The automaker expects profitability to improve in the second half, supported by new model ramp-up and cost-cutting measures.Volvo Cars expects stronger profitability in the second half, it said on Friday, even as the Swedish carmaker warned of rising costs of key raw materials and a more severe slowdown in China that sent its shares down 8 per cent.
The Swedish automaker had warned ahead of time that the second quarter would be weak, pressured by high raw material and freight prices and tough discounting.
However, a tougher-than-expected 35 per cent sales plunge in China squeezed its operating profit margin to 1.1 per cent from 1.6 per cent the quarter before. “It’s a very tough situation; volumes are down and (there is) severe price competition,” CEO Hakan Samuelsson told Reuters. “So profitability is far from satisfactory in China.” His comments echoed those from Germany’s carmakers in recent weeks. BMW said last week its China sales had fallen 30 per cent in the second quarter, and issued a profit warning in June that it partly blamed on China.
China the most difficult region
Car industry veteran Samuelsson returned to run Volvo last year to revive the company’s fortunes and share price at a time of challenges including US President Donald Trump’s trade war. Now Volvo, like its rivals, is also battling higher prices of oil and key materials like lithium and aluminium due to the US-Israeli war on Iran, which has cut off the Strait of Hormuz, a critical conduit for the world’s raw materials.
Those higher prices will start to hit in the second half, CFO Fredrik Hansson told Reuters. The company is protected by hedging, but “to a large extent it is outside of our control”, he said. The force of the downturn in China was worse than the carmaker, and the whole industry, feared, the CFO said. “Everyone, including us, was thinking (the first quarter) is going to be a bit rocky, but I think in Q2 it has taken the industry by surprise,” he said.
Question mark over long-term recovery of Chinese demand
Analysts at Citi said in a note that while the EBIT margin had collapsed and the company was dealing with a negative free cash flow, the biggest question was if China would ever recover.
Volvo Cars’ Chief Commercial Officer Erik Severinson said the company was protecting its pricing.
“China is right now the most difficult region in the whole automotive industry,” Severinson said. “But we are not going into discount wars.” Volvo shares were down 7 per cent at 0921 GMT, on track for their worst day since February.
The company, majority-owned by China’s Geely Holding , posted an operating profit of 800 million Swedish crowns ($82.8 million) for the April to June period, lagging the first quarter’s 1.6 billion crowns. Volvo said it expects earnings margins to rise in the second half as output of the new flagship EX60 SUV fully ramps up, and sees 10 per cent volume growth from the first half. The company last year launched an 18 billion-crown cost-cutting plan, and said on Friday it had delivered 5 billion of indirect savings six months ahead of schedule.
