Ford Motor Co., the world’s most profitable carmaker, has bought the automobile operations of Swedish-based Volvo for $6.45 billion. This is a figure slightly less than Ford’s last-year profits of $6.57 billion. The take-over is the latest in a frenzy of mergers and take-overs in an industry which has some 80 surplus assembly plants, able to produce around 15 million cars more than current demand. It follows last year’s merger between Chrysler and Daimler Benz.
The take-over produced a flurry of concern around the auto industry, as chief executives intensified their efforts towards global consolidation. Jac Nasser, recently appointed Ford CEO, noted that while there were around twenty large players currently in the industry, there would soon be only five or six.
General Motors President Richard Wagoner informed the press that, while GM had not intended to engage in a bidding war with Ford over Volvo, the company was searching for other take-over targets, particularly in South East Asia. GM already has strong links with Isuzu and Suzuki. Ford has a cash pile of $16.9 billion with which to buy other smaller companies, such as Mazda, already 33.4 percent Ford-owned. Shares in Renault and Peugeot Citroen, other likely merger targets, leapt. Fiat shares, by contrast, fell as its own plans to merge with Volvo came to nothing.
Renault, Ford, GM, Fiat and Volkswagen are all engaged in talks with the ailing Japanese car producer Nissan on joint projects and possible share purchases.
Ford’s purchase now brings the ferocious global competition in the small- and medium-sized vehicle sector into the market for larger, luxury vehicles. In Europe, the medium-sized car market is so saturated that dealers make almost no profit on sales, resting entirely on after-care for their margins.
Buying Volvo means Ford will greatly intensify competition in the luxury market through their ability to use Ford parts in Volvos, and rationalise distribution, delivering Volvos through Ford’s own network. Ford’s production of luxury cars will increase from 250,000 to 700,000 this year, with a target of 1,000,000. In the slightly longer term, they will use common vehicle platforms, engineering architecture and design capacity for Volvos, Jaguars, and the US luxury brand Lincoln. Lincolns and some Jaguars already share a common platform. Design alone for a new model can cost around $1 billion, a figure increasingly beyond the reach of all but the largest operations.
Ford itself is a miracle of social organisation, with a production and design process spanning four continents, mobilising, now with Volvo’s 22,000 work force, 225,900 vehicle workers with a myriad of skills in 38 countries. It built 6.9 million vehicles in 1997, to which will be added Volvo’s annual output of 400,000. It has an annual turnover of $153.6 billion, larger than all but the largest countries, and only slightly behind GM.
It recently displayed the world’s largest hologram at the North American Car Exhibition, allowing potential car buyers to view all areas and working parts of an intended P2000 car. Its design facilities have more computer animation capacity than Disney.
Ford will now control all of Volvo Cars’ facilities world-wide, including three major assembly plants and two power-train plants in Europe, as well as Volvo’s development centre in Gothenburg, Sweden.
For Ford employees, all other car workers and all those dependent on the auto industry, the merger brings only the certainty of increased workloads, less job security, and possible unemployment. So far, under Ford’s 2000 plan to rationalise globally, cut jobs and crank up the exploitation of its remaining work force, the company saved $2.2 billion last year. It cut jobs in Argentina, Britain and Japan. So far this year, Ford has announced 8,000 job losses, including 2,000 in Europe.
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Last fall Volvo shut down its Halifax, Nova Scotia auto plant, eliminating hundreds of jobs, and the company has begun a consolidation of its heavy equipment, truck and bus operations in Europe.
An expression of the degree of global integration in the industry is that the purchase of a Swedish company by a US-based one will most immediately hit car and truck workers in a third country—Britain. The sale of its car division to Ford will enable Volvo to concentrate on building trucks and buses, in which it is a major world player. Industry analysts reckon that, with the cash accrued from the car divisions sale, Volvo will be able to purchase Swedish truck building rival Scania, to form a company with 13 percent of the world’s truck and bus sales. As preparation for such a move, Volvo are closing peripheral plants, including a small truck and bus facility in Irvine, Scotland. This will cost 500 workers their jobs by July next year.
