1.26.2013

Volvo to take minority stake in Dongfeng

The Financial Times, January 26, 2013


Volvo FH16 750 truck

The reason for both the groups’ talk of flexibility is clear: 
the chances of an economic downturn globally are on the rise again

Volvo has agreed to pay Rmb5.6bn ($1bn) for a minority stake in the commercial vehicle unit of China’s Dongfeng Motor, creating a powerful new truck venture in the world’s biggest commercial vehicle market. Volvo said the deal would make it the world’s biggest maker of heavy trucks.

The Swedish company, currently the world’s second-biggest truckmaker, will take a 45 per cent stake in the new joint venture, which has not yet received approval from the Chinese government. The move will give Volvo a significant foothold in China, where it previously had only a minor presence.

Olof Persson, Volvo CEO, called China the “missing link” in the company’s global strategy, saying China has a total market for heavy trucks equivalent to the European and North American markets combined. “Combining Dongfeng’s strong domestic position and knowhow with the Volvo Group’s technological expertise and global presence will offer (the new venture) excellent potential for growth and profitability in and outside China.”

With European and US markets depressed by the global slowdown, truckmakers have been looking to emerging markets to boost growth and profitability. “China accounts for over 50 per cent of the global market, so foreign OEMs need to find a foothold there,” says Ivo Naumann of AlixPartners in Shanghai. But the Chinese side is taking a stronger role in these joint ventures than in passenger car ventures, he says, pointing to the fact that Dongfeng will hold 55 per cent of the venture. Dongfeng will also have four places on the seven-member board and will nominate the managing director.

Last year’s Chinese market for heavy trucks totalled around 636,000 vehicles, of which Dongfeng had a 16 per cent share. The medium sized truck market totalled 290,000 of which Dongfeng also had a16 per cent share.

Last year’s Chinese market for heavy trucks totalled around 636,000 vehicles, of which Dongfeng had a 16 per cent share. The medium sized truck market totalled 290,000 of which Dongfeng also had a16 per cent share.

Volvo, currently the world’s third largest heavy truckmaker, produced 180,000 heavy trucks in 2011 and it said the part of Dongfeng that will be included in the new venture produced 142,000 units. The two firms will form a new venture called Dongfeng Commercial Vehicles after the Chinese firm buys Nissan out from their joint venture in medium and heavy-duty trucks.

Bill Russo, head of Synergistics auto consultancy in Beijing and former head of Chrysler in China, said increasing competition in the heavy truck sector is driving Chinese truckmakers to explore more alliances with foreign manufacturers. “These challenges are pushing local brands to alter their thinking regarding the need for development and technology support from international partners”, he said.

But the new venture must still secure regulatory approval from Beijing. “The Chinese government is closing the gate for international newcomers by raising the entry barrier for new project approval,” he says. “Volvo would be fortunate to get this approved before the window closes”.