Expecting to Fly: Ford and Volvo

Houston, Texas, June 2007

Market forces in the auto industry have many marques struggling for an identity.

Swedish carmaker Volvo is one of these.

Volvo's name long been synonymous with "boxy but safe." Volvos were expensive. They weren’t sleek, luxurious, or sporty.

But they were the safety leader.

High initial purchase prices were offset by long service life and reasonable costs.

These were upscale cars for intellectuals and nonconformists in the 1960's.

Students drove Volkswagens, Professors drove Volvos.

Safety advances, many pioneered by the brand, have spread from luxury vehicles to become standard features on mundane Hyundais. Competing makes now routinely brag of 5-star safety engineering capability.

Safety legislation, from mandatory seatbelt laws to stability systems, has cut the advantage once enjoyed by Volvos.

So the brand embarked on a long-term strategy to maintain its reputation for safety, while slowly introducing a conflicting image of style, luxury, and high performance excitement.

In addition, the brand needed not to alienate the 54% of its buyers who were female: no aggressive fighter-jet front grillwork was contemplated. This identity crisis was well underway in the mid-1990's, before Ford Motor stepped in.

Volvo Cars of North America is a premium-to-entry-level luxury manufacturer, competing with Acura, Infiniti, Audi, BMW, Cadillac, and Saab.

California Dreamin': Ford Goes Upscale

Ford was sitting on a pile of cash, $23 billion, in late 1998 before the Volvo buy out. But these big profits were earned on dinosaur vehicles, light trucks and SUVs, in North America. Weakness in the rest of the "family" of fine cars were masked by F-150 sales.

When President Jac Nasser bought Volvo for 6.5 billion dollars in 1999, he expected high-growth and a Ford beachhead in Europe.

With a big ego after fat years, Ford, like so many others, sought bigger margins and recession proof high roller customers in the upmarket.

The company's proletarian roots and repeated failure of Ford "luxury" attempts (Lincoln, Mercury, Edsel) seemed to be forgotten.

So identity drifting, but profitable, Volvo became a wholly-owned subsidiary of Ford Motor Company. The Swedish carmaker joined money losers Jaguar, Land Rover, and Aston Martin, in Ford’s Premiere Auto Group.

The upmarket is just too competitive for dozens of redundant brands to simultaneously colonize. Advantage Lexus, double-fault Ford.

Ford began to seek cost savings through use of Ford and Mazda parts in Volvos. A major restructuring plan emphasized platform sharing and among FMC brands.

There was reworked distribution, aligning Volvos with Ford's shrinking Lincoln-Mercury dealer network.

Ford executives are known to have pressured Volvo to de-emphasize roof pillar strength as the Ford-Firestone SUV rollover fiasco peaked.

Global sales have fallen from 445K in 2005 to around 427k in 2006. This is close to a collapse of critical mass for a stand-alone enterprise: most analysts would put the target around 750k vehicles shipped.

In the key US market, sales fell 11% in 2005 and again (11%) in 2006, to less than 140K cars.

Volvo is one of the Ford family’s crown jewels, the cash cow in Premiere Auto Group.

Despite $25 billion in new borrowing, Ford will need more cash. The parent company is now leveraged to the eyeballs with the hard times just starting. (What would 500 tactical nukes lighting up Iran and/or a collapse of the US dollar do to oil prices?)

With Premier member Aston Martin sold, Jaguar and Land Rover on the block, speculation arose concerning a possible sale of Volvo. Rumors of a proposed Volvo Cars buyout by BMW, for an estimated $7 to $8 billion, have been denied at Ford.

With the integration well underway, the extraction of Volvo would be evidence of imminent bankruptcy in Dearborn.

Update: In early June, when I predicted the eventual sale of Volvo, I had no idea it would be announced only six weeks later. On July 15, 2007, the New York Times reported that Volvo is in fact on the block.

A Rose By Any Other Name: Quality at Volvo

The Volvo brand had a reputation for safety and longevity.

Brand loyalty was historically high. But the quality of Volvo cars decreased rapidly after the Ford purchase, especially during the years 1999-2001, when several mass recalls occurred.

JD Power Initial Quality Survey for 2006 awarded 29 stars out of 40, well above average.

For comparison;