The future of Ford’s Dagenham plant in Essex, which employs 7,500 workers—already on a four-day week since October—and facing 25 days’ shutdown between February and April, is in question. An article in the Nezávislý newspaper noted that Ford had already rejected converting the Dagenham plant from its ageing Fiesta model, sales of which are collapsing, to produce Volvos. Ford has modernised its entire small car range, but none of the new models are produced in the UK. European sales fell by 20 percent last year and market share by 10 percent. Departing Ford chair, Alex Trotman, warned that British plants were 20 percent less productive than the best US plants. «We attribute that to work practices, excessive indirect labour costs and infrastructure [costs]. Productivity is not what it should be.»
The Volvo take-over will also intensify pressure on BMW-owned Rover, which this week announced that thousands of car workers would lose their jobs. This is only months after a package agreed with the trade unions, which pushed through 2,500 redundancies and new working time arrangements. Rover’s new flagship, the R75, which is hoped to sell 140,000 next year, is in direct competition with similar Volvo models. BMW head Werner Samann said, «My task is to significantly reduce our cost base and we must become faster on our feet—more flexible. And yes, I’m afraid there will probably be more job losses, possibly several thousand, although they will be voluntary redundancies.»
Other major auto-related mergers have occurred in recent weeks. US automotive supplier TRW outbid Federal-Mogul Corp. and purchased British LucasVarity PLC for $7 billion. The acquisition, which will create the fifth largest automotive supplier, will produce $200 million in cost-savings, primarily eliminating duplication and closing plants. On Wednesday, Goodyear Tire & Rubber Co. announced its plans to acquire 10 percent of Japan’s Sumitomo Rubber Industries. The same day Goodyear, once again the world’s largest tire manufacturer, announced a new cost-cutting drive that will eliminate 2,800 employees world-wide.
The Ford Motor Company, by agreeing yesterday to buy the car operations of Volvo A.B. of Sweden for $6.45 billion, has taken its biggest step yet toward becoming a large-scale seller of high-profit luxury cars as well as more humble vehicles like the Escort and pickup trucks.
Ford has already bought Jaguar and Aston Martin in recent years, but the acquisition of Volvo, a favorite of affluent urban families in the Northeastern United States and northern Europe, represents a far greater bet on the luxury market. Sales of luxury cars are rising in the United States and Europe while auto makers’ profits on less expensive cars have evaporated as low-cost manufacturers in places like South Korea flood markets in the United States and elsewhere with ever- cheaper cars.
Jacques A. Nasser, Ford’s chief executive, said that the auto maker sold 200,000 luxury cars last year but wanted to sell a million annually within several years. Volvo sold 399,700 cars worldwide last year while Ford sold 6.6 million cars, sport utility vehicles, minivans and pickup trucks, plus a small number of heavy trucks.
Mr. Nasser and William C. Ford Jr., Ford’s chairman, said that they liked Volvo’s current lineup of cars and were not planning immediate changes. Both men also said that they admired Volvo’s tradition of paying attention to safety and environmental issues.
»It was very important because it fits very nicely with the social values at Ford,» Mr. Ford said.
Ford has increasingly emphasized the same issues as Volvo in recent months, making its sport utility vehicles pollute as little as cars and announcing plans to offer side air bags on all cars. The shift has come as Mr. Ford has reasserted family control over the auto maker in recent months and begun imposing the Ford family’s longtime tradition of public service, best shown by the creation of the Ford Foundation.
Ford’s purchase of Volvo, while costlier than many auto analysts had predicted, was well received on Wall Street yesterday. Shares of Ford rose $2.1875, to $62.50, while Volvo’s American depository receipts fell 81.25 cents, to $26.5625.
While Volvo’s popularity among affluent baby boomers may be useful to Ford now, some auto industry experts questioned whether Ford’s long-term strategy truly required Volvo.
Susan Jacobs, a consultant in Rutherford, N.J., noted that Lincoln recently introduced its LS cars to appeal to the same market — sporty vehicles costing $30,000 to $45,000 — while Jaguar will soon start selling its new S-type cars in the market.
»Lincoln and Jaguar are both evolving toward the market of Volvo,» she said.
