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Volvo Becomes China Latecomer as Li Misreads Home Advantage (1)

June 04, 2013

Volvo Becomes China Latecomer as Li Miscalculates Home Advantage

An employee at a Volvo automobile dealership walks past an S80L sedan in Beijing. Photographer: Nelson Ching/Bloomberg

Three years after buying Volvo Cars, Chinese tycoon Li Shufu may get to compete with Volkswagen AG (VOW)’s Audi and Bayerische Motoren Werke AG on a more level playing field in his own country.

Volvo Cars, a unit of Li’s Zhejiang Geely Holding Group Co., has begun test runs at its first factory in China and a second plant may open late next year, Lars Danielson, senior vice president at Volvo Cars China, told reporters today. The company had so far brought in its cars from overseas -- subjecting them to the nation’s 25 percent import tariff -- or produced them in limited quantities at a Ford Motor Co. plant in Chongqing, China.

The three years it took to open the factory shows how Li, 49, miscalculated the edge he would have in his home country as the Chinese government subjected the Swedish brand to the same regulatory approval procedures as all foreign automakers. Still, the plant paves the way for Volvo to double sales to 800,000 by the end of the decade as China heads toward becoming the world’s largest market for premium vehicles.

“If they fail in China, I don’t really see where they can gain volume significantly,” said Lin Huaibin, a Shanghai-based analyst at IHS Automotive. “If they can do China right, they will gain strong momentum.”

Volvo posted a loss last year as global sales fell 6.1 percent to 421,951 units, with the biggest decline in Sweden. In China, sales dropped 11 percent, while deliveries at Audi and BMW climbed 40 percent and 30 percent, respectively.

Expensive SUV

Volvo’s share of China’s luxury vehicle market fell to 3.4 percent last year from 5.3 percent in 2009, the year before the Geely takeover, according to estimates at IHS. By comparison, Audi and BMW saw their market shares rise to 33 percent and 24 percent, respectively, according to the researcher.

One reason for Volvo’s under-performance is price. For example, its XC60 sport utility vehicle starts in China from 389,900 yuan ($64,000), or 8.8 percent higher than a China-produced Audi Q5, according to Autohome.com.cn, China’s most-visited car comparison website. In the U.S., the sticker price on the Volvo starts at 4.3 percent lower than the Audi Q5.

Volvo also has to compete for premium buyers with other newcomers like General Motors Co. (GM:US)’s Cadillac, Nissan Motor Co.’s Infiniti and Honda Motor Co.’s Acura, which have all announced plans to produce models in China.

‘Nothing Special’

Denny Shen, a Shanghai-based entrepreneur, says Volvo’s challenges stretch beyond price. The brand has no distinguishing features that help it stand out in China’s competitive car market and even its name, pronounced “wo’erwo” in Mandarin, sounds awkward for Chinese speakers, he said.

“What is Volvo’s brand identity?” said Shen, 28, who has cars including a BMW M3 and Jaguar XF. “There’s nothing special about it, and the look of the cars is very average. It doesn’t appeal to young people like me.”

Late last year, Li reshuffled Volvo’s management, hiring former MAN SE Chief Executive Officer Hakan Samuelsson to replace Stefan Jacoby as CEO. Samuelsson has pledged to add another 100 Volvo dealers in China over the next two to three years to its existing 150 outlets and focus on smaller Chinese cities to boost sales.

Volvo’s reputation for safety, Scandinavian design and environmental care and performance will help it attract the growing number of Chinese consumers seeking to embrace a “more understated luxury,” spokesman Per-Ake Froberg said.

‘Politically Incorrect’

“The Volvo brand is a relative newcomer,” Froberg said. “Increasing awareness about the Volvo brand among the right segments of Chinese consumers is at the top of our priority list.”

Volvo’s low-key image may be an advantage these days in China, where the government is campaigning for officials to rein in lavish spending, according to John Zeng, Shanghai-based managing director at LMC Automotive.

“At the moment, driving a high profile luxury car to show off is considered politically incorrect,” he said. “For people hoping to keep a low profile, a brand like Volvo would be a better option.”

In April, Volvo sales in China rose 30 percent and even surpassed those of the U.S. for the first time. For the first four months, deliveries in China have climbed 28 percent, faster than in any other market, according to the company.

A4 Competitor

The new factory, which will be able to make 125,000 cars a year and located in the south central city of Chengdu, starting with a stretched version of the S60 -- an Audi A4 competitor -- and full production will probably begin in the fourth quarter, according to Danielson. The second plant will be located in the northeastern oil city of Daqing, he said.

The expansion is part of plans for the Swedish brand to sell 200,000 vehicles in China. Though the company had previously said it may reach that target in 2015, that goal was “a little bit too ambitious” and will likely be achieved in about 2020, give or take a year, Danielson said.

Volvo, which sold fewer than 42,000 units in China last year, expects growth of at least 20 percent in 2013, said Fu Qiang, chief executive of the China distribution business. The company aims to have 140 dealers across 80 cities by the end of the year, from the current 126, Fu said.

Marrying Self

For Li, getting approval for the Chengdu plant was a long awaited step. Though Geely agreed in 2010 to buy Volvo from Ford for $1.8 billion -- the biggest overseas acquisition by a Chinese automaker -- it took him years to get the necessary regulatory approvals to build cars at home. Even Tata Motors Ltd. (TTMT)’s Jaguar Land Rover, which set up a Chinese venture two years after Geely bought Volvo Cars, took less time in gaining permission to manufacture cars in the country.

“When I first acquired Volvo, we were very clear, Volvo will be a Chinese enterprise, a company under Geely and will enjoy some of China’s policies,” Li told Economic Daily in a televised interview in 2012. “But now we have to be a joint venture, Geely cooperates with itself, marries itself, signs a contract with itself.”

Li, who used to photograph tourists and manufacture compressors for refrigerators before entering the automotive industry in 1989 by producing motorcycles, has become one the wealthiest Chinese auto executives today, as he controls a 45 percent stake in Hong Kong-listed Geely Automobile Holdings Ltd. (175) currently valued at about $1.8 billion. Geely’s earnings are on the rise, with analysts estimating profit to rise 24 percent to a record 2.5 billion yuan this year.

Further success in China will depend on more than setting up a local factory as the company faces heavy competition and deals with problems that have been unresolved for years, such as its brand positioning and insufficient volume for each platform said Max Warburton, a Singapore-based analyst at Sanford C. Bernstein Ltd.

“Volvo products have yet to really resonate with Chinese consumers,” Warburton said. “In recent years, it’s been more of a struggle. Mr. Li himself is out there making public statements about why that might be, they felt that the product did not yet tailor to Chinese taste.”

To contact Bloomberg News staff for this story: Alexandra Ho in Shanghai at aho113@bloomberg.net

To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net


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