Swedish brand says deal will make
it global sales leader
China's Dongfeng Motor Corp and
Sweden's AB Volvo recently agreed to form a joint venture to produce medium and
heavy-duty trucks carrying the Dongfeng nameplate for sale in both domestic and
overseas markets.
According to the agreement,
Dongfeng will own 55 percent of the venture, while Volvo will pay about 5.6
billion yuan ($903 million) for a 45 percent stake.
The new venture, Dongfeng
Commercial Vehicle Co, will have seven board members, four appointed by the
Chinese partner and three by Volvo.
China's second-largest auto group,
Dongfeng sold more than 3 million vehicles last year, including more than
205,000 medium and heavy-duty trucks, making it the biggest domestic
manufacturer in the segment.
The group's medium and heavy-duty
truck unit was previously part of its partnership with Nissan Motor Corp. The
large Sino-Japanese joint venture also produces passenger cars and light-duty
commercial vehicles.
The recent agreement calls for
Dongfeng to buy out Nissan's share in the truck unit and transfer a 45 percent
stake to Volvo.
Dongfeng President Zhu Fushou said
the "strategic alliance" with Volvo will help the company quickly
improve its research and development capability and accelerate its entry onto
international markets.
"We will jointly develop new trucks,
new engines that can meet the latest emission standards, as well as
transmissions, all under the Dongfeng brand," Zhu said.
"Dongfeng and Volvo will share
resources in suppliers, manufacturing and international sales to achieve the
best synergy," he said.
The company said the new venture
will retain the former production facilities in the central province of Hubei,
the home base of Dongfeng.
Familiar partners
Volvo and Dongfeng are actually not
new partners. They already have a joint venture in Hangzhou, Zhejiang province
that makes chassis for big trucks and buses. Dongfeng started the joint venture
in the 1990s with Japan's UD Trucks, which was acquired by Volvo in 2007.
Both companies said their
cooperation in Hangzhou works well, which led to the "further step"
in the latest agreement on trucks.
Still pending government approvals,
the transaction is expected to be completed in 12 months, according to a
statement from Volvo, which said the partnership will make it the world's
biggest heavy-duty truck maker in annual sales.
"With this agreement in place,
we take a crucial step toward reaching a number of our key strategic objectives
such as size and growth in Asia," said Olof Persson, Volvo's president and
CEO.
"China is the world's largest
market for heavy trucks, equivalent to the European and North American markets
combined," he said.
Market data shows that sales of
heavy trucks in China last year totaled about 636,000 units, the lowest number
in the past three years.
LMC Automotive forecasts that with
more investment likely this year, China's heavy-duty truck sales might see a 10
percent increase to more than 700,000 units. IHS Automotive projects a bounce
back this year as well, but by about 6 percent.
In addition to Dongfeng, almost all
major truck makers in China have formed joint ventures with foreign partners to
improve their technological strength. China National Heavy-duty Truck Corp
(Sinotruk) has partnered with MAN, Jianghuai Automobile Co with US company Navistar,
and Bejing-based Foton with Daimler.
The new partnership with Volvo will
help Dongfeng meet more stringent safety and environmental requirements and
differentiate itself in the Chinese market with advanced technology and vehicle
features, said Bill Russo, senior advisor of Booz & Co.
Mutual benefit
"More importantly, it gives
both Volvo and Dongfeng the opportunity to develop capabilities that are going
to be relevant to other markets, not just in China," he said, "There
is mutual benefit."
Wayne Xing, veteran industry
observer and chief editor of the China Automotive Review, agreed that
"it's a good opportunity for both partners".
"Dongfeng needs a partner to
achieve its ambition to become the third-largest commercial vehicle maker in
the world, and for Volvo, there is no market other than China that can
significantly increase its sales and profit," he said.
One of the world's leading truck
makers, Volvo has been longing to participate in the vast Chinese market, yet
its effort with Sinotruck was unsuccessful.
The joint venture established in
2003 made Volvo trucks, which proved to be too expensive for the market to
accept. It was dissolved in 2009 following sluggish sales and disagreements
over management.
After its painful experience with
Sinotruk, Volvo has changed its strategy with the new joint venture to adapt to
the Chinese market. In the new venture, Volvo agrees to take a minority share
and produce local brand vehicles.
"They (Volvo) did learn that
it's always difficult to control a partnership of any kind whether in China or
anywhere else," said Russo at Booz & Co.
The company has also learned that
trying to produce a Volvo truck for China is "not realistic from a market
standpoint," he said.
Roman Mathyssek, head of global
truck research and advisory at IHS Automotive, said that after the first joint
venture, "Volvo will be more patient with Dongfeng, and it will need to
understand that Dongfeng has an interest to expand to other markets as
well".
"In our view, the most
critical element for the long-term success of the venture will be how the two
companies plan to divide the sales and responsibilities in other emerging
markets," he noted.