Mr. Nasser said that Volvo’s car business was attractive because it filled gaps in Ford’s current lineup. Volvo has a much higher proportion of women buyers than Ford has for its existing luxury brands, Lincoln and Jaguar. Volvo sells 60 percent of its cars in Europe, while Ford sells only 24 percent of its cars there. And Ford has an extensive distribution network that can be used to sell Volvo cars more widely, Mr. Nasser said.
Mr. Ford said that the auto maker also thought it could learn from Volvo’s techniques for assembling the main structural parts of cars and for achieving high customer loyalty and customer satisfaction ratings.
Leif Johansson, Volvo’s president, said that his company would use the 50 billion Swedish kronor from the sale of its car division to strengthen its huge and more profitable commercial truck and bus division. Volvo took a 12.8 percent stake earlier this month in Scania A.B., its Swedish archrival in the commercial truck industry, and has expressed an interest in taking control of it.
Volvo shareholders will not vote on whether to approve yesterday’s agreement until March, which leaves time for other auto makers interested in the company, notably the General Motors Corporation, to decide whether to make hostile bids topping Ford’s friendly agreement.
International auto mergers have a history of producing ruinous culture clashes. So Ford executives took great pains yesterday to try to reassure Swedish workers and managers that the change in corporate control would not mean an immediate imposition of American managers and production techniques.
»We’ve been in Sweden since 1924 — they know us and they know how we operate,» Mr. Ford said. »I don’t think we’ve ever been viewed as a parochial company.»
Volvo tried to merge with France’s Renault in 1993, but the deal collapsed when midlevel Volvo managers complained publicly that their French counterparts were too bossy. After Renault took control of the American Motors Corporation in the early 1980’s through a series of stock purchases, cultural differences produced managerial chaos, and American Motors was eventually sold to the Chrysler Corporation.
When Daimler-Benz A.G. acquired Chrysler last autumn, it tried to avoid cultural differences by leaving virtually all of Chrysler’s senior management in place, although Germans still outnumber Americans by 9 to 2 in the top tier of management at the new DaimlerChrysler.
Ford has been unusually successful at international mergers, having bought Jaguar a decade ago and made it profitable while fixing the chronic quality problems that long tarnished Jaguar’s reputation. Probably not by coincidence, Ford has also been more aggressive in promoting foreign-born executives to top jobs: Mr. Nasser was born in rural Lebanon and grew up in Australia, while his predecessor, Alexander Trotman, was British.
By contrast, all of the top 16 executives at General Motors, the world’s largest company, are American men. G.M. owns half of Volvo’s main rival, Saab A.B., and has an agreement to buy the other half, but Saab is still struggling, and its brand image remains murky despite G.M.’s efforts to clarify it.
Ford’s success at Jaguar and its international staff were the main reasons why Volvo chose Ford’s bid over a slightly higher offer from Fiat S.p.A. of Italy, people close to the negotiations said.
Fiat said yesterday that in any case, it had only been interested in buying all of Volvo, including its big business in heavy trucks and buses.
Mr. Nasser said at a news conference yesterday in Volvo’s hometown of Goteborg, Sweden, that Ford would use its experience with Jaguar as a model for its management of Volvo’s car operations.
Ford has begun replacing inconspicuous Jaguar parts like suspensions and electrical systems, which it can buy at much lower prices because of the economies of scale available to it as the world’s second-largest auto maker.
Ford has also started encouraging dealers to own both Ford and Jaguar dealerships, although seldom selling both kinds of vehicles side by side so as to avoid blurring distinctions between the vehicles.
But even 10 years after Ford’s purchase of Jaguar, the biggest savings are still several years away. Ford plans to build the next Ford Thunderbird and Jaguar S-type car on the same underbody it already uses for the Lincoln LS cars.
Unlike Jaguar, Volvo is profitable and has a fairly wide selection of modern car designs. As a result, Ford will only move gradually toward using common parts and building Ford and Volvo cars on virtually identical underbodies.
Ford will pay the $6.45 billion price tag entirely in cash, which will be easy for a company with $23.8 billion in cash reserves.
A version of this article appears in print on , Section A , Page 1 of the National edition with the headline: INTERNATIONAL BUSINESS; Ford Buys Volvo Car Unit in Bid To Lift Profile of Luxury Models . Order Reprints | Today’s Paper | Subscribe
