How Volvo plans to stay single - Volvo Motor Co. president Leif Johansson's management strategies - Company Profile

Automotive Industries, July, 1998 by Richard Feast

President Leif Johansson outlines his strategy -- add product and move into Asia and central Europe.

Every time there's a merger-mania discussion, Volvo is gobbled up by somebody. No one seems to think the tiny Swedish company will be able to stand alone. For one thing, it doesn't have the economies of scale of its rivals in the passenger car sector. Volvo made 387,400 cars last year -- or about a plant and a half's output if you're measuring traditional U.S. facilities. That's a small increase over 1996, but below the level of the late 1980s. Mercedes-Benz and BMW, meanwhile, were in the 700,000 units/year level.

Volvo also has no big brother to act as a protector. Meanwhile its competitors have forged some strong links -- Audi and Volkswagen, Jaguar with Ford, and Saab with General Motors.

The answer for Volvo, according to Group President Left Johansson, is "to stay out of what everyone else is doing simply because we cannot compete with their volumes."

Volvo's strengths extend beyond being just an automaker, stresses Johansson. It is among the world's leading producers of heavy- and medium-duty trucks and buses, and has good positions in the marine engine and construction equipment fields.

Johansson, 46, is a newcomer to the automotive business. He was CEO of Electrolux, the home appliances group, before joining Volvo last year. His strategy, in part sketched out by his predecessors, is to enter the next century with two basic car platforms and annual sales volumes of half a million. That would mean lifting Volvo car sales by 10% a year for at least three years -- something never previously achieved. It will be tough given that one of the regional targets for growth is Asia.

The priority is to fill under-utilized production lines at Volvo factories in Sweden, Belgium and the Netherlands. Johansson says Volvo will not even consider another production center in North America within the next three years. (It has a CKD car plant in Halifax, Nova Scotia, and heavy-duty truck operations in Dublin, Va., and Salem, Va.) "We are already very large in manufacturing in North America, both in trucks and buses and in construction equipment and marine engines," he insists. "The only product that we do not manufacture in North America is cars."

The new 80-series, unveiled in Sweden at the end of May, will be a key element in the push for higher volumes. So is the decision to sell the 40-series, a joint venture with Mitsubishi, in the U.S. beginning in 1999. Johansson has targeted two regions in which he feels Volvo is under-represented: central Europe, Where he plans a fivefold increase in sales to $2 billion by the end of 2000, and Asia, where he wants to double sales to $4 billion over the same period.

Overall, these actions should generate the 5% to 7% operating margins necessary to fund the next generation of cars, he says.

Unfortunately, last year's progress on margins (4.6% compared with 2.4% in 1996) slipped in the opening quarter of this year in the wake of the Asian crisis. That gave shareholders the jitters, though the group is solidly profitable, thanks to disposals of non-core businesses over recent years. These left Volvo with cash reserves in the region of $2.4 billion -- a sum that would be handy for shareholder disposal if Volvo was subject: to a hostile takeover bid.

The group made a net profit of $1.3 billion on sales of $23.9 billion last year. However, Johansson says he would like to "use the billions to make strategic acquisitions or to improve our relative positions, but not to use them in the normal operating business. That's why we are so focused on reaching the 5% to 7%." At that point, he says it will generate enough cash flow to fund both the R&D and the capital investments needed for future generations of cars.

And if that happens, perhaps the little Swede can stand alone.