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CARS

‘Chinese firms too small for Volvo takeover’

Chinese car makers are too small to take over troubled Swedish firm Volvo despite the persistent rumours of an imminent bid, market analysts have said.

Despite their global ambitions, Chinese automakers are still not big enough to take over their troubled foreign rivals, analysts and company officials said.

Reports have swirled for weeks on persistent rumours that Chinese automakers are eyeing the chance to buy Sweden’s Volvo from US giant Ford Motor Co. or to take either Swedish unit Saab or American all-terrain vehicle-maker Hummer off the hands of General Motors.

The companies at the centre of the rumours, such as Geely, one of China’s largest private automakers, have repeatedly denied the reports while at the same time fanning the rumours by saying they are open to foreign acquisitions.

Such acquisitions are a route through which Geely could access capital, new markets and international partnerships, according to the car company’s website.

Analysts, however, said they do not expect to see any startling Chinese auto acquisitions in the near future.

“Compared with more than 40 billion yuan (5.8 billion dollars) needed to acquire Volvo, (Geely’s) market value is only about three billion yuan,” consultancy Roland Berger said in a research note.

“The total assets of Chery Automobile are about 30 billion yuan, with capital of three to four billion yuan and the acquisition requires about 40 billion yuan,” the firm said, listing the Chinese automakers that would be most likely to bid.

The market value of Chang’an Auto is only about 8.5 billion yuan, it added.

“I do not see any kind of possibility that a local company would acquire Volvo or Hummer. It is not realistic financially or even in terms of management capability,” said John Zeng, a Beijing-based analyst with Global Insight.

“For a number of Chinese companies, their sole experience with foreigners is their joint ventures in China. They have never operated overseas,” he said.

One exception – and one that has turned out badly – is SAIC’s acquisition in 2004 of small South Korean automaker Ssangyong, which now faces bankruptcy.

Jia Xinguang, an analyst with the China Automotive Industry Consulting and Development Corporation, agrees Chinese companies lack the necessary management experience.

“The complicated relationship between trade unions and employers in foreign companies is another problem for them,” he added.

But size is the main obstacle.

“Any overseas acquisition needs National Development and Reform Commission approval and at his time the NDRC has concerns about Chinese companies’ capacity to run such acquisitions,” said John Shen, an analyst for Roland Berger.

Late last month Chen Bin, the head of the commission, effectively warned Chinese automakers they were not yet ready to rub shoulders with international players but at the same time told them “all options were open.”

Last week, Beijing once again urged China’s crowded domestic auto sector to consolidate.

But the international opportunities remain attractive as a means to acquire the technology that the Chinese automakers need.

“They do not have strong brand technology and are still relying heavily on foreign partners. Over 60 percent of vehicle production comes from joint ventures including more than 85 percent of passenger cars,” Global Insight’s Zeng said.

“One more realistic way to go would be to go for some core assets which they need, rather than buy the whole company,” Roland Berger’s Shen said.

That could make more sense at a time when several Chinese companies, notably SAIC, FAW and DongFeng Motor Corp, want to establish their own brands.

It is a path Geely seems to have taken with its acquisition on Friday of Australian auto parts manufacturer Drivetran Systems.

Geely said the deal would improve its capability to develop and produce gearboxes, or transmission – a key technology that Chinese automakers must learn to master to be globally competitive.

The fact that Chinese automakers crave the global spotlight may mean they enjoy the attention the rumours over foreign acquisitions bring, Shen said.

“A lot of companies are taking advantage of it to promote their brand so they are not taking active measures to clarify the rumours,” he added.

VOLVO

Sweden’s Volvo regains strength after pandemic puts brakes on earnings

Swedish truck maker Volvo Group was hit by a sharp drop in earnings due to the coronavirus pandemic, but business rebounded at the end of the year.

Sweden's Volvo regains strength after pandemic puts brakes on earnings
Volvo Group CEO Martin Lundstedt. Photo: Adam Ihse/TT

In 2020, the group saw “dramatic fluctuations in demand” due to the Covid-19 pandemic, chief executive Martin Lundstedt said in a statement.

For 2021, Volvo raised its sales forecasts in its trucks division – its core business – in Europe, North America and Brazil.

However, it said it also expected “production disturbances and increased costs” due to a “strained” supply chain, noting a global shortage of semiconductors across industries.

The truck making sector is particularly sensitive to the global economic situation and is usually hard hit during crises.

In March, as the pandemic took hold around the world, Volvo suspended operations at most of its sites in 18 countries and halted production at Renault Trucks, which it owns, in Belgium and France.

Operations gradually resumed mid-year, but not enough to compensate for the drop in earnings.

With annual sales down 22 percent to 338 billion kronor (33.4 billion euros, $40 billion), the group posted a 46 percent plunge in net profit to 19.3 billion kronor (1.9 billion euros).

Operating margin fell from 11.5 to 8.1 percent.

However, the group did manage to cut costs by 20 percent.

“We have significantly improved our volume and cost flexibility, which were crucial factors behind our earnings resilience in 2020,” the group said.

Volvo's business regained strength in the second half of the year.

“Customer usage of trucks and machines increased when the Covid-19 restrictions were eased during the summer and this development continued during both the third and fourth quarters,” it said.

“Both the transport activity and the construction business are back at levels on par with the prior year in most markets.”

For the fourth quarter alone, the company reported a 38-percent rise in net profit from a year earlier.

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