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Volvo’s Dongfeng truck JV, Trojan horse, a springboard or a curse?
AID Newsletter Editorial 1302 from Peter Schmidt - February 05th 2013
Published: Tue, 05th February 2013 13:14:10 GMT

Volvo Dongfeng truck agreement

Open quote signUnlike China’s huge car market, which remains dominated not only by western designs, but also by leading Western carmakers like Volkswagen Group, GM or Hyundai-Kia, China’s truck market has remained almost entirely a domestic affair.

China’s significance is underlined by the fact that its heavy truck market is now more than twice the size of West European and US sales put together.

So given that heavy truck demand in these two mature regions is already at or near saturation, it comes as no surprise that of late Western truck makers’ eyes were firmly focused on the untold opportunities to be had in China’s heavy truck market.

Little wonder then that last week Sweden’s Volvo said it had signed a JV agreement with China’s Dongfeng for a 45 per cent stake in Dongfeng’s commercial vehicle operation.

A great deal can be read into that deal.

On balance, and apart from the fact that that move has probably crowned Volvo as the world’s leading heavy truck maker, bringing with it untold future economy of scale benefits for both partners, critics also fear that potentially Volvo stands to lose more than it can gain.

Unsurprisingly, siren warnings suggest that Dongfeng’s truck arm will evidently milk its new partner for everything it’s got.

That’s chiefly Volvo truck’s cutting-edge technological know-how, comprising cab, chassis, engine, gearbox and safety technology, to name but a few key areas.

Some will go further, saying that ultimately Volvo’s exemplary global truck sales and service network - the absolute key for entry into any sophisticated truck market - could be turned into a fast-track route to both sell and service ‘cheap’ Chinese trucks in leading western markets.

In short, the danger is that Volvo’s likely technology and truck platform sharing, supported for good measure by Volvo’s five-star dealer and service network, may cannibalise future sales of Volvo’s own trucks in many, if not all its established main markets.

No doubt, these fears and risks are real. Particularly if, as China’s Geely has already illustrated with its acquisition of the Volvo car brand, Dongfeng will take the helm after first swallowing Volvo’s truck brands during future years.

None of that is far-fetched in the least.

However, if history is any guide, these same arguments and reservations were no doubt raised following the slam-bang pace of joint ventures between western carmakers and their know-how seeking Chinese partners.

In the event, following a great deal of initial heart-searching at Volkswagen Group, which was first to set up shop in China with local Chinese partners, Volkswagen Group’s commercial fortunes have been lifted into new stratospheric heights, thanks in large measure to their mutually beneficial Joint Ventures with their Chinese partners.

In effect, and apart from untold volume sales gains, their joint ventures in China have proved most rewarding in almost every sense.

A case in point, earlier last year Bernstein Research alleged VW was using massive profits from its still highly profitable China business to subsidise a price war to relentlessly build market share at the expense of its weak competitors in Europe.

More of this same happy tale, China is thought to have generated about 30 per cent of Audi’s profit in 2010, and almost half of BMW’s in 2011.

Given their markedly richer recent sales mix in China, the profit story for last year was probably better.

On balance, and notwithstanding the undeniable risks, Volvo trucks’ bigwigs were right to seek out and sign up a commercial vehicle based JV deal with Dongfeng.

What counts is making acceptable future profits and if any major JV deal promises to deliver that, decision makers should go for it and grab it.

If, on the other hand, part of the group cannot do that, it should be disposed of.

That’s exactly what Volvo’s top decision makers did back in early 1999 when Volvo’s car arm was offloaded to Ford for $6.45bn. Leif Johansson, Volvo Group’s chief executive at the time, was then reported as saying that Volvo’s car offshoot was sold because it lacked increasingly vital critical mass, sufficiently high profit margins and resources to remain competitive in the long term.

The Dongfeng tie-up, on all these counts, potentially fits Volvo Trucks’ business case in almost every sense.

But Volvo should wise up to the life-preserving necessity to keep a close eye on its Chinese partner’s manoeuvring at all times.
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