Interview: Volvo CE president Pat Olney

Pat Olney has had an impressive rise through the ranks at Volvo Construction Equipment (Volvo CE). He joined the company in 1997 when his then employer, grader manufacturer Champion Road Machinery, was acquired by the company.

After a spell as CFO, he moved into general management positions within Volvo CE. The appointment as president of the grader business saw him return to his native Canada, from where he went on to oversee the wider road machinery division following Volvo's acquisition of Ingersoll-Rand's road building business in 2007.

But the big step came earlier this year when Olof Persson, president of Volvo CE, was chosen to replace Leif Johansson at the head of the Volvo Group. Mr Persson left Volvo CE as a company in strong health. It currently achieves an operating margin above 10%, and is ranked 4th in iC's Yellow Table survey of the world's 50 largest construction equipment manufacturers.

But although the company has emerged from the recession in good shape, the world has changed, and it is clear that in the future, Volvo CE under Mr Olney will be something of a different animal to the company of today, and certainly of a few years ago.

Emerging countries are more important than ever, and
one of the biggest challenges for Volvo and other many other equipment manufacturers is how to adjust to the needs of these markets. It is not just about developing different products, but building a geographic footprint that is less Euro-centric than before.

Dual brand

It has been Volvo's ability to tap into this emerging market growth, thanks in part to its factories in Brazil, China and India, which has put it on the sound footing it is on today. But one move that looks particularly astute is its investment in China's Lingong.

Volvo bought a 70% stake in the Shandong province-based company in 2007 for CNY 328 million (about US$ 50 million at today's exchange rates). It is one of several large, formerly state-owned manufacturers in the Chinese market, along with the Likes of Liugong, Chenggong, Xiagong and so on, which have historically commanded the lion's share of the country's wheeled
loader market.

As well as giving Volvo a slice of the massive Chinese equipment market, which in unit terms today is about the same size as the rest of the world combined, it has given the company a range of 'no frills' machines which it says hits a different customer group than the Volvo brand does. These machines are now being rolled-out under the SDLG brand to other developing markets outside China.

It is an unusual approach. Most companies in the sector prefer to keep everything under one roof and one brand. Indeed, this was a big focus for Volvo for many years as it integrated acquisitions like Ingersoll Rand, Champion and Samsung.

So why two brands in some countries? "What we recognised looking more closely at those markets is that there are very distinct segments of customers which require different levels of technology in the products and which also require different levels of aftermarket support in what we call soft products and the soft offering. We wanted to be able to offer that different segment of the market a solution from the Volvo Group, but not necessarily under the Volvo brand.

"That approach is one we've taken in China specifically,
and what we've seen so far is very minimal, if any, cannibalisation between the products, which tells us there really are distinct segments in the market with different needs. And of course we're trying that approach in different markets like Brazil as well," said Mr Olney.

Volvo's approach is cautious at the moment, but the SDLG brand looks likely to be pushed out into other areas as the years go by.

Mr Olney said, "The good news for us is we have the ability to respond if it proves to be the case that there is a large segment in those markets that has a demand for those specific lower technology products. We have that strategic option.

"In the meantime, we're taking it step by step in those large markets, which therefore represent the biggest potential and best business case."

Portfolio

Another unconventional move from Volvo has been to abandon the manufacture of its own skid steer loader designs and opt instead for an OEM supply agreement with JCB. Under the terms of this agreement, JCB is building Volvo-branded skid steer and tracked loaders at its factory in Savannah, Georgia, US.

The idea of working with competitors in this way would have been unheard of a decade or so ago, but today Volvo is not the only manufacturer to go down this route. Other companies taking this approach include Caterpillar, which works with JLG for telehandlers and Wacker-Neuson for small mini excavators.

On the subject of skid steer loader manufacture with JCB, Mr Olney said, "The amount of value added from Volvo or JCB relative to the total price of that equipment is much less than it is in say a 46 tonne excavator. The economy of scale becomes even more important.

"We saw the opportunity with a partner like JCB to offer products that were differentiated by the two different brands, but with some synergies to allow economies of scale, so we could offer these products through our separate channels to different customers in a more cost-competitive manner."

He added, "There's no golden do or don't rule. What it comes down to is do you have the conditions to be competitive with the set-up you have today, or do you need to do something in a different way. If we have any products in that sort of category and the right sort of partner is available, it's not something I'm going to rule out. Of course it's not the way we want to approach 95% of our business."

This subtle change is perhaps a symptom of changing priorities for Volvo and the wider industry. In the pre-crisis years the emphasis for many was on being a full-line manufacturer and offering every machine conceivable to buyers in North American and Europe. These days those markets are distressed, and prospects look brighter in emerging economies where requirements are not as diverse.

"The geographic dimension has come to the forefront in recent years because of how dramatic it has been in some of these markets. Not participating in the growth in Brazil or China or India would have been a game changer for our business. So that has come to the forefront.

"In the last couple of decades the focus was on broadening that range to be a broad-line player. Now we have that, we can go for that geographic reach. That doesn't preclude us from coming back to the range and saying, 'Hey, there are a few holes here and there that we'd like to fill.' But I think we have a broad coverage across the segments," said Mr Olney.

Global strains

Although times are still tough in Europe and the US, the surge in demand for equipment from China, India, Brazil and the wider developing world over the last few years means that the volume of machines sold around the world this year, will be about the same as the peak that was seen in 2007.

That may be good for the industry, but it is also a source of concern. Those boom years saw a lot of strain on the industry's supply chain, driving up prices for plate steel and leading to shortages for a variety of crucial components, from engines to hydraulics and even tyres. The result was rising prices and long lead times for new machines.

Volvo has an advantage in that it makes a lot of its own components, including diesel engines, but it still has to buy-in numerous specialised parts, and with markets growing further, this could mean pinch points.

"From an external standpoint, it's important to manage these partnerships carefully all the time with suppliers - to be a good partner, to be an honest partner and to be a partner that has earned the trust form that business. So when the pinch does come, we're not the guys at the bottom of the list.

"We put a lot of emphasis on building those relationships. At the end of the day it's people across the table - whether its customers or suppliers, it's people working with people, and you need to have a good understanding of each other's needs. We want suppliers who are healthy through the cycle," said Mr Olney.

He continued, "One of the challenges they have is that some of them are quite capital-intensive. They went through a very tough downturn and now they have to have the confidence to put in the next big investment in machining or whatever and see that they will get a pay-back on that. I think some suppliers struggle with that uncertainty in Europe and North America. In Asia most suppliers are quite confident in the market future and are enthused to invest, so it's a mixed picture."

Fit for future

The strategy launched by Mr Olney's predecessor, Olof Persson, was called 'Fit for Future', which helped the company navigate the recession to find itself in the strong position it enjoys today. Commenting on his predecessor's work, Mr Olney said, "That strategy was built by the team that I was part of under Olof, and we're very committed to seeing that through.

"Having said that, we're dealing with ever more uncertainty now, which we have to monitor and respond to. We also have to cast our eyes out beyond 2012, which was the end of the fit for future strategy, and start looking further ahead."