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Racy Cars? This Can't Be Volvo


International Business: SWEDEN

RACY CARS? THIS CAN'T BE VOLVO

In the sleepy seaport of Guteborg, Volvo's head office perches serenely atop a hill dotted with swaying pines. From his window, Chief Executive Suren Gyll peers down at Volvo City, a vast and orderly manufacturing complex where Volvo's cars, trucks, and buses are turned out.

This placid setting gives no hint of the turbulent times Volvo has been going through. In the two years since he killed a planned merger with France's Renault, the 54-year-old Gyll has put some $6.5 billion in assets, from an investment bank to a brewery, on the block. Gyll is using the proceeds to produce a new car model every year for the next five years, sleeker and faster versions that break away from Volvo's boxy look.

STELLAR RETURNS. But going back to Volvo's basic business hasn't settled the nagging question of the company's future, despite strong sales that should come in this year at $26 billion, and a surge in estimated pretax earnings to $2 billion. Some company veterans think the new models stray too far from Volvo's core image. And many shareholders were dismayed by first-half results. Thanks to strong exports and a weak krona, operating profits did spurt 34%. But unexpectedly high expenses forced first-half margins down in autos, from 4.3% to 3.7%. That weakness could really hurt once auto markets sag. Some investors wonder if cars will ever match the stellar returns of the truck division.

Suren Gyll isn't satisfied with Volvo's performance either. "It's not good enough," he says flatly. But, he points out, progress is being made. After asset sales, Volvo will have $4 billion in cash by yearend 1996. While it took 10 years to produce the 800 series, new models now take two years.

Gyll has also set a goal of boosting annual auto sales 40%, to 500,000, by 2000. Already the 850 model, which features side air bags, has boosted Volvo's share of the U.S. luxury market a full percentage point, to 8%. Then there are the new models. Later this year the S4, a $27,000 curvy midsize compact, debuts to compete against Audi, BMW, and Mercedes in Europe. A four-wheel-drive sedan, a convertible, and the first two-seater coupe in 25 years will follow over the next two years. A sports utility vehicle is on the drawing board.

Yet inside the company numerous rows have broken out over this new direction. A company source says brand managers, called the "image police" internally, fret that the designers, interested in speed and performance, risk alienating Volvo's loyal base of customers, who want safety and environmental friendliness in a car.

One sign of this conflict surfaced in the U.S. Dealers eager for new products recently were surprised to learn that they won't be getting the new S4 compact as promised. According to one insider, some senior executives felt the smaller, high-performance S4 would undermine the company's "safety first" image in the U.S. as well as drive up marketing costs. A spokesman says selling the S4 in the U.S. just wasn't economically feasible.

NOTHING DOING. Meanwhile the Swedish shareholders who opposed the Renault alliance are still worried. Says Lars-Erik Forsgardh, managing director of the Swedish Association of Small Shareholders: "We would like to see a more aggressive dividend policy. The company has accumulated so much cash, it has become a huge target for a raider." Volvo shares have languished at about $22 on the Stockholm exchange. Another concern is that Volvo still needs a partner to share development costs.

Nothing doing, says Gyll. "Mergers are one hell of a job," he states. But Volvo's not going it alone, exactly. It's forming mini-alliances on specific projects. In a plant in the Netherlands, for example, the same teams produce Mitsubishi Motors Corp.'s Carisma and Volvo's S4, using the same platform. Another alliance is with Britain's TWR, the sports car maker that recently built the limited edition Jaguar XJ220. TWR will produce a coupe and convertible for Volvo, using the 850 platform.

These limited deals make sense to Volvo, as Gyll certainly doesn't want his company to be another corporation's pawn. But only Volvo's performance in the next recession will show if Gyll can escape the attention of the auto giants and bring his grand plans to fruition.

Volvo's New Strategy

FOCUS ON CARS

By yearend 1996, Volvo will have sold $6.5 billion in assets, including stakes in Hertz, Pharmacia, and Renault. Volvo will be left with cars, trucks, and construction equipment.

MAKE MORE MODELS

Volvo wants to broaden its appeal with a four-wheel-drive sedan, a coupe, a convertible, and maybe a sports utility vehicle and minivan.

PRODUCE MORE FLEXIBLY

Volvo is outsourcing more of its cars, including diesel engines and transmissions. And redesigned plants can produce four models on the same production line.

DATA: COMPANY REPORTSBy Paula Dwyer in Guteborg, with Keith Naughton in Detroit


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