Dongfeng and Volvo cooperation project be handed in to DRC

After five year’s marathon negotiation, cooperation between Dongfeng and Volvo could be seen in short time. Last week, reporters learn from Volvo China that its cooperation project with Dongfeng has been handed in to National Development and Reform Commission. It is predicted that official reply could be gotten in the end of the year.

The handing in of the project means that Dongfeng and Volvo have found a cooperation plan which is acceptable to both sides. Analyst says the possible cooperation solution could be Nissan withdraws parts of its equity from Dongfeng Commercial Vehicle and focus its business in passenger vehicles or Volvo and Dongfeng cooperate in a new entity which is not under Dongfeng Limited.

The major problem for their cooperation is about shares.  According to China’s automobile industry policy, foreign company is not allowed to produce vehicles in China independently. In order to produce vehicles they have to form a joint venture with a Chinese automobile company and the Chinese company should hold a minimum of 50% of the equity. However, Dongfeng Auto had injected almost all of its good commercial vehicle equity into Dongfeng limited which was established by Dongfeng Auto and Nissan in 2003. The cooperation negotiation between Dongfeng and Volvo was believed to be started by Dongfeng Commercial Vehicle Shiyan Company and Dongfeng Liuzhou Auto. However, if Dongfeng cooperates with Volvo by the two companies, they will fails to meet the minimum 50% of the equity requirement.

In Jan.2007 Dongfeng Auto declared that Dongfeng Nissan and Volvo were negotiating on commercial vehicle project and a preliminary cooperation agreement had been reached in Hong Kong. The negotiation could make Dongfeng Limited focus its business on passenger vehicle and light commercial vehicle, while Volvo would cooperate with Dongfeng on its heavy and medium commercial vehicle business and engine business.

However, in May 2008, Dongfeng Auto General Manager Mr. Xu Ping said cooperation between Dongfeng and Volvo might under a new entity instead of Dongfeng Limited but which might have an impact on Dongfeng Commercial Vehicle’s current situation also.

In first half year of 2008, China domestic heavy truck sales volume reached 387,200 units in creased by 51% y-o-y. It is learned that heavy truck market increase rates in 2006 and 2007 were more than 50%. So analysts are very optimistic on China heavy truck markets. However, sales of heavy truck joint venture from North Benz (Beiben heavy duty truck), Huawo, Dongfeng Nissan to Chiangzhou Iveco were disappointing. Analyst says the main reason leading to their failure is that domestic market could not afford so high price trucks. As for trucks with same GVW, foreign brand trucks’ price is 3 times as much as that of China brand trucks. And the lack of cooperation harmony between two sides of the joint venture was another reason leading to the failure.

However the development of China highway and logistics requires more comfortable and good quality trucks which will be an opportunity for foreign trucks.

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