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Volvo’s challenge of supplying demand

Volvo Group’s CEO Martin Lundstedt talks side-stepping conflict in Russia and supply chain woes to steer the commercial vehicle-maker’s growth in 2022

Taking to the reporting stage at the end of a tumultuous start of the year, the CEO of Volvo Group, the maker of Volvo and Renault trucks, buses and Penta engines, Martin Lundstedt is putting on a serious tone despite a seemingly strong start to 2022.

“Economic activity continued to be good in Q1 2022 with high transport volumes and good construction activity in most markets,” he says. “We increased sales and improved profitability. Our net sales grew by 12% to SEK 105.3 billion. The high business activity combined with our growing service contract portfolio resulted in continued good service growth, which was up by 19%. Adjusted operating income (profit) increased to SEK 12.7 billion (11.8 in Q1/2021).”

Make no mistake, the numbers look good on paper as they carry over the divestment of UD Trucks to Isuzu – said to be worth over $2 billion in total – and an order book that remains healthy, but they also bely serious pressure in the supply chain.

“We achieved an adjusted operating margin of 12.0% despite a challenging supply chain situation,” he says. “Operating cash flow in the Industrial Operations amounted to SEK -5.4 billion (5.7 in Q1/2021), in part due to a build-up of inventory related to the unstable supply chain.”

“In the first quarter, the economic activity continued to be good with high transport and construction activities. In most markets, demand continue to be larger than dupply and in such times – and we have seen that now for a while – it is important to keep discipline in the order book management.”

He adds: “The supply chain continued to be strained, which caused disturbances and stoppages in production also in Q1. Order backlogs are extended and lead times long, and this has negatively impacted order intake.”

While the supply chain strains, transport activity across most regions is at good levels, and demand for trucks is high, the company is unable to match demand with supply.

“We have large order books and delivery times are long, and this has made us restrictive with order slotting, which has affected order intake negatively. We are doing everything we can to reduce the long lead times to our customers. We are restricted to booking firm orders, and the order intake isn’t currently a good indicator of the market activity going forward: the size of the order book, the fleet utilisation among our customers, the used trucks business, the service business and the customer finance activities, all these indicators are still strong and at healthy levels.”

“Despite these issues, truck deliveries increased by 6% to 55,600 vehicles which is a record for a first quarter. Net sales grew by 31% to SEK 69.6 billion. We have had extra costs due to the supply chain disruptions as well as higher costs for material and have worked proactively with price management to mitigate them. We expect that the inflationary pressure will continue. Despite these headwinds, our truck business achieved an adjusted operating margin of 12.5%.”

He continues: “Truck deliveries increased by 17% on the back of really hard and dedicated work along our supply chains, both internally, and externally. We are running our manufacturing system at a high level, with extra flexibility. And we see that this is paying off in terms of volumes. And also in positive market share developments in many markets.”

Throughout his review of the Group’s start to 2022, Lundstedt stresses that the numbers have been impacted by disruption in the Russian market. Since of the war in Ukraine in February and the sanctions that followed, all sales, services and production in Russia have been suspended. Effectively, dislocating the Swedish firm from its operation in the country and SEK 9 billion of assets says Lundstedt, adding that it estimates its losses over the quarter to be SEK 4.1 billion.

“The ongoing war is devastating for Ukraine and my thoughts go out to everyone who is suffering. We are doing what we can to support affected colleagues, families and communities. The group and many individual employees have donated funds to the Red Cross and UNHCR.

“Furthermore, our colleagues in neighbouring countries have teamed up with these organsations so that we can provide concrete local in-kind support that matches their needs. There are many examples of our colleagues going above and beyond to support the victims of this humanitarian catastrophe and we appreciate all their dedicated efforts.”

“We are doing what we can to support colleagues in the Ukraine and families, communities, customers and business partners that are affected by the war. There are many examples of our colleagues in the group in and around Ukraine, going above and beyond expectations to support victims of these humanitarian catastrophe and we really appreciate appreciate all the dedicated efforts done since the war started and sanctions were imposed. We are continuously assessing the situation to protect people and assets to the fullest extent possible from outside of Ukraine.”

He adds: “What we have seen so far when it comes to the capacity constraints and the supply chain constraints is not related to the situation in Russia.”

Unlike Russia, the Chinese market is both a critical component of Volvo’s global supply chain network as well as a key sales territory.

“Construction activity in Europe and North America has remained on good levels, driven by both the commercial sector and infrastructure investments. In the first quarter, the economic activity continued to be good with high transport and construction activities. In most markets, demand, continue to be larger than supply and in such times. And we have seen that now for a while. So in such times, it is important to keep discipline in the order book management.

“The Chinese market, on the other hand, continued to decline. Volvo CE’s net sales decreased by 9% to SEK 22.6 billion, primarily related to China (the adjusted operating margin amounted to 12.4% (15.4 in Q1 2021),” he reveals, adding that the market has shrunk by as much as 35%.

Of major concern, is its role as supplier of semiconductors and raw materials. He estimates that the total global sales could be down by as much as a 10% (and “maybe considerably north of that”) compared to a market where production is flowing easily.

“That is why we have been restrictive with order intake with the restraints that we see, not least the lockdowns we have seen in China recently. In deepsea logistics transport we do see a specific flows of semiconductors and electronics, but we should understand that in a normal truck depending on if it’s a fully electric, or if it’s an ICE truck, you have somewhere between 1,600 and up to maybe 3,500-,4000 semiconductors. So it’s really now a game where we are working supply chain by supply chain. You need to take step back and say, the Group trucks delivering the 6,500 trucks – which is a record for a first quarter – shows we have the methodologies and the organisation – and the competence – to work with it internally, and together with our supply chain. And we will continue to drive it like that.”

Read the full story in the May issue of Truck and Fleet Middle East.

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Stephen Whitehttps://truckandfleetme.com/
Stephen White was formerly editor of Big Project ME.
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