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Volvo’s Q1 Earnings Show Signs of Strength but a Dependence on Volatile Markets

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On Friday, April 28, Volvo reported a Q1 year-over-year increase in net income of 26%. Volvo’s global sales grew by 7.1%, driven largely by demand in China and the EMEA region, which saw year-over-year sales gains of 18.8% and 9.2%, respectively.

Volvo sold slightly more than 530,000 vehicles in 2016, a remarkable rise from the 373,000 it sold in 2010 – the year after Ford sold the brand to the Chinese automotive conglomerate Zhejiang Geely Holding Group. 2010 also marked the year when Volvo’s then-CEO Stefan Jacoby hinted at an annual sales target of 800,000 by 2020.

In the seven years since, Volvo has grown its production presence outside of Europe – with nearly every new model rolling off of European assembly lines being jointly produced in either China or Malaysia – and has invested heavily in new model development. The 800,000 unit sales goal has stuck – now with only about two and a half years to make it a reality. If Volvo’s global sales follow the Q1 trend of a 7% year-over-year increase, the company will sell around 575,000 vehicles this year.

Despite having made sales gains of over 40% between 2010 and 2016, Volvo is unlikely to increase sales by a further 40% by 2020 due to the brand’s dependence on China and the US as sales drivers and competition among global luxury players.

Heavy Reliance on an Increasingly Indebted Chinese Market

The Chinese consumer is becoming more leveraged, which raises the risk of a credit crunch that will negatively impact many aspects of the Chinese economy – including new car sales. Between 2009 and 2016, the number of vehicles on the road in China increased by 181%, while the outstanding balance of automotive debt increased by 261% in real terms over the same period. China is Volvo’slargest market by sales volume.

Sources: Vehicles in Circulation: Euromonitor International from European Automobile Manufacturers’ Association (ACEA)/International Road Federation (IRF)/Eurostat/national statistics; Consumer Finance: Euromonitor from trade sources/national statistics

Macro and Micro Struggles in the US

The US auto market, traditionally a bastion of growth for global automakers, has entered a period ofunstable growth and declining prices, which hinders its ability to serve as a safe haven for acompany like Volvo trying to grow its presence. Easy credit has ballooned automotive debt, dealer car inventories are rising as new car sales decline, and a glut of off-lease used cars is putting pressure on the used car prices.

At the company level, Volvo’s US sales declined by 17.6% year-over-year in Q1 due to the decision to prioritize distribution of the new 90-series models to all regions, not just the Americas. The double-digit sales decline highlights the automaker’s wavering presence in the United States and its belief that near-term sales growth will come from other regions, namely China. Volvo controls 0.4% of the total US market – it’s third largest by volume – small even among premium automakers like Mercedes-Benz and BMW, which control 2.1% and 2.0% of the US market, respectively.

Tough Competition among Global Luxury Players

In a crowded luxury car market where most brands have adopted the safety features that once made Volvos unique, Volvo faces strong competition in its attempt to stand out. Stealing share away from other brands is a methodical process and in light of an unreliable distribution network and the potential softening of two key Volvo markets – the US and China – a further 40% increase in sales in two and a half years is unlikely.

Source: Euromonitor International/JATO Dynamics

Ultimately, Volvo not meeting its 800,000 unit sales target by 2020 does not mean that the company struggled to revive itself, but rather that it is carefully growing. In recent decades, Volvo has portrayed itself as a niche player focused on discreet luxury and safety rather than a showy, mass-affluent luxury brand. Volvo could pursue short term expansion strategies by implementing aggressive incentive programs in key markets, but those are likely to erode profit in the long term by cheapening the brand. Instead, the company’s pursuit of long term growth initiatives like vehicle electrification and new model introductions are poised to yield positive returns far beyond 2020.

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