Chinese carmaker Geely purchased Volvo from US automaker Ford earlier this year at a cost of US$1.8 billion. The business logic seems straightforward: Combine cheap Chinese manufacturing with a known Western brand, distribute the product and count the money. Is Volvo set to take a bite out of German premium automakers’ market share in China?
“[Volvo] has a good product, good brand equity, and it will probably come in at a price tag below the German guys,” said Arndt Ellinghorst, London-based head of automotive research at Credit Suisse, an investment bank. “I definitely think that Volvo could be a serious premium competitor.”
Mei Songlin, Asia Pacific general manager at JD Power and Associates, an auto research company, says that Geely’s plans for the brand are particularly aggressive, including boosting its car sales to 200,000 units a year by 2015, up from a paltry 39,000 last year. To achieve that goal, it has announced plans to boost local production capacity and increase investment in research and product development.
Combined with Geely’s strong China distribution network, Mei reckons that Volvo stands a good chance of reaching its goal: 20% of China’s coveted premium car market.
However, while good distribution can serve strong demand, it cannot create it. And Chinese premium car buyers have demonstrated an imperious indifference to price. Volvo needs to either create a luxury brand in China that is distinct from its image in other markets, or wait for the arrival of a Chinese version of the Western soccer mom, Volvo’s most lucrative segment. Either strategy will be tricky. Volvo’s old values of safety and performance over design and status have yet to gain much traction in China – and they are losing traction in the West. Subaru’s Outback series of station wagons took a substantial chunk of Volvo’s market share in the ‘90s. (Interestingly, there are rumors that Geely is preparing to form a joint venture with Subaru in China.)
As for reinventing Volvo’s image, it’s not so easy any more. China once was once a place for weak foreign brands to re-market themselves. But Chinese consumers are wising up.
“Information and market knowledge is so global now that Chinese consumers are bound to see what practices luxury consumers have in other markets,” said one industry analyst following Volvo, who asked not to be named.
He noted that across the luxury goods market – from perfume to clothing to vehicles – globalization has diluted regional variations in taste. “When you have the free flow of information like what we have now, what’s popular in other markets is bound to be popular in China.” In other words, to convince Chinese people it’s gone premium, Volvo may need to convince foreigners first.