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Volvo Finding True Value In The Electric Bus Market Case Solution
Volvo’s mission to offer efficient, clean, and safe transportation was what led it to developing the pilot project of ElectriCity in Sweden. This project revolved researching and developing the next-generation sustainable transport vehicles. A part of the ElectriCity project was the partnership with KPMG to offer a more accurate depiction of the true cost of running on non-renewable fuel sources. The KPMG’s True Value methodology enabled companies to assess their “true” earnings and understand the future earnings that were at risk.
Previously transport authorities and municipalities focused on the direct financial costs since the relevant data to estimate the social and environmental costs was not available. With the increasing competition in the transport market, one way that Volvo found to differentiate its electric buses was to partner with KPMG to provide data on the environmental and social costs of running diesel and fuel buses. So, the true total cost of ownership (TrueTCO) included the conventional cost of ownership added with socio-economic, environmental costs and tax incentives which were previously not accounted for. Electric buses had a lower TrueTCO than diesel and biogas buses.
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Case Analysis for Volvo Finding True Value In The Electric Bus Market
China is one of the most attractive markets for electric buses. With a large industrial workforce and rising issues of pollution and smog, Chinese energy policy was aimed to take countermeasures against the rise in the environmental issues. Therefore, in the attempt to mitigate air pollution, China was interesting in pursing the development and implementation of electric vehicles in urban areas. These and other facts make China one of the most attractive options for Volvo to implement KPMG’s True Value methodology.
This report will explore the key issues, evaluate the internal environment of Volvo and external environment in China to develop recommendations for Volvo’s plans for capturing a strong market share in the Chinese bus industry based on the True Value methodology.
There is no information about the suppliers of parts, materials, and renewable energy for Volvo. It is also not defined whether the company will be sourcing its parts and setting up a manufacturing facility in China, leveraging the cheap labor available to further reduce the prices. Since Volvo is not yet established in China, it is assumed that they will be setting up a manufacturing facility there. It is also assumed that Volvo holds the financial muscle to open up a manufacturing facility in China that can cater to the demand there.
It is also assumed that Volvo has supplied to China through a joint venture in Shanghai, therefore, it holds experience of the Chinese industry and practices. It is assumed that it is not unaware of the logistics and influence of the government, as well as local preference in the Chinese industry.
3. Key Issues
Compared to Sweden, China was a much larger and more competitive market. It had the state-owned FAW group which had the support from the Chinese government. Other local companies in China included Ankai, Zhongtong, and Zhengzhou which were already large players in the electric bus industry. BYD, initially a battery manufacturer also stepped in the electric bus industry seeing the immense potential and had its electric bus model called K-9 tested in several countries apart from China.
New energy vehicle (NEV) research was funded by the Chinese government, private organizations, and academic research organizations to develop, pilot, demonstrate, and execute energy vehicles in the urban areas. A pilot project called Thousands of vehicles; tens of cities (TVTC) was aimed at implementing NEVs in public vehicle fleets in 25 cities. China was struggling to find a national model to expedite the diffusion process of electric busses. With electric bus manufacturing centered in China, Volvo could not just capture the market with its electric bus. A differential factor was needed to capture the market that was already dominated by major local industry players.
The TVTC program preferred locally produced vehicles. These local protectionism practices proved to be challenging for non-Chinese manufacturers, especially in the TVTC cities. Although the central government aimed at reducing these protectionism practices, there were still challenges for non-Chinese manufacturers like Volvo.
While China had scaled up its goals for electric vehicle implementation to 500,000 electric vehicles by 2015 and 5 million by 2020, these five years could be a huge opportunity for Volvo to expand into the Chinese market. However, differentiating in a localized industry with a strong threat of substitutes and a market dominated by large local and multinational players like FAW and BYD required effective strategic planning.
i. Porter’s Five Forces Analysis
Bargaining Power of Buyers
Since the municipalities purchased the electric cars, they were the customers. they had a high bargaining power because they had multiple options of reverting to hybrid, fuel cell, and battery electric buses since implementing any of these resulted in the eligibility of large subsidies from the government. Also, local manufacturers had leveraged the cheap labor to produce electric cars that might have been priced at a lower level than other firms. Buyers, therefore, had a lot of attractive options making their power high.
Bargaining Power of Suppliers
Since the suppliers of raw materials also have many options to offer their raw materials to, it is likely that Volvo will face some level of bargaining power of the suppliers. However, since Volvo is an established name and will have a strong investment capital in the Chinese market, the bargaining power of suppliers will lower eventually.
Threat of New Entrants
The threat of new entrants, especially at the local level is high. This is because of the ambitious goals of electric vehicles in China which will attract investment in this industry. Furthermore, other international vehicle manufacturers might also be interested in the market because of the immense opportunities in the country.
Threat of Substitutes
Threat of substitute products is also high since the municipalities might opt for seemingly cheap pollution producing transportation options. Secondly, the government offered large subsidies for the municipalities that purchase hybrid, fuel cell, and battery electric buses under the TVTC program, it might be willing to lower its goals so that the municipalities purchase vehicles which contribute to sustainability, lowering the reliance on diesel and gas. China’s 836 programs also showed China’s inclination towards supporting other technologies for reducing pollution.
The industry rivalry is high since there are a lot of strong competitors in the market. FAW is a state-owned auto manufacturer and its alignment with the political programs assured its role in the developing economy of China. BYD was also one company that had risen from being just a battery manufacturer to developing an electric bus model called the K9 which was tested in many countries in Europe and South America along with China. Zhongtong Bus, Zhengzhou Yutong Group, and Ankai Automobile also emerged as major players which had benefitted from the growth of the electric bus market in China.
ii. PEST Analysis
Many programs are inclined to supporting local manufacturers which shows the political inclination towards local production. However, the Chinese central government was the local protectionism practices as leading to low-level redundant activities across the provinces rather than making an effort to invest in technology and offer something that is of substantial value to the country. This shows that on some level, Volvo might face political inclination towards local protectionism which is being mediated by the central government’s efforts.
With the electric bus industry expected to grow in China, it is forecasted that by 2015, China will be a consumer of 50% of the electric bus market. furthermore, China accounted for 90% of revenue of eight electric vehicle manufacturing companies in 2014 alone. This shows the economic favorability of the electric vehicle industry in China. Also, between 2014 to 2019, the bus market was expected to grow nearly 400% which would account to 76% of the share of the global electric bus industry.
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