus fleet,” Imsgard said. “That’s one of the reasons they’re stuck in the late cyclical wave of the financial crisis. They seem to be struggling to reach good earnings in that division.”
Global bus demand remains roughly the same today as it did at the end of the second quarter, Carlson said.
“We see continued strong demand in China,” while the European and North American bus markets remain weak, he said.
Volvo is building out capacity at its factory in Bangalore to about 2,500 buses per year from the current 1,000 vehicles, Carlson said. The expansion should be completed around the end of the year.
Diesel-electric hybrid buses, which Volvo started selling in 2009, present a “big” growth opportunity as local governments and other customers chase more fuel-efficient solutions, Carlson said. So far this year, Volvo has sold 363 hybrid models, compared with 311 for all of last year, the chief said. Volvo has started building hybrids in Brazil on a limited scale and will have full production by early 2013, he said.
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