Volvo and Geely to merge engine units in electric car push

[NEW YORK] Volvo Cars and China's Geely plan to merge their engine operations into a standalone company, a step the Swedish automaker says will cut costs as it shifts to a fully electrified lineup.

The combined unit would supply two million diesel and gasoline-powered engines, compared with the 600,000 Volvo produces today, giving the two companies more scale to reduce material costs. It could also supply other car manufacturers, though none have expressed interest yet, Volvo Chief Executive Officer Hakan Samuelsson said.

Global automakers are walking a financial tightrope as they spend billions to develop electric vehicles that IHS Markit forecasts will grow from 2 per cent to 12 per cent of new-car production by 2030. At the same time, slowing sales, trade wars and tightening emissions regulations in China and Europe are pinching profits.

Forming a standalone supplier will free up Volvo to focus on electric powertrains and platforms in-house without starving its internal combustion engine business of resources, Mr Samuelsson said.

"It's not like the combustion engine is going to be a growing business," he said in a phone interview. "The right thing to do is to consolidate and seek synergies. And the earlier you do that, the stronger you will be."

Volvo said no jobs will be eliminated in forming the new supplier, which will employ about 3,000 Volvo workers and 5,000 from Geely, including people in engineering, procurement, manufacturing, information technology and finance.

It's too soon to tell whether the merger would lead to job cuts over time, because it will depend on how quickly the market transitions from combustion engines to fully electric vehicles, said Alan Baum, an independent auto analyst in West Bloomfield, Michigan.

"The extent that you move to full battery-electric, you obviously displace those white-collar and blue-collar combustion-engine people," Mr Baum said, adding that some staff may be able to transfer to new areas within the companies. "If they remain heavily involved in the supply chain, perhaps in a way they weren't in combustion engines, then they would in fact absorb some of that transition."

Some forecasters see electrification taking off faster than IHS, with BloombergNEF analysts projecting that battery-only and plug-in hybrid vehicles will reach 30 per cent of sales by 2030.

Volvo wants half of its global sales fully electric by 2025, and for the remainder to run on engines for gas-electric hybrids supplied by the new unit formed with Geely. The carmaker sold more than 355,000 vehicles globally in the first half of 2019, a 2.5 per cent gain over last year. It will start production next year of the brand's first fully electric car, a battery-powered version of its XC40 compact crossover.

Mr Samuelsson embarked on US$200 million of cost cuts in July after announcing operating profit fell 30 per cent in the first half. Geely's profit plunged 40 per cent in the first half, dragged down by the first slump in Chinese auto sales in a decade.

The CEO hopes to bring the planned merger of engine operations before Volvo's board for approval next year.

"You cannot be world champion on everything," Mr Samuelsson said. "We don't want to risk losing out on electrification."

BLOOMBERG