A BMW Purchase of Volvo? More Questions Than Answers

A BMW Purchase of Volvo? More Questions Than Answers

By Mark Bursa

Reports that Ford might sell Volvo to BMW have certainly raised eyebrows in the auto industry. After all,   it’s only a few months ago that Ford told Renault in no uncertain terms that its Swedish luxury brand was not for sale.

Furthermore, Ford claims Volvo is profitable, and its role within the company’s Premier Auto Group (PAG) has become more sharply focused in the wake of Ford’s ongoing downsizing of Jaguar into a Porsche-sized prestige-and-performance car brand.

This leaves Volvo as Ford’s European luxury brand –- a direct rival to BMW and Audi. Why would Ford suddenly decide to exit this sector and surrender to a rival a brand whose star is on the rise?

Can Ford’s Denials Be Believed?

Ford has denied the reports, which have been bubbling around on the Internet for several weeks and blew up last week when London’s Financial Times picked up a report in the Swedish Goteborgs Posten newspaper.

You’d expect the denial, couched in the usual managementspeak about “assessing our operations and portfolio, as any good business does.” But the leak is said to have originated from within Ford, not BMW. So does the evidence stack up?

A lot has happened since Ford knocked back Carlos Ghosn’s enquiries. There’s a new man at the helm of Ford, former Boeing CEO Alan Mulally, and Aston-Martin has been shunted out of the PAG portfolio, raising around $850 million in cash.

And Ford’s need for cash is the only possible reason why it might want to sell Volvo. Ford paid $6.45 billion for Volvo in 1999, and its value today can’t have fallen too much –- a Merrill Lynch analyst valued the three PAG brands at a combined $9 billion. A sale would certainly compensate for the heavy losses Ford sustained last year -- $2.8bn, of which PAG contributed $327m.

Volvo Sale Shortsighted

But selling Volvo would be to put short-term gain over long-term sustainability in Europe. If you want to make money in Europe, you need to be in the luxury sector. Volume brands such as Ford can no longer make money from large cars -– gone are the days when Ford dominated the big sedan sector with the likes of Granada and Scorpio.

Even in the European upper-medium sector, where Ford’s Mondeo competes, the likes of the BMW 3 Series and the Audi A4 now dominate. Most of Ford’s sales in Europe come from small cars such as Fiesta and Focus –- and in those sectors, margins are tight. Perhaps Mulally wants to apply the “big brand” logic that worked at Boeing to the car sector? Experience suggests this would be a bad move.

In addition, Ford and Volvo are doing much platform and parts sharing these days. The Volvo C30, S40 and V40 are Ford Focus-based models. One of the side benefits to this platform/parts sharing is that Ford can build the models in its various Focus plants, for example, the growing markets of Russia and China. Though there's a fair bit of Volvo-Land-Rover sharing as well with the XC models, it has less impact on the rest of Ford.

Without PAG, Ford’s long-term ability to make money in Europe looks pretty thin. But let’s imagine that Alan Mulally really does believe that a big pile of cash would serve Ford better than a continued presence in the luxury market. Why would he sell Volvo to BMW? And why would BMW want Volvo?

Why BMW?

The reasons put forward are rather tenuous. BMW wants Volvo, apparently, because it wants to share the cost of developing front-wheel-drive Minis. You could make a case for platform sharing between the Volvo C30 and the Mini, but unless BMW has a secret plan to make big Minis (!), there’s not a lot of scale economies from other Volvo models. The XC90 and XC60 SUVs could share underpinnings with the BMW X5 and X3, but any attempts to bring the development of these relatively new models together would take many years, given the complexities of product development cycles.

In any case, BMW has been down the front-drive route before -- with Rover. And the Rover exercise also showed the weaknesses within BMW when it comes to managing non-BMW brands. “Not Invented Here” syndrome was rife, resulting in the sale of Land Rover to Ford after BMW realized it could stretch the BMW nameplate into the SUV sector without a specialist brand. And the Swedes might fear BMW’s interpretation of “Swedish Luxury” might be as fatal to Volvo as the Bavarians’ take on “British Luxury” was to Rover.

Against that, BMW has different management these days, and the Mini experience has taught it how to make a go of a brand that doesn’t consist of the letters B, M and W. But BMW is still not an obvious destination for Volvo. The most likely buyer surely has to be the company that has shown its hand -– Renault.

The Renault Factor

Remember that Renault almost bought Volvo in 1994 -– Swedish shareholders squashed the deal. But this broken tryst has never been resolved, and acquiring Volvo would solve Renault’s need, identified by Carlos Ghosn, to sell greater numbers of more profitable large cars. The logic that put Renault and Volvo together a decade ago is, if anything, stronger today –- regardless of the Renault-Nissan alliance.

Ghosn wants Volvo so much that he was prepared to take on Jaguar as well. Yet last year Ford wouldn’t do business. You’d have thought in the circumstances that Mulally would be on the phone to Ghosn if he wanted a willing buyer for Volvo. Or is BMW being used as a stalking horse to flush out a bid, for a better price?

Other Potential Suitors?

And there are other potential new suitors in play. As the sale of Chrysler to Cerberus proves, the private equity companies are in play. Cerberus itself might see some synergies between Chrysler and Volvo -– Jeep and the Volvo XCs, for example. And the private equity companies have the money –- though whether they represent long-term security for the companies they acquire is another issue.

There are new entrants -– ambitious automotive companies in China, India and Russia for whom Volvo would be a prize capture, though perhaps a premature one.

Ford quietly striking a deal with BMW would seem to make no sense given the likely bidding war that would accompany an announcement that Volvo was up for grabs. You can imagine that Alan Mulally’s already had a few phone calls.

Michelle Krebs:  is Editor-in-Chief of AutoObserver.com. Follow @AutoObserver on Twitter.