Volvo Plans to Invest $1 billion in First US Plant
Following a rebound in the United States market, Volvo has decided to invest in the company’s first United States plant. This investment totals to be another 1 billion dollars to the factory already under construction. In this expansion, Volvo will add a second production line to the factory in Charleston, South Carolina. The plan for this new plant is to make the S60 Sedan in late 2018, along with another unnamed vehicle.
This expansion for Volvo will almost double the amount of jobs initially planned for the plant. 2,000 jobs were planned initially and this expansion will add 1,900 more to the company size. By expanding the plant and adding more workers, the plant’s capacity (the maximum rate of output of a process or system) will increase. This is because more workers are now able to produce more output, cars.
The Charleston plant is part of Volvo’s United States growth bid. The company wants to expand its United States market even more. Volvo’s “sales have rebounded over the last two years amid a strong U.S. marketing push”. By creating a plant within the United States, the company hopes to increase its sales even more moving forward.
Volvo is expanding its product line through the creation of the new plant. Further research in Automobile News shows that the company aims for “800,000 global vehicle sales by 2020-50% more than last year’s record total”. One of the only ways Volvo’s goal for 2020 is attainable is through an increase in production capacity with this new plant and expansion.
Volvo’s competitive priority in the past was mainly focusing on passenger safety. Now, Volvo is becoming a “leader in driver assistance systems and autonomous vehicle development” (Automobile News). With this shift in competitive priorities, the company must find ways to increase their capacity and sell more automobiles.
Volvo’s decision to expand the Charleston plant is classified as capacity planning or a long-term capacity decision. The company’s investment in a new facility plans to cover at least two years into the future. At this point in time, the company’s overall success depends on the success of this plant to increase capacity.
From the article, it is apparent that the company measures the capacity based on output measures of capacity. These output measures are best utilized with companies that have a small number of standardized processes with high volumes. This makes sense for the car manufacturer, Volvo, as their capacity can be measured as the number of cars produced per day. Volvo’s capacity measurement also fits well with the company’s overall goal. Because the company aims for an increase of 50 percent in global vehicle sales, it follows that Volvo would measure the capacity based on output measures.
Also involved in Volvo’s planning of long-term capacity was the company’s decision about timing and sizing expansion. An important decision companies must make is in determining when is the appropriate time to adjust capacity and by how much. It has been seen that capacity expansion is done in response to the change of market trends. Volvo followed this trend to expand their plant after an improvement in the United States’ market conditions.
Overall, do you think Volvo will be successful in the company’s expansion of the plant? Will the company meet its goal for 2018 of selling 800,000 in global vehicle sales? How can you relate Volvo’s decision of expanding the plant to linking process capacity to other operating decisions?
https://www.wsj.com/articles/volvo-now-plans-to-invest-1-billion-in-its-first-u-s-plant-1505837604
In order to make an investemt as hight as this one, the first thing is predict the future demand, and Volvo has predicted an increase of 50% in his sales, which makes 800,000 global sales in 2018. In order to increase capacity Volvo needs to increase the space where they make the cars, so they are planning to invest in a new plant. But the problem with this investments is that you need to predict a future demand, which, by the end of the investments might have changed. If the prediction is wronge, then the investment will fail; losses. So it is all about making a good prediction of the demand in the long term.
In my opinion, a good way to invest decreasing the risk is by leading the demand with incremental expansion instead of leading the demand with one-step exansion. 1 billion dolar is a lot of money, so a good way to invest decreasing risk would be an incremental expansion, instead of puting all at one time. See how the demand changes with the capacity changes.
Also, before increasing the capacity they should analyze the utilization. Maybe they have some plants, buildings, equipment, employees… that are not being used and they could help increasing the production without the need of increasing capacity.
I agree with Carmen on the incremental issue suggestion. An increased demand of 50% is a huge milestone to achieve with the construction of one plant. The first issue to consider is whether the new plant will have the required capacity to fulfil any additional demand needs if the actual demand of cars exceeds the expected demand. Also, it seems to me that Volvo is significantly relying on increased sales in the US market. It should be aware that demand can easily fluctuate with the market. If market does not perform as well next year, Volvo’s demand for cars can take a significant hit. In such a situation, what will happen to the excess capacity of the new plant? The WSJ article already says that Volvo’s sales took a 7% dip this year. If the sales are already falling, is the 50% increase in demand actually a reliable figure? If the demand falls, Volvo will not have enough sales to cover its fixed costs related to the new plant. This situation could result in huge losses for Volvo. Considering all these questions and scenarios, it would be interesting to see how Volvo adapts to the changing situation in the US car market.
Is it possible to apply the equation from class if we had the utilization rate? Finding this out might help Volvo monitor its output and look for ways to improve as it expands. I understand that the competitive priorities of the company are shifting slightly, but not clear on how that requires them to sell more. I think being on the cutting of those driver assistance systems and autonomous driving would make Volvo more popular in the market, as long as it can communicate and maintain that promise to customer safety. Additionally, I do believe that Volvo will be successful. The decision to expand is not one make without intense consideration, and I don’t believe a company of Volvo’s reputation would make a promise like this if they were not able to meet and exceed the expectations of the market, its competitors and its customers.
After reading your post, it seems to me that Volvo is trying to increase their market share in the American car industry by understanding how American car customers make buying decisions. Consumer Reports states that roughly eight out of ten Americans would prefer to buy an American-made product over an imported product. Of those that prefer American-made products, sixty percent of them stated that they would be willing to pay up to ten percent more for a ten percent product than they would for an American-made product. By establishing their first plant in the United States, Volvo is entering the market of “American Made” cars. This coupled with the news that the plant will bring 2,000 jobs to Charleston, South Carolina will surely be a PR boost for Volvo. For many reasons, Volvo building their fist plant in the United States is essential for their growth in their market share within the American markets.
https://www.consumerreports.org/cro/magazine/2015/05/made-in-america/index.htm
I agree with Michael that it seems that Volvo is trying to increase their American Market share. This to me felt like an example of one of the different timing strategies to expand. As Lauren mentioned, Volvo has been on a huge PR push in America which has increased demand for their cars, especially their trucks. When I was looking into the increase in demand I found a bunch of articles about the demand for their trucks. This struck me as odd considering all their commercials are about cars, and in fact I didn’t even know that they made trucks. According to Business Day, not only does Volvo make trucks but they’re working towards making quieter and even electric trucks. As I posted about a couple weeks ago, there is a giant truck shortage in America right now with more companies pushing to give their customers faster delivery. I think moving into the electric market is a genius play by Volvo, especially to increase their American market share. As they followed the trends, they adapted by adding in an American plant and hopefully will continue their demand and expansion.
https://www.businesslive.co.za/bd/life/motoring/2018-02-08-volvo-trucks-fast-delivering-a-quieter-and-electric-future/
Throughout the past 20 years, Volvo has changed ownership a handful of times. Originally, Volvo was an independent Swedish company which built a reputation based on safety. According to Assar Gabrielsson; one of Volvo’s cofounders, “Swedish steel was good but Swedish roads were bad”. Volvo revolutionized the automobile industry by inventing and introducing a number of safety features now seen standard in nearly every car produced. These include the three point seatbelt, rearward-facing child seats, emissions oxygen sensors, side-deploying airbags, and even safety oriented headrests. in 1999, Ford Motors took ownership of Volvo Cars. In an era where many of the features that Volvo had pioneered where no longer making Volvo “order winners”, Ford Motors struggled to highlight Volvo’s competitive priorities, instead relying on a previously loyal customer base. Amid dwindling sales and diminishing financials, Ford agreed to sell off their ownership of Volvo to a Chinese company called Zhejiang Geely Holding Group in 2009. The Chinese ownership originally caused some concern, since the parent organization had a bad reputation of producing cheaply made vehicles.
Instead, the new owners took this opportunity as a time to reintroduce Volvo’s original reputation as a high-quality, innovative line of vehicles. Volvo again began to differentiate itself beginning with safety features such as blind sport warnings, as well as being one of the first manufacturers to implement automatic braking systems. In fact, the company set a goal of completely eliminating all fatalities and serious injuries connected to their vehicles by 2020. Though ambitious, the strives made towards achieving this goal have undoubtedly brought Volvo back into the consumer spotlight.
In terms of sales, Volvo has consecutively achieved 3 years of record breaking sales between 2013 and 2016, while at the same time increasing it’s market share in the US by 18.1% in 2016 alone. So to answer the question of Volvo meeting their sales targets- I think it is very obtainable. Under this ownership, the company has proven to be ambitious and it has clearly paid off. The decision to invest another $1 billion in the United States is certainly not a simple one, and it was certainly made with complete regard to their expected demand.
https://www.wired.com/story/volvo-history-future-auto-industry/
https://www.media.volvocars.com/us/en-us/media/pressreleases/202294/volvo-cars-2016-sales-hit-new-record
https://www.volvocars.com/us/about/our-company/heritage
As long as Volvo has the capital to pull this off, this can be a great move for them. The growth that they have experienced in the U.S. needs to have a match in capacity planning, otherwise they will have to have a slower rollout of cars which could mean higher inventory costs for cars that do not hit the market.
For Volvo this makes sense because they can allocate their fixed costs against a lot of different brands. The larger their output, the less cost is can be for each individual car they make and those cost savings can make a difference especially if they have a huge land liability in the new plant they are building.
Yes, I completely agree with Brandon that Volvo should pursue this massive investment if there are limited capital constraints. As we discovered in the Starbucks line issue discussed by Brianna in this weeks blog posts, it is essential that a company is able to meet the demand of their product in an efficient and full manner. Just like Starbucks, as their product becomes more popular with consumers, they need to make sure that their planning capacity matches their demand. Therefore, if financially this project makes sense, then Volvo should undergo this plan to meet the growth that they are experiencing with U.S. customers.
This particular move for Volvo is an interesting one as it is a large scale investment in autonomous driving, an area that many car companies have put massive capital behind in the past few years. However basing their newest plant within the United States to produce an additional 800,000 vehicles to increase U.S. based sales by 50% seems to be an ambitious move by the Chinese held corporation. Volvo’s order winner has always been safety and luxury, and haven’t always been known to be the first in pioneering technology except with safety design, as they created the three point seat belt. The push for driverless cars has consumed many automotive corporations with many vying to become the first in the field which would garner the lucky chosen an almost instant monopoly. However, this technology is still many years away from becoming a practical reality.
This increased focus on planning capacity to build more and more cars is an aggressive push for a company that over the past two decades has seen a lot of turmoil being sold and passed around from corporation to corporation. However by doubling the size of the plant Volvo is betting that demand will be enough to allow it to run at maximum capacity but with lower fixed cost. The choice to locate within the United States is peculiar these days as many automotive plants in North America are now based in Mexico. Perhaps the increased focus on technology requires more highly skilled and trained workers within the brand new plant. If executed correctly, this new plant could be the launching pad from which Volvo could be immensely successful, however it could also become a massive drain on the companies resources if their forecasting of demand for their models is not correct.