Volvo Cars Makes Largest Ever Job Cull Amid Rumours of Sale to China's SAIC

Desperate Times Call for Desperate Measures

Volvo Cars has announced the culling of 2,000 jobs worldwide—equivalent to 8% of its 25-000 strong global workforce—which is the most drastic ever lay-off scheme in the Swedish carmaker's history. 1,400 of the losses will be white-collar jobs, 500 of which will be consultants, whilst 600 blue-collar workers will also be laid off through the earlier-announced cutting of the third shift at its Torslanda plant in south-western Sweden. As a result, production of the V70 and S80 passenger cars and XC70 and XC90 sport utility vehicles (SUVs) will be reduced. Most of the white-collar cuts will also come from Volvo's Swedish workforce with over 1,000 workers from the company's Gothenburg headquarters to lose their jobs. That leaves around 300 jobs to be cut from Volvo's overseas operations. Volvo says the measure forms part of a wider 4 million kronor (US$662 million) cost-reduction programme.

The Ford-owned carmaker blamed the decision on a number of factors. "Negative currency effects, mainly due to the weak U.S. dollar, and increasing raw material prices, have for a long time had a significant impact on Volvo Cars' financial situation," it said in a statement. "Previously, this had been balanced with the help of cost reduction and efficiency programmes. However, with a continued declining U.S. market, continued price increases on raw materials, and weaker market conditions in Europe, the situation has deteriorated." Consequently Volvo posted a loss of US$151 million for the first quarter of 2008 compared with a year-earlier profit of US$94 million.  

Fredrik Arp, President and CEO of Volvo Car Corporation said in the statement: "This is an unfortunate but necessary action if we are to achieve a better financial position. We must tackle the difficult market conditions, most of all in the U.S. market. The U.S. market contribution to cover Volvo Cars' costs is very small," he said.
 

The purpose of these actions is to return to profitability, Volvo says. Noting its existing growth strategy in markets such as Russia, China and Eastern Europe, it stresses that it will also maintain a strong focus in the established European markets. For the United States, a selective strategy will be used in order to ensure improved profitability, it says. This is believed to include the closure of one-fifth of its North American dealerships as sales slide in the region. Whilst Volvo once targeted North American sales of 200,000 cars by 2010, sales have been reduced to around the 90,000 mark.

Rumours Circulate about Sale to Chinese Company

Adding to the uncertainty faced by Volvo's Swedish workforce right now are rumours that the brand is being prepared for sale to a Chinese carmaker. As reported by Automotive News Europe, Swedish newspaper Dagens Industri has said that Ford is already in negotiations with a Chinese vehicle manufacturer. Although that company has not been named, some media outlets have speculated it to be China's largest carmaker Shanghai Automotive Industry Corp. (SAIC), the owner of failed U.K. carmaker MG Rover. Dagens Industri also claims that a Russian investor is interested in acquiring the unit.

Speaking to Automotive News Europe, a Ford spokesperson categorically denied the rumours: "We have been consistently saying since the end of last year that Volvo is not for sale. We are focused on improving Volvo's business results."

Outlook and Implications

Although all carmakers are grappling right now with an environment of massive increases in the price of raw materials and diminishing U.S. and European demand, Volvo is being hit harder than many of its rivals in the absence of a U.S. manufacturing facility. The United States is Volvo's largest market but exporting cars trans-Atlantic from Sweden has become a deeply unprofitable business.

Ford's position on Volvo is confusing. In the last year, Ford has publicly said that having conducted a strategic review, it has decided not to sell Volvo after all and will instead give it more independence. However, rumours persist that, privately, Ford Chief Executive Officer (CEO) Alan Mulally favours the sale of Ford's last remaining premium brand. Meanwhile, Kirk Kerkorian, who is Ford's latest major shareholder, has made his views clear that Ford should sell the Swedish car-maker which it acquired for 50 billion kronor at the end of the last decade.

It should be noted, however, that any sale of Volvo would be far more complicated than the sales of Ford's other European upmarket brands of Aston Martin, Jaguar and Land Rover in the last 18 months. Volvo's products are much more deeply integrated into Ford's global portfolio than the three U.K. brands ever were. As well as allowing amortisation of expensive platforms over incrementally more volume, globally, such integration would make the extraction of the brand an extremely intricate and costly process.

Another, more simple, reason for Ford not to sell Volvo right now is the extremely bad timing, with the current credit market possibly preventing the company from dropping the carmaker due to anticipated inability to find adequate financing for a buyer. Of course this is way the world goes; times are hard and so Ford has to think about selling Volvo. However, because times are hard buyers will inevitably be in short supply.

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