Volvo Feeds Another $11 Billion into its Bleeding Cash Box
Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A friend of mine is a Volvo connoisseur. He can tell you the problem behind a nasty sound, can tell you when your engine and transmission will likely fail depending on the year, and knows how much it costs to replace those annoying little lights in the dashboard that have a tendency to go out (it’s up to $600, mostly labor for pulling out the entire steering wheel).
He also cautions his friends to only buy Volvos made in 1998 or before. Why? Because Ford (NYSE: F) bought Volvo in 1998. The last year of the authentic, box-shaped Volvo is 1997, and 1998 saw Ford tweaking the exterior to make it more aerodynamic. But more importantly, Ford began messing with the drive train in 1999.
This is significant because Volvo knew how to make amazing cars (my friend’s 1998 Volvo 850 is still running strong on the original drive train with 185,000+ on the body). The keyword here is knew. Once Ford acquired Volvo, the company became “Americanized,” which is synonymous with low-quality.
For proof simply look to General Motors (NYSE: GM), who declared bankruptcy and needed to be purchased by the US government. Hence it became Government Motors. Why did GM fall into such a slump? Because its car quality fell far below that of its competitors, mainly Honda and Toyota (NYSE: TM). Just take a look at Craigslist.com and see how many used cars from the '90s are listed for sale. Most of them will be foreign.
In fact, I actually remember where I was when The Wall Street Journal announced that Toyota had overtaken General Motors as the top car manufacturer on the planet. It was a sad day for America.
On the positive side, however, General Motors is making a rebound. Toyota and GM have been battling for the title as the world's largest auto maker. GM regained the title earlier this year before Toyota scrapped to win it back. For the first half of the year, Toyota sold 4.97 million cars to best GM's 4.67 million.
The saddest part, however, is seeing a wonderful car company hampered by American car manufacturers. The Ford acquisition was a stepping stone that led Volvo to be resold to the Chinese Zhejiang Greely Holding Group in 2010. Since the sale, the firm has tried to reverse Ford’s changes but has been unsuccessful.
Fierce Competition
Volvo’s chief competitors -- Volkswagen (NASDAQOTH: VLKAY), BMW, and Daimler, which owns Mercedes -- have all experienced record sales in 2012. Many of the sales came from purchases in the United States, which is still recovering from the recession, and China, which is one of the key markets that these foreign autos are targeting.
However, the competition’s success was Volvo’s loss. Volvo had a sales decline of 5.2% through August, and it posted cash outflows of $338 million through July. Moreover, Volvo lost sales in China, which is supposed to be one of the company’s growth markets. According to one analyst:
My understanding is that the premium group, consisting of Mercedes, BMW, Audi, has been represented in China for a longer time than Volvo, and that they've made an impression on Chinese people. The group of Chinese who can afford to buy a car today…are perhaps looking past Volvo at more established brands instead.
Also, Volvo’s sales collapsed 10.7% in Europe, mainly the result of Europe’s economic woes, and 1.1% in the US. For comparison, Daimler boosted year over year sales 11.3% last month.
Volvo’s Plan
To reverse this trend, Volvo will invest in new technologies and in two new factories in China. First, this is strong because Volvo is still known as one of the world’s safest cars. If the firm can add “reliable” or “next-generation” to that label, the company may be able to boost sales. Also, building new Chinese factories is wise.
The analyst quoted above believes that Volvo suffered in China because the Chinese are less familiar with the brand. Building two factories and employing Chinese workers at those factories will be a strong improvement. Also, Volvo is able to escape its high costs of production because most of the firms’ factories are in Sweden – and the Krona is significantly stronger than other currencies.
To accomplish these goals CEO Stefan Jacoby plans to spend $11 billion over five years. The gamble is dicey – Volvo is already bleeding cash at a time when it needs stability – but perhaps this risk-taking is exactly what the company needs.
On the personal side, I do hope that Volvo’s bet pays off in the next few years. And so does my friend. He’ll need a new Volvo in a few years.
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ChrisMarasco has no positions in the stocks mentioned above. The Motley Fool owns shares of Ford. Motley Fool newsletter services recommend Ford and General Motors Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.
