Volvo Car invests in Sweden to cut production costs

GOTHENBURG, Sweden Mon Dec 3, 2012 2:16pm GMT

People sit in a Volvo V40 car on media day at the Paris Mondial de l'Automobile, September 28, 2012. The Paris auto show opens its doors to the public from September 29 to October 14. REUTERS/Christian Hartmann

People sit in a Volvo V40 car on media day at the Paris Mondial de l'Automobile, September 28, 2012. The Paris auto show opens its doors to the public from September 29 to October 14.

Credit: Reuters/Christian Hartmann

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GOTHENBURG, Sweden (Reuters) - Chinese-owned Volvo Car Corporation will spend about half of $11 billion (6 billion pounds) of planned investment on a production upgrade in Sweden that it says will cut costs and help sales of its cars buck a market downturn.

Volvo, which Geely bought from U.S. automaker Ford Motor Co. (F.N) in 2010, highlighted the tough conditions it faces in its key market of Europe, as chief executive Hakan Samuelsson appeared to cast doubt on the timing of its 2020 sales goal.

"There is no reason to change that (the 2020 goal). But in today's situation, one cannot sit and discuss whether we will meet that in 2021 or 2019, but the goal remains, we need to be bigger and we will be bigger," he said on Monday.

The maker of premium cars said it would introduce new, simpler production methods, and only one engine size.

The plans would mark a final technological break with Ford, cut production costs through economies of scale and greater efficiency, and produce more attractive cars to lure buyers even in an economic downturn, it said.

"About half of the approximately $11 billion (6 billion pounds) investments covering the years 2011 to 2015 will be spent in Sweden in the form of infrastructure for the new vehicle architecture and engine family," said Samuelsson, who was appointed in September, when his predecessor was fired for weak Chinese sales.

The sum of $11 billion is what Volvo has said it will invest as it aims to double total sales by 2020 to 800,000 vehicles.

Samuelsson told reporters some of the investments were being funded by cash flow from sales and some from borrowings, without giving a precise breakdown.

NO POSITIVE SIGNALS

"There are no direct positive signals in the European market," Samuelsson told reporters when asked about 2013.

Western Europe's car market shrank by 7.3 percent in the first ten months of the year, data from industry group ACEA showed.

Samuelsson said it would be tough to reach break-even at the operating level this year after it posted a first-half operating profit of 239 million crowns ($35.89 million).

At the net level, it made a first-half loss of 254 million crowns. Samuelsson said the North American market was "coming back" and that China was still growing, albeit at a slower pace.

Volvo's sales fell 5.9 percent in January through October and the company has had to cut production both in Sweden and in Belgium, where it also has a plant, to adjust to flagging demand.

Peter Mertens, senior vice president of research and development, said Volvo was abandoning its Ford car architecture, which would simplify production and allow different sized vehicles to be built on the same platform, sharing some design, production, engineering and components.

"We are actually cutting off all our old technology and designing a completely new set-up so that in the end we will have one engine family and two architectures on the vehicles," he told Reuters, down from four architectures - or sets of engineered components - and eight engine families.

Volvo expects to launch the first model based on the new architecture, a next generation version of the XC90 crossover, at the end of 2014. Crossovers combine features of an estate car and a sports utility vehicle (SUV).

The bulk of the investments in Sweden will go on developing the new equipment, but plants will also be built or modified.

($1 = 6.6587 Swedish crowns)

(Reporting by Patrick Lannin; Editing by Greg Mahlich and Helen Massy-Beresford)

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