Volvo's dangerous road

By Alex Taylor III, senior editor


(Fortune) -- If there was ever an automaker to which the expression "back in the day" belongs, it would be Volvo.

Back in the day, Volvo was a bulwark of suburbia, the choice of right-thinking parents concerned about the safety of their children and not unwilling to flaunt their priorities.

On college campuses, impoverished graduate students motored around campus in decrepit 240 sedans with hundreds of thousands of miles on the odometers, taking pride in their parsimony.

But Volvo began to lose its distinctive identity after Ford (F, Fortune 500) bought it in 1999. And since Alan Mulally took over as Ford CEO some three years ago and vowed to simplify the company, Volvo has been an endangered company.

For the past several months, Volvo had been left dangling -- an unnerving situation for employees, dealers, and potential customers. Geely, the fast-rising Chinese automaker, had reached an agreement to buy Volvo, but the deal was been held up by first, a need to secure financing, and second, the approval of the Chinese government.Update: Ford completes sale of Volvo to Geely for $1.8 billion.

Limbo is a bad place to be for an automaker. Product development, especially in the early stages, can be delayed. Marketing momentum can slow. Dealers become beset by uncertainty and contemplate allegiances with other automakers with a more certain future.

At the Geneva auto show, Volvo president Steve Odell was forced to evade such basic questions as whether he expected to remain with the company after the sale -- not a prescription for management stability.

Last year was a difficult one for Volvo. In the U.S., its largest market, sales slid to 61,435 -- a long way from the 139,384 it sold in 2003 and leaving Volvo in the same neighborhood as such brands as Mitsubishi and Mercury.

Its performance was illustrative because today, Volvo is running in the middle of the automotive pack, and finds it difficult to distinguish itself. In the 2009 initial quality ranking compiled by JD Power, it ranks below average. And surprisingly, it also finishes below average in Power's vehicle dependability study, which measures problems experienced by original owners of three-year-old vehicles.

Buyers who claim they plan to "drive their Volvos into the ground" are not going to get away cheaply. And those who like to disparage Volvos as "Swedish Buicks" should think again; Buicks are more durable and finished at the top of the dependability study.

Volvo is introducing some interesting new safety features, like a system that alerts the driver and stops the vehicle if it determines a collision is imminent. But the rest of the industry is catching up. Twenty years ago, only Mercedes was willing to challenge Volvo's informal designation as the world's safest car. Now Volvo is just one of many in a category where many manufacturers are above average. In its latest auto issue, Consumer Reports gave top ratings to 46% of the 149 vehicles it graded.

Ford expects to conclude an agreement to sell Volvo by the end of the month and complete a sale by June 30. What will become of Volvo's engineering and manufacturing in Sweden and Belgium remains an open question. Given a choice between keeping it in Europe, or moving it to China where workers are paid a fraction as much, it is isn't difficult to imagine what Geely might do.

Volvo has vowed to sell more cars this year, and, with the help of generous incentives, its sales have risen 40% in an overall U.S. market that is only up 10%. Meanwhile, Volvo lovers everywhere adored the new S60 with four-door coupe styling at the Geneva auto show. But the S60 is late to that design segment and its prospects remain uncertain.

Every 10 years or so, the auto industry goes through a realignment. GM and Ford stocked up on European brands at the end of the '80s. Then the end of the 1990s saw GM close Oldsmobile and Chrysler shutter Plymouth.

The past two years have seen feverish trading of some famous nameplates as Ford sold Land Rover and Jaguar to India's Tata, and GM closed Pontiac, Saturn, and Hummer, and disposed of Saab.

The phenomenon of companies in developing countries like China and India buying luxury or near-luxury brands is unprecedented. Managing names that hope to command a price premium is a tricky business that certainly eluded GM and Ford.

Whether Geely can stabilize Volvo and build it for the future is a huge unknowable.

Meanwhile, Volvo's employees, dealers, and customers are waiting out the uncertainty -- and trying to remember what it was like back in the day. To top of page

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