Volvo looking to China for success

When Chinese group Geely bought Volvo from Ford for $1.8 billion in 2010, you have to wonder if they realised quite the level of investment that was going to be required to pitch it properly into the global premium car market.

So far that outlay has hit $11 billion, and that’s only for the roll-out of new large models. It is almost certain to need another sizeable injection of funding to kickstart a range of smaller cars, although plans are already in place to develop these in conjunction with its Chinese owner so costs can be somewhat shared.

Much of the money spent in the last three years can be attributed to the decision by former owners Ford to halt any major investment in new models once a decision was taken in Dearborn to offload the Swedish brand. It was bad timing for Volvo, which desperately needed a new XC90 to compete in the SUV segment, given that the outgoing model was first launched in 2003.

Since the Geely takeover, Volvo has tweaked and updated what they had from the Ford relationship, while developing its own range of four-cylinder diesel engines to power them. This week saw the first real fruit of the $11 billion investment by Geely, the new XC90. Built on Volvo’s new large car platform – that will be under a new S80 and V70 in the next 18 months – it represents the first in-house developed platform from Volvo for many years.

While the XC90 meets the criteria of discrete Swedish design, its sizeable presence means it should work in a Chinese market where motorists like to be noticed. The age of the SUV is far from over and even in the little Irish new car market, the first signs of economic recovery has already seen a spike in SUV sales, with smaller versions now the second biggest category in the market here and sales of large and prestige SUVs approached 2,000 so far this year.

But it is in China where the sales of models like the new XC90 really matter. According to a report from consultants McKinsey, it is set to be the largest premium car market by 2020. As that landmark approaches, Chinese brands such as BYD, Geely and Great Wall are all surrendering market share to imports and cars produced by foreign-invested joint ventures. Geely will soften the blow from this move by selling under the Volvo brand.

Volvo has returned to profit under Geely’s wing, but it needs to become firmly established as a premium player, where margins are better than the cut-throat mainstream market. With the right financial backing it might just make a run of being a smaller-scale premium alternative to the often brasher German premium brands. Whether it succeeds will depend on success in China and the deep pockets of its Chinese backer.