Volvo Rolls on in China (Part 2)

Saturday, May 5, 2007 6:31
Posted in category Uncategorized

Following up on out post a couple weeks ago, Volvo Rolls on in China, I found this interview of Volvo China President Joakim Hjerpe entitled Keep on Trucking in the May edition of Eurobiz Magazine (EU Chamber of Commerce publication).

Through the interview, a few interesting things came through on the local market in the following three questions

EB: How can you compete with local truck makers?

JH: We’re at the upper end of the market. The local truck makers are getting better faster than most people expected, but we compete on quality and value. Our main competitors are Western companies. Chinese buyers are gradually coming around to accepting that price for value. China needs better trucks and more efficient logistical systems. This is in line with its policy for a sustainable economy. What you have in China today is a fantastic road network. But the logistic costs are too high. They’re something like 21 percent of China’s total GDP. It should be about 10 percent, like in Europe, so the logistics sector here is not too efficient. The technology of local trucks and the way the trucks are used on the road is inefficient and it’s wasteful. China has the chance to have an efficient logistics system, but they have the road network and in order to utilize that network you need trucks with high average speeds and good service life and fuel efficiency and we believe you need modern trucks and engines.

EB: Are Chinese truck operators willing to pay for quality?

JH: About 70 percent of China’s GDP is accounted for by imports and exports. So even though China has built great roads, the transport system on them is really inefficient. And I think truck operators see us as a good-value option because Volvo trucks have longer service life and higher speeds and they’re more fuel-efficient, so in the end they work out a better deal than a lower-quality and cheaper truck.

EB: How many trucks did Volvo import last year and how large is the market?

JH: We imported about 1,200 trucks. Some people say the market for trucks could reach 500,000-600,000 unit sales a year. But it should be better, not just more, trucks that China wants.

At only 1200 trucks, Volvo is capturing a fraction of a fraction of the market, so it is no wonder that they are looking to enter the low/ medium market (see Volvo Rolls on in China).

Following this, it only makes sense that Volvo will continue to see increased sales, however I am not convinced that operators are coming around just yet. After all, the majority of operators as independent drivers who own 1.. maybe 2.. trucks, and the investment in one truck by Dong feng or FAW is all they have.

So, Volvo will have to find a way to overcome the fact that they are 2+x the price.

At the same time, as discussed in Volvo Rolls on in China, Volvo’s service network is also in a poor competitive position as their service centers are still few and long haul operators will resist using a truck that doesn’t have the repair center network in place.

All that said, it is the next two questions that I found most interesting

EB: Do you have any plans for more joint ventures with local manufacturers in the truck business?

JH: We’re in discussions with Dongfeng on a possible co-operation in the heavy and medium-duty commercial vehicle business and their engine business. We’re always on the look out for a good partner but Dongfeng looks the best bet for now. We started talking at the end of last year with the Chinese authorities on the future possible cooperation. Any deal will be subject to approval by the authorities.

EB: Will you build for export?

JH: No, that’s not our plan.

Again, going back to Volvo Rolls on in China, this venture will be to support a product that hits on the middle/ low end market and increases sales from a few thousand into the tens of thousands.

On a final note, Hjerpe’s answer to the question What are the priorities for you as a group in terms of European Chamber lobbying activities? was also quite interesting, and leads me to believe that we are going to be writing a lot about M&A in the future:

Probably the limitation on foreign investment in joint ventures. There have been strict restrictions on foreign investors for 20 years now that means you can’t own any more than 50 percent of a local joint venture. It would be a lot more productive for local and foreign brands if they were not locked into 50-50 joint ventures. There is also a limit that means foreign investors can only invest in two passenger cars and two commercial vehicle joint ventures and this is prohibiting consolidation and a more mature market. If foreign brands are allowed to pursue their own strategies it will make the overall industry more competitive and innovative.

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One Response to “Volvo Rolls on in China (Part 2)”

  1. Vladimir says:

    December 21st, 2007 at 3:44 pm

    The Volvo Group is expanding heavily in China and Asia but the fact remains that they do not have any products, sales or revenue to support the investments. Recent acquisition of Nissan Diesel helps a bit but we are still not talking about a life saving product.
    Volvo China Investment Company including the Asian office are spending millions of dollars every year supporting all the expatriates they have sent to China. While at the same time they skimp on the salaries of the non expatriate staff regardless of their skill level and capabilities. It is basically one big bubble which is bound to burst at some stage. It is unbelievable that the Volvo Group does not see that this is not a sustainable business. It never has been. The P&L has looked terrible ever since the start.