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Racy? This Can't Be Volvo (Int'l Edition)


International -- Intl' Business: SWEDEN

RACY? THIS CAN'T BE VOLVO (int'l edition)

In the sleepy seaport of Goteborg, Volvo's head office perches serenely atop a hill dotted with swaying pines. From his window, Chief Executive Soren 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 completely undone the diversification strategy of his predecessor, Pehr Gyllenhammar. Some $6.5 billion in assets, from an investment bank to a brewery to stakes in food, beverage, and drug companies, have gone 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 trademark boxy look.

TOO FAR. 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 marketing and development expenses forced first-half margins down in autos, from 4.3% to 3.7%. That weakness could really hurt once auto markets sag and a strengthening krona dampens exports. Some investors now wonder if cars will ever match the stellar returns of the truck division.

Soren 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. While it took 10 years to produce the 800 series, lead time on new models is now down to two years. The auto maker has also learned to stretch the number of models it can produce from the same platform from one to four. And today's profits are preferable to the $1 billion in losses Volvo sustained from 1990 to 1993, as it finished developing the 800 series in the teeth of a global recession. By yearend 1996, the company should have $4 billion in cash.

Gyll wants all of his critics to wait and see if a revamped Volvo can boost annual auto sales 40%, to 500,000, by 2000. Already the 850 model, which features side air bags and comes in a turbo version with faster pickup than a Ferrari, has boosted Volvo's share of the U.S. luxury market a percentage point, to 8%.

Then there are the new models. Later this year, the S4, a $27,000 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. Car buffs love the S4 design by Britain's Peter Horbury, who also shaped the curvy contours of the new Jaguar XJ220. Horbury has used convex sides and a low grille to give the S4 a retro look that recalls the Volvo P120 model of 1956, now a favorite of collectors such as retired U.S. General Colin Powell. "There will be no more boxes," says Horbury.

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 Per-Erik Mohlin, president of Volvo Car Corp., had promised. According to a company insider, some senior executives at headquarters felt the smaller, high-performance S4 would undermine the company's "safety first" image in the U.S. and drive up marketing costs.

Some think the controversy cost Mohlin, a rising star at Volvo and Gyll's heir apparent, his job. In September, Gyll removed him and made him a technical adviser to the board. A company spokesman says the board needed the counsel of a seasoned car engineer.

HAM-HANDED. Volvo has stubbed its toe on trivial matters as well. The S4 compact, for example, is due for a name change even as it goes into launch. Volkswagen, which provides diesel engines for the S4, has complained that the moniker is too close to that of the new A4 from Volkswagen's Audi division. The A4 and S4 will even be competing for the same customers. Embarrassed Volvo officials are searching for a new name.

Such ham-handed moves do nothing to calm Swedish shareholders. They opposed the Renault alliance, but their worries aren't over. Says Lars-Erik Forsgardh, managing director of the Swedish Association of Small Shareholders: "The downturn in margins caused some distress, and 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, which overall has risen 15% this year. Another concern: "I would like to see Volvo with a new partner, someone who can share those heavy [development] costs," says Barclays de Zoete Wedd Ltd. European auto analyst Philip Ayton.

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. The joint ventures make use of specially trained teams that switch from model to model, depending on what's coming down the line. 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. The plant is one-third owned by each, with the Dutch government also owning a third.

"RATHER BRAVE." Another alliance is with Britain's TWR, the sports car maker that recently built the limited edition Jaguar XJ220 and designed the new Aston Martin. TWR will produce a coupe and convertible, using the 850 platform, out of an ultramodern plant in Uddevalla, Sweden, that Volvo shut down in 1994 to cut capacity. "It's rather brave what they're doing--putting the manufacturing out to contract. They own just the production concept and the distribution," says John Lawson, an analyst with DRI/McGraw-Hill. More partnerships are expected. Says Albert R. Dowden, president of Volvo North America: "We're in a position where we can look around the entire world."

A year ago, Volvo also flirted with the idea of a hookup with Chrysler Corp., but the negotiations broke off as soon as Volvo realized Chrysler had more of an acquisition than a partnership in mind, says one source. Gyll certainly doesn't want his company to be another corporation's pawn, especially with Volvo selling cars as fast as it can make them. But only Volvo's performance in the next recession will prove Gyll's ability to escape the attentions 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 Heidi Dawley in London and Keith Naughton in Detroit


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