May 18, 2017 5:04 am JST

Volvo stepping on the gas with high-end Chinese exports

S90 sedan the first to benefit from lower production costs in global realignment

AKIHIDE ANZAI, Nikkei staff writer

Volvo Cars' plant in Daqing will hew to the same quality standards its European factories do.

TOKYO -- Volvo Cars will soon start building a top-of-the-line sedan in China for export to Europe and elsewhere as part of plans to make the Asian manufacturing powerhouse the linchpin of its global production strategy.

The luxury automaker, owned by China's Zhejiang Geely Holding, will shift output of the S90 from its home market of Sweden to a factory on the outskirts of Daqing, Heilongjiang Province, starting with the summer 2017 model. Production could begin as soon as mid-May.

"China will play an increasingly important part in our global manufacturing ambitions," Volvo Cars CEO Hakan Samuelsson said in a statement when an upgraded S90 for China was unveiled in November. The carmaker's plants in the country "will deliver world-class products for export across the globe in coming years," he said.

Adding assembly lines for the S90 is part of a broader expansion at Daqing. The facility can now build an annual 80,000 autos, turning out vehicles including China-specific sedans. Plans are to raise the figure above 150,000 by 2020. Total production capacity at the Daqing plant and a Chengdu factory will rise from 200,000 units today to 300,000 units over the same period.

Volvo has brought in veteran Belgian engineers from a main European plant to give Chinese technicians in their 20s intensive training in the Volvo Car Manufacturing System, a set of standards for everything from the angle of a bumper to the correct sequence for assembling parts under the hood.

New home

Geely acquired the Swedish company from Ford Motor in 2010 for $1.8 billion and is supporting a global overhaul of Volvo's operations, with a particular focus on expanding the automaker's footprint in the parent's home market. Volvo made 16% of global sales, or 80,000 autos, in China in 2015. Worldwide sales hit 500,000 units for the first time that year and rose to 530,000 in 2016.

Increasing production in China and turning the country into a base for exports is the critical next step in Volvo's global plan. Of the 300,000 autos its Chinese plants will able to churn out in 2020, up to 100,000 will be shipped abroad. In contrast to the many manufacturers export lower-end compact cars from China to such markets as Africa and Southeast Asia, Volvo will be among the few manufacturers using the country to export high-end vehicles.

While the Swedish automaker will incur higher transport costs under the new plan, realigning global production of various models will help hold down production expenses overall, said Marc Gombeer, general manager of the Daqing plant. The automaker has not made public exactly what production in China costs. But such expenses as labor and the cost of running factories there are likely less than half what they are in Europe, according to Tang Jin, an expert in China's auto market at Japan's Mizuho Bank.

Shipping methods and transport costs will also be re-evaluated. Vehicles made in Daqing are now carried away by truck and shipped to Western Europe and elsewhere via the Trans-Siberian Railway. There are plans

to bring a branch line into the factory itself in the future.

Promising market

Volvo will also give Chinese sales efforts more gas. Of the 800,000 vehicles the automaker aims to move globally in 2020, 200,000 are to be sold in China. Dealerships in the Asian nation, currently a little over 200, are to be increased to 400-plus locations by that year through expansion in regional cities and elsewhere.

The general manager of a Volvo dealership in Shanghai noted that many of the brand's customers are well-educated in addition to having a certain level of income -- doctors, lawyers, professors and the like. Around 70% of customers already own a car and are looking to upgrade or purchase a second or third vehicle, the manager said.

A 32-year-old securities company worker in Shanghai is considering swapping out a high-end Buick from General Motors of the U.S. for a Volvo sport utility vehicle. "The design is refined, and I want to give some consideration to safety -- I have a 4-year-old at home," the worker said.

Gombeer knows the possible challenges for Volvo's new global strategy, noting that the quality of Chinese-made goods is often viewed as suspect. But Volvo implements a consistent manufacturing system around the world, he said, predicting that cars built in China could become the world standard, much as iPhones made there are accepted across the globe.

And if Chinese exports gain acceptance in Europe and the U.S., Volvo's brand power could benefit, bolstering sales even in China itself, Mizuho Bank's Tang said. Other automakers are watching their Swedish peer's experiment closely, ready to replicate it if results look promising.

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