Volvo's official answer is about depressed markets, heavy losses and low capacity utilization.
Indeed, the auto maker is in deep trouble in its main markets. In only three years, from 1989 to 1992, Volvo's total des of 'large cars' (the 200,700/900 and the new 800 series) dropped by 30%, from 280,000 to 200,000. The Swedish market, VOWS second most important, virtually collapsed. Registrations dropped from 344.000 in 1988 to 155.000 in 1992, the worst figure in more than 30 years. The year 1993 will be even worse. At the end of the 1980s, when sales had already started to fill, Volvo expanded production capacity in Belgium and commissioned the new plant in Uddevalla. Theoretically the two plants( in Ghent and Gothenburg) alone have the capacity of producing 300.000 cars, which is 50 percent in excess of current sales for two years; the result has been in the red. In 1992, the Group's operating loss will be 2.3 billion SEK ($300 million) of this Volvo Car accounted for more than hall. Management became preoccupied with immediate measures to reduce capacity and costs. In this situation of disastrous capacity utilization, Uddevalla's character of being a small and incomplete plant was a great disadvantage.
According to the official figure, presented in 1992, Volvo Car will save 350 million SEK ($50 million) annually by consolidating its Swedish operations in Gothenburg, Volvos main plant. This figure has been seriously disputed. First, 100 million SEK of the total 350 is a fictitious capital saving, as a result from accounting transactions. Instead of annual depreciations, the investment at Uddevalla is deleted at one stroke as part of restructuring costs for fiscal '92. This is of course no real saving, but it is politically important for the new CEO, Soren Gyll, who was appointed in 1992. In this way he will be able to show improvements and claim that he has started to turn the company around. Second, Volvo argues that the company will save 250 million SEK in operating costs by dosing down the two small plants. Many of the entries on this list are debatable or, at worst, fake. For instance, white collar workers are treated as a fixed cost. By consolidating production in Gothenburg, all post positions at Uddevalla are eliminated. In theory, costs are reduced by 30 to 35 million SEK. This estimation assumes that there will be no increasment in salaried positions in Gothenburg as a result of the added volume. Unfortunately, this hypothesis is impossible to check ex post. Closing the production warehouse in Uddevalla accounts for another projected cost saving of, approximately, 10 million SEK yearly. The assumption is that the production warehouse in Gothenburg will stay the same, but this is not proven. Furthermore, this theoretical reduction is not compared with the very real reduction in final product stock Uddevalla could achieve by introducing customer order assembly (that saving was worth 4 times more than the plant's entire production warehouse). That omission is symptomatic of the whole exercise in which only the costs, and not the revenues, of operating Uddevalla are listed. The Uddevalla anticipants in the company's study team showed a very different calculation. According to this Volvo would save only 50 million SEK ($7 million) per annum by shutting down the plant.
Irrespective of the exact evaluation of individual items in these exercises it is dear that the operational savings of shutting the plant are insignificant. The puzzle deepens – why did
Volvo takes this decision?
It is impossible to understand Volvo's decision without referring to corporate politics. Of course, disputes of this character are difficult to substantiate, because it is always embarrassing for top management to accept the fact that strategic decisions are based on other considerations than objective analysis of economic facts. Tthere is very strong evidence that Uddevalla's future was decided already at a board meeting in early autumn, long before the analytic analysis and estimation of the plant's performance had started. At this meeting the Volvo executive was under heavy pressure from the company's major shareholder, the French state-owned Renault corporation. The Renault managers demanded that Volvo tool radical measures to stem the red ink and eliminate excess capacity. The Renault CEO, Louis Schweitzer criticized, in public, Volvo's production structures and its small-scale plants. Renault executives never studied Uddevalla's performance. Compared with Volvo's option range, Renault's best selling Clio is much more standardized car concept, relying on tightly scheduled mass-production plants. Renault managers could see no particular advantage in Uddevalla's flexible ability of building highly individualized cars.
Volvo's president, Gyllenhammar was conspicuously missing at the press conference in
November announcing the decision, and there were many indications that he was against it.
Historically he has played an important role as an advocate of 'humanistic manufacturing'.
However, his overall impact on Volvo has been highly ambiguous. While promoting work reforms and decentralization of authority to the shop floor, his own management style became increasingly elitist and autocratic, thereby alienating the most able senior executives. As a result, Volvos top management team is weak, in terms of industry experience and product expertise. There is a conspicuous absence of 'cat guys' in leading echelons. Gyllenhammer's penchant for grand deals, acquisitions, mergers and product diversification (to energy, drugs and food businesses) has diverted managerial attention away from the central business and gave birth to illusions that Volvo could survive without continuously upgrading process and product. He has followed a portfolio strategy similar to the strategies of merger and acquisition that gained such importance in the United States in the 1960s and 1970s and chipped in to the subsequent loss of competitive advantage in American capital-intensive industries. Despite his lack of detailed knowledge of the auto business, Gyllenhammar has nevertheless repeatedly meddled in with the sensitive product development, adding extra delay to an already inefficient process. In 1992, his position had been undermined due to a recent strategic failure, the aborted merger with a Swedish state owned food company Procordia. This gave the new CEO, Soren Gyll, a strong position. For more than two decades Gyllenhammar had been Mr. Volvo. He was closely associated with the development of Kalmar and Uddevalla. Gyll now wanted to definitely seize the reins.
To Gyll, Volvo's production structure was a matter of simple logic not assuring any close examination; one big consolidated plant must be better than one big plant plus two small ones. When Gyll visited Uddevalla, just before the closing was announced, he was genuinely impressed by the plant's major productivity improvement, as well as its responsiveness to customer demands and dealer requests. His conclusion was: 'Thank you; you have done a damn good job. Now Gothenburg will have to do the same.’ That summarizes Uddevalla's predicament. The plant had to prove its performance and matches it with Gothenburg’s. When Uddevalla took the lead and developed a number of innovative features, management took as a given, without demanding any proofs, that Gothenburg could do the same. For Gyll, learning about Uddevalla's accomplishments only made the “pain†worse, since the plant's future had already been decided.
A third fateful player in this process was the Gothenburg plant. These workers had taken a series of heavy cuts and neither management nor unions accepted taking any more. They both demanded the sacrifice of Uddevalla to save volume and jobs at the main plant. Only a few years earlier the Swedish Metalworkers' Union -had been heavily involved in the development of the Uddevalla concept. That’s a bit odd because the Union that was involved in the development of the plant, now, they were opposing against it. The plant was seen as a model of labor management cooperation and a proof that the Metalworkers' demand for a fundamental renewal of manufacturing was no wishful thinking. At two consecutive congresses this was the main policy line, spelt out in several documents advocating a 'Solidaristic work policy' (see Swedish Metalworkers' Union 1987). At the time of the first contest, this union commitment came to naught. .The Gothenburg union representatives on Volvo's board urged management to dose Uddevalla, and the national union found no way to surmount these entrenched local interests.