The Economic Times of India, July 30, 2017
Finally, Tesla Motors may have some competition — not just from domestic first-mover in electric vehicles (EVs), Mahindra & Mahindra, but competition of the global variety. Early this month, Volvo Cars made headlines across the world when the 90-year-old Swedish carmaker declared that it will go all electric by 2019, pulling the plug on cars with just an internal combustion engine.
“…Tesla has managed to offer such a car for which people are lining up. In this area, there should also be space for us,” Volvo Cars global CEO Hakan Samuelsson told the media. Some of those present called it a wake-up call for Tesla founder Elon Musk. With a market capitalisation of over $50 billion, Tesla’s stock fell after Volvo’s announcement.
“Volvo’s ambition has been to be a full premium brand competing with Mercedes, BMW and Audi. By leading in electrics, it may find a distinctive positioning among best luxury car brands,” says Detroit-based Michael Dunne, founder of Automotive Resources Asia.
Volvo may have Swedish roots, but its DNA has been showing ample traces of Chinese derivation ever since it was acquired by Geely Holding Group, the parent of Geely Automobile, for $1.8 billion seven years ago. Since then, Volvo Cars has been learning new tricks. The Swedish carmaker that’s earned a reputation of being conservative and safety-obsessed is visibly changing. The bit player — it sold just 5.34 lakh units as against industry sales of 88 million globally in 2016 — is now shifting gears with an eye on future demand.
EVs may well be the game-changing gambit. India is key to that transformation. For multiple reasons. The world’s fifth-largest car market today is expected to climb two notches by 2020. “Europe is not growing. China is our biggest market where we sold 1,00,000 cars in 2016. India is where China was in 2000. Nothing can stop the India market from growing,” says Tom von Bonsdorff, managing director, Volvo Cars India.
Bonsdorff is also excited about India’s EV ambitions. Shunning the internal combustion engine, the Indian government is audaciously betting on EVs to curb pollution and take a leap on transportation technology. By 2030, it wants all new cars sold in the country to electric. “The government’s EV thrust aligns with ours. India is our next growth frontier,” says Bonsdorff.
Tesla seems to be in no hurry to rush into India. In May, Musk had sought clarifications from the government on local sourcing of components on Twitter; the government was quick to point out that foreign direct investment in automobiles is not conditional on sourcing. More recently, Road Transport Minister Nitin Gadkari made a visit to a Tesla factory in the US to sense Tesla’s appetite for manufacturing in India.
Meantime, Volvo has quietly upped the ante. After a decade of a low-key existence, the company will have an assembly plant in Bengaluru ready by end 2017. Operating in the luxury car market, competing with the likes of BMW, Audi and Mercedes with its cheapest entry at a little over Rs 30 lakh, it wants to double its segment share to 10%, selling 5,000 cars by 2020. It will also boost its geographical footprint, growing its dealer network from 19 to 25 by the year end. Some 800 units of the XC90, , priced at a little over Rs 70 lakh, have been sold so far. Volvo’s most expensive model, the hybrid XC90 T8 Excellence priced at roughly Rs 1.27 crore, has received some 50 orders.
Dragon at the Door
Volvo’s India moves also gain significance due to the China factor. In 2010, reeling under the aftermath of the global economic crisis, Detroit giant Ford Motors sold the loss-making Volvo Cars to Geely, then known for making cheap, copycat cars. Since, led by Chinese billionaire Li Shufu, it has come a long way.
Geely has been on an acquisition spree – after Volvo it acquired London Taxi Company in 2013, British sports carmaker Lotus and its Malaysian parent PROTON (49% stake) and American flying car firm Terrafugia in 2017. From 4.2 lakh passenger vehicles in 2011, Geely expects to sell 1.1 million in 2017 and is targeting over 2 million unit sales annually by 2020.
Geely’s acquisition of Volvo Cars is now an HBR case study. Volvo’s financial turnaround, Geely’s deft cross-cultural handling, how it leveraged the former’s technology depth, and how it is now boldly stepping into an electric future make the duo fairly unique in global Motown.
“Geely has benefited from Volvo’s engineering experience and R&D capabilities,” says China-based Bill Russo, managing director of Gao Feng Advisory Company. Geely posted its biggest profit growth in eight years in 2016. “With Volvo, Geely immediately got access to a highly respected brand known for safety and reliability,” says London-based Colin McKerracher, head of transport analysis, Bloomberg New Energy Finance. In 2016, Geelyhad a top line of $7.79 billion and profits of $741 million.
It has been a good ride for Volvo Cars too. “Our owners (Geely) have financial strength. And that makes a big difference. Our sales and financials have never been better,” says Bonsdorff. Post acquisition, Geely has invested $11 billion in Volvo to develop new technology and R&D. The strategy seems to be working. Volvo XC90 won the North America SUV of the year award in 2016, beating BMW, Audi, Mercedes and Land Rover. “Volvo has made dramatic improvements under Geely,” says US-based Dunne.
How did Geely manage this feat? When it acquired Volvo, it largely left the latter’s management unchanged and independent with cars being manufactured in Europe. This strategy mirrors well with what Tata MotorsBSE 0.15 % did with JLR after the acquisition in 2008.
With strong foundations, Geely is now fortifying its future and global ambitions. Last month (in June), Volvo launched a separate brand Polestar to focus on high performance electric cars and take on Tesla. Last year in a joint venture with Volvo, Geely launched a new brand Lynk & Co that will focus on making next-gen cars targeted at millennials globally.
Based on a new compact modular architecture platform, in the works at Volvo for some time, it will debut in October. It plans to offer lifetime warranty and a pay-per-use subscription plan to its customers. In India, for now, Geely is looking at the top end of the market with Volvo. For a nation that suffers from poor quality perception in India, Volvo’s luxury positioning may offer the best entry point for Geely.