Volvo, Renault to Link Operations, Seek ‘Critical Mass’

Sweden’s car maker Volvo and the French state-owned automotive concern Renault said Friday that they intend to make sizable investments in each other to try to make both companies more competitive.

The announcement, made during a news conference in Amsterdam, capped a year of negotiations between the two companies, whose sales have been under pressure in an increasingly competitive world market.

Volvo has been suffering from the slump on the previously profitable U.S. market for European auto sales, while Renault is rapidly losing ground to the Japanese at the top end of the market.

In addition to the equity investments, the companies said they intended to enter into an “extensive cooperation agreement” under which they would coordinate elements of product development, purchasing and investment plans.

But they said each company would maintain its independent identity, trademarks and distribution organizations and would continue assembling and marketing its own cars, trucks and buses.

Under the agreement, the companies would exchange a 45% interest in their respective truck and bus divisions.

The plan calls for Renault to become a limited company in which AB Volvo would acquire through a special issue 20% of the shares and an option to obtain another 5%.

Renault, at the same time, would acquