9 November 2007

Ford Decides to Hold Onto Volvo

It's pretty well known that as part of Ford's continuing review of its brand portfolio (coupled with a relatively urgent need for cash to fund its turnaround efforts), it had considered selling Volvo.

Yesterday, as part of the release of Ford's better-than-expected third quarter financial results, CEO Alan Mulally announced that for the time being, Ford is not going to sell Volvo. Instead, Ford intends to improve Volvo's cost structure and brand positioning. The objective for Volvo in the near term is for it to operate more independently, yet achieve greater efficiency by cooperating with the global Ford organization in purchasing and product development.

Both Volvo and Ford are in difficult positions. Aside from its aforementioned struggles, Ford has depended on Volvo-developed platforms for several of its large cars and crossovers, and an extraction of Volvo from Ford might be difficult while there is so much component sharing. Volvo is struggling with its perception in the marketplace as safe family cars with a touch of luxury, but also of a brand that is a step or so behind the big-name luxury brands such as BMW, Mercedes-Benz, and Audi. Also, the fall in value of the US dollar, coupled with the appreciation of the Swedish Kronor, has made Volvos (all of which are produced in Sweden currently) difficult to price competitively in the US. Volvo's options are to reduce the cost structure (possibly at the expense of any premium image), raise prices (possibly at the expense of sales volume), or hold the line on prices (possibly at the expense of profitability). Speaking of profitability, although Ford does not break out Volvo's results individually, but the company did say that Volvo posted an undisclosed loss in the third quarter of 2007. According to Automotive News, sources close to the company have said that it was in excess of $100 million.

Ford said that just because it decided not to sell Volvo in the short term, it doesn't mean that Volvo might not eventually be sold. Down the road, the focus on improving efficiencies in product development and purchasing might make Volvo's financials look better for a potential buyer, and encouraging Volvo to otherwise operate more independently might make it a more attractive purchase for another buyer.

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