What’s going on in Dearborn? Why wouldn’t Ford want Volvo’s strong brand and profit potential? Volvo also contributes much under many Ford skins and the terms of last year’s huge loan for Ford would also complicate a sale. Neil Winton reports.

Ford is so determined to rescue itself by going back to basics, it even regards the association with proven moneymaker Volvo as a distraction from the all important task of rejuvenation.

Ford CEO Alan Mulally has already decided to relieve the balance sheet by dumping the chronic loss maker Jaguar, and the barely profitable Land Rover. You would think that Volvo, the one remaining component of the ill-fated Premier Automotive Group (PAG), making nice profits, with an impressive new model programme, and providing much content under the skin for many Ford products, would be an integral part of Ford’s future.

Aston Martin has already gone from PAG. A deal to sell Jaguar and Land Rover is thought be imminent. Ford is now examining the strategic importance of Volvo to its future.

But some experts think Volvo’s strong potential might not be enough to convince Mulally to hang on to it because he has decided that for robust health to be restored to the Blue Oval, it must go back to its core ethos of just making high quality, volume cars.

If Volvo is eventually going on the block, that raises the question of who would buy the upscale Swede, and there is no shortage of candidates. Investors from Russia, China, Sweden, the Middle East, and Renault of France are seen as possibilities.

Can Ford really be so desperate that it will be forced to sell?

A quick look at the numbers tells you why, even though Ford reported a surprising net profit of US$750m in the 2nd quarter compared with a loss of US$317m in the same period last year. Last year Ford lost $12.7 billion. In December it completed a US$23.4bn financing package to back up its restructuring plan.

Here’s why Volvo will be easy to sell, for up to US$8bn.

Environmental worthiness
Volvo, with its brand values of safety and environmental worthiness, has proved itself a success. Sales, after a pause, are accelerating as it replaces its model line-up.

Andrew Wright, Senior Analyst, European Vehicle Forecasts at CSM Worldwide, expects Volvo to show steady growth, rising from 427,000 in 2006 to 641,000 by 2013.

“These aren’t premium sales, but they are near premium – Volvo is making handy profits and getting stronger in SUVs. It’s difficult to justify the logic of selling Volvo,” said Wright.

And Volvo has also become an integral part of many Ford products, providing components for the Taurus and Sable in North America. The little Volvo S40 shares parts with the European Ford Focus. The new Ford Mondeo has much in common with the Volvo S80 and new Volvo V70 station wagon.

Global Insight auto analyst Paul Newton reckons that if Volvo were sold it would raise nearly US$8bn, but doesn’t think it makes any sense either.

Logic hard to decipher
“Despite the boost that US$8bn would provide, a boost that the company has previously assured the industry it does not need, the logic of selling off one of the profitable arms of the company that provides solidly engineered technology on a global level would be hard to decipher,” Newton said.

Could Ford be keen to sell Volvo because, although it was currently moderately successful, with iconic products like the new V70 station wagon and XC-70 crossover, its future was in fact clouded?

Some critics have said Volvo’s styling is caught in a time warp. It has become complacent about its previous reputation for a green philosophy. The competition has caught up with its safety leadership, they say.

No, the future is promising.

“In 2006, there was a bit of a dip in global sales but essentially new models like the new coupe C30, based on the European Ford Focus, can sell with big profit margins, and the XC-70, bode well for Volvo,” he said.

No place in the future
Professor Peter Cooke of Nottingham Trent University’s Motor Industry Management School believes Ford has decided that Volvo has no place in its future.

“Ford has started to retrench back to its core, back to basics making volume quality cars. Mulally is really taking the company back to areas where the Ford philosophy and ethos is volume cars. Volvo doesn’t really fit into this pared back Ford. (former CEO Jacques) Nasser’s idea to set up PAG was brilliant, but its Achilles heal was that Ford management didn’t have the time to make it work,” said Cooke.

“I don’t think Volvo fits into the long term Ford strategy of getting back to basics, and over the next 12 months I expect Volvo will be offered for sale, 100 per cent, or maybe a stake,” Cooke said.

“Mulally is going to fix what the best auto brains couldn’t. They all had too much emotional baggage which meant that the reality of brands like Jaguar was never addressed. With Mulally, it’s almost like bringing in a hedge fund, with no emotional attachment he can stand back and be utterly objective,” Cooke said.

No buyer shortage
There will be no shortage of possible buyers for Volvo. Press reports from Sweden have suggested the hugely rich Wallenberg family which controls local investment giant Investor AB might launch a bid, in tandem with Volvo Trucks. Ford bought the Volvo car company from Volvo Trucks in 1999 for US$6.5bn.

Global Insight’s Newton doesn’t think that makes much sense.

“I feel that’s not a solution that Volvo would look for. If it teamed up with Volvo trucks, there would be no overlap. It might as well merge with a plane manufacturer. Volvo would want to team up with another car manufacturer; the most logical solution is Renault, they have a long history of collaboration,” said Newton.

BMW has been linked with Volvo, and has said it is in the market for acquisitions, apparently unfazed by the debacle with Britain’s Rover, its last attempt at a merger.

Motor Industry Management School’s Cooke agrees there would be no shortage of potential buyers.

“Russia needs solid, heavy-weather vehicles and it is expanding and buying western brands and technology. They will be looking. There could be a buy-back by the original Volvo owners (Volvo Trucks) in a kind of re-Nordicisation. Renault is a candidate, the Chinese are also looking for strong global brands, but I don’t think the Japanese, or other Europeans or North Americans would be interested,” said Cooke.

One big drawback
“My dark horse would be the Middle East, which because of high oil prices is still slopping with money. It could be a major Middle East investor. But any buyer would have the problem of separation from Ford, which is almost like a Siamese twin. Ford could sell off a significant part, like DaimlerChrysler did with Chrysler, and manage the separation steadily, over time,” Cooke said.

There is one big drawback to Ford selling Volvo.

When Ford pledged the family silver and borrowed big in December last year to finance its restructuring plan, it was forced to make some unpleasant concessions, as you do. One of the terms is believed to have been that if it sold more than 20% of Volvo, at least half of the proceeds would have to be used to reduce overall Ford debt. So if it sold Volvo for US$8bn it could “only” get its hands on US$4bn cash.

This can’t make any sense, unless Ford is more desperate than the published numbers suggest.

Neil Winton

Neil Winton, former European auto correspondent for Reuters, writes the European Perspective column for the Detroit News Online’s Autos Insider and publishes www.wintonsworld.com.