Ford Finds a Buyer for Volvo: Putting Some Color Back in the Blue Oval

by: Wall Street Strategies

By David Silver

Over the weekend, Ford (NYSE:F) and Zhejiang Geely Holding Group Co. agreed to terms that would shed the Dearborn, Mich. company of its struggling Volvo (OTCPK:VOLVY) brand and would propel the Chinese automaker onto the world stage. The Volvo experiment was a big money loser for Ford, acquiring the brand in 1999 for $6.45 billion amid a flurry of mergers and acquisitions in the auto industry.

The move comes after months of negotiations with Geely, and allows Ford to concentrate on its three core brands (Ford, Lincoln, and Mercury). The timing of the deal also comes as sales are improving in the United States while sales in Europe are expected to see a dramatic decline following the end of government incentives. Many European countries have had a cash for clunkers program; this has stimulated growth through the first two months of the year. Growth in Europe has increased by more than 20% year over year (despite a steep decline in Germany). Germany saw its incentive programs end at the end of 2009, while the U.K., France, Spain, and Italy continue to have programs in place.

The move is the first by a Chinese automaker onto the world stage. Management from Geely expects to sell approximately 600,000 vehicles in Europe and the U.S., and is in the midst of stoking demand in China for the luxury sedan. The company has plans to build a plant in China capable of producing 300,000 vehicles (200,000 for China and 100,000 for the rest of Asia) and hopes to sell more than a million vehicles per year in four to five years. It seems that Geely plans to build share in an already overcrowded market.

The first of the month is approaching and with that comes another month of monthly auto sales figures. We are expecting a sizeable improvement from March of 2009 as well as from February of 2010. During February, the industry seasonally adjusted annual rate of sales (SAAR) was 10.4 million vehicles, and we are modeling for there to be more than a million vehicles sold during March, bringing the SAAR above 12 million for the first time since December of 2009 and only the second time since August (cash for clunkers program). We expect Ford, General Motors, and Toyota (NYSE:TM) to be among the biggest surprises. Toyota is offering incentives including 0% financing and higher trade in values to spur sales following the company's massive recall of more than 8.5 million vehicles over the past few months. The following table outlines our expectations with the percentage change both year over year and sequentially.

The industry has gotten into a pricing war of sorts as Toyota tries to win back some customers with its incentives and other automakers are increasing their respective incentives to match Toyota. According to, Toyota is spending $2,242 on average per vehicle in March on incentives, up from $1,881 last month and $1,565 in March last year. General Motors is spending $3,497; Ford is spending $3,301; Nissan (OTCPK:NSANY) spent $2,406 this month. This will definitely help auto sales during the month of March; however, we expect these deals to be weaned out over the next six to eight weeks.