Volvo suppliers threaten to pull the plug

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Could the major obstacle to Ford selling Volvo to Geely be the issue of suppliers, who are threatening to stop supplying parts to Volvo should Geely become the new masters?

From Bloomberg:

Oct. 29 (Bloomberg) — Volvo Cars, Sweden’s third-largest private employer, may lose contracts with some suppliers unless Zhejiang Geely Holding Group Co., the favored bidder, promises to protect their patents and not plagiarize products in China.

“Big, tech-heavy suppliers are definitely concerned about China’s record when it comes to copyrights and Volvo would be in real trouble if it ends up not being a preferred customer among suppliers,” said Svenaake Berglie, who heads FKG, a group that represents 300 automotive suppliers. “Just as carmakers choose suppliers, suppliers choose carmakers.”

Ford Motor Co. said yesterday it has focused talks on the sale of Volvo to one bidder, a group led by Hangzhou, China- based Geely. Ford hasn’t yet resolved concerns about protecting intellectual property, a person familiar with the talks said.

Suppliers to Volvo include Autoliv Inc., the world’s largest maker of automotive air bags, and IAC Group, the U.S. interiors supplier owned by Wilbur Ross. The auto-parts industry in Sweden employs 72,000 people, mainly in the southwest part of the country, where Volvo Cars, Saab Automobile and Volvo AB, the world’s second-largest truckmaker, are based. Sweden’s vehicle industry accounts for 14 percent of all exported goods and employs 140,000 people, according to FKG.

Magnus Sundemo, head of engineers’ union at Volvo Cars, shares Berglie’s concerns. The founder of Konsortium Jakob AB, the Swedish investor group that also wants to buy Volvo, said that suppliers were worried that Volvo’s technology may be abused by Geely and that they may choose not to make high- technology products available to the Swedish carmaker.

‘Immature’

“We need a competent owner with a long-term view,” Sundemo said by telephone, adding that Jakob won’t abandon its bid for the Swedish carmaker. “Most Chinese car companies are very immature — they haven’t been around for very long.”

Yuan Xiaolin, a spokesman at Geely Holding, didn’t answer calls to his mobile phone after office hours.

John Gardiner, a spokesman for Ford Europe, said that any agreement the Dearborn, Michigan-based carmaker reaches with Geely will take intellectual property rights into account.

Geely is prepared to pay about $2 billion for Gothenburg, Sweden-based Volvo, less than a third of Ford’s purchase price a decade ago, people familiar with the talks have said.

The Chinese company probably wants to move Volvo production to China from Sweden and Belgium in three to four years, when the next generation of Volvo models will be introduced, according to Mike Tyndall, an automotive analyst with Nomura Securities in London.

Made in China

“Volvo hasn’t exactly been hugely profitable in recent years and Geely will need to figure out how to make it a profitable business and to me that means lowering costs,” said Tyndall. “We shouldn’t be surprised if we, in the future, see Volvos made in China being shipped to the rest of the world — depending on price, this looks like a win for Geely and ultimately a bit of a loss for jobs in Sweden.”

Volvo, originally a subsidiary to ball-bearing maker SKF AB, has about 20,000 workers worldwide, including 15,000 in Sweden. In “the extreme case” that Volvo would shut all its production in its home country, as many as 15,000 jobs would be at risk at Swedish suppliers, Berglie said.

Prime Minister Fredrik Reinfeldt said yesterday that a deal on Volvo, which invented the three-point seatbelt and that claims it was first to introduce a rear-facing child seat, should not create a burden for taxpayers and that Geely’s commitment would stand the test of time.

Quarterly Loss

“The automotive industry is being recast,” Reinfeldt said. “One can question if a leader of a country who raises a hand and says that ‘no jobs will be affected here’ has really understood the power of the restructuring forces,”

Mikael Saellstroem, a leader from the IF Metall Union at Volvo Cars, said workers are concerned about Geely’s commitment to Sweden after a takeover.

“The most important question is how they view production and product development in Sweden in the long-term and while Ford has said that the headquarters will remain in Sweden, that’s what Ford says,” he said. “Geely can do what they want.”

Geely plans to maintain Volvo’s production and research facilities, union agreements and dealer networks, the Chinese company said in a statement yesterday.

Volvo Cars had a pretax loss of $255 million in the first quarter, and the deficit narrowed to $231 million in the second quarter. In 2008, the pretax loss was $1.47 billion, according to company spokeswoman Maria Bohlin.

‘Expansive Market’

Volvo, which sold 374,297 cars globally in 2008 and saw sales drop 27 percent in the first half of this year, cut 2,700 jobs last year and reduced its workforce by a further 3,300 by not replacing people who left the company and by slashing the number of consultants. A sale to Geely may be an opportunity for Volvo to increase sales, said Matts Carlsson, managing director of the Goeteborg Management Institute.

“Volvo has always been suffering, as has Saab Automobile, of having too small markets,” Carlsson said. “A deal with Geely would therefore be very positive for Volvo as they get access to the world’s biggest and most expansive market.”