AB VOLVO is paying the price of staying independent, slashing 5,300 jobs in an urgent effort to cut costs.
The job cuts, representing about 7 percent of the worldwide workforce, take effect by the middle of 1999. Volvo estimates the job cuts will lower costs around $370 million a year, at the present exchange rate.
Most of the job losses involve white-collar staff. About half are in Sweden. In North America, about 1,000 positions will be eliminated, or about 10 percent of the total workforce.
'We felt that we were too slow in reducing costs,' said Leif Johansson, president and chief executive of AB Volvo, in a conference call last week with reporters and stock market analysts.
The staff cuts will also hit suppliers. Swedish supplier group spokesman Lars Holmqvist said 10 of his 150 member companies will reduce job levels.
Sources in Sweden said short-term profit demands from investors have put pressure on the company to become more efficient. AB Volvo made profits of Skr 7.78 billion ($963.9 million) in the first nine months of the year.
Johansson said it will take several weeks to sort out how the positions will be cut, whether through attrition, or termination. Besides the 5,300 full-time employees, Volvo will also drop about 700 people hired on a consulting basis. Hiring expensive consultants has traditionally been unpopular with Volvo's powerful unions in Sweden.
A reporter asked Johansson last week whether he will also use the economic crises in Asia and Latin America as leverage against the unions. 'What I say to the unions is between me and them,' he replied.
In Volvo's third-quarter report, the company blamed a fall-off in profits on new product investment, and sharp declines in Asia and Latin America.
'If the turbulence and crises continue and result in a declining total market, measures will have to be taken to adapt the group's level of costs to smaller volumes,' Johansson warned in the October report. The lay-offs were announced 30 November.
In the long run, the downsizing has its roots in Volvo's decision to go it alone, when it killed a would-be merger with Renault in late 1993. Under its new business plan, Volvo has sworn off cross-ownership with other auto companies, and sold off non-core subsidiaries in areas like food and pharmaceuticals.
Johansson said Volvo has targets for higher sales volumes, faster and cheaper product development, and higher profits. He said product development and sales volume growth are on track, but profits are not sufficiently keeping up. For the first nine months, AB Volvo's operating margin was 4.2 percent - down from 4.4 percent in the equivalent period in 1997. That figure does not include subsidiaries sold or acquired in that time frame.
'We cannot continue (just) to develop wonderful products, and grow. We also have to do the normal rationalization any manufacturer does,' he said.
Volvo's financial targets include a 10 percent annual increase in revenues, and operating income of 5 to 7 percent of revenues.
Johansson also announced earlier this year that he wants a 5 percent annual increase in productivity. He wants the costs of purchased materials to go down by 15 percent by 2000, and he wants every new model to cost 15 percent less to develop than the model it replaces.
Higher revenues and profits are needed, so Volvo can afford its desired targets on capital spending, and research and development. Volvo believes it needs to spend 5 percent of revenues on each, but it is not hitting that target, Johansson said. For the first nine months, capital spending was 4.8 percent of revenues, for instance.
'We were not self-financing at those levels,' Johansson said.
The timing of the layoffs may be related to short-term global market conditions, but Johansson insisted last week that the job cuts and other measures are necessary in the long run. He said: 'The jobs we are talking about here will not come back if there is an upturn in the business cycle.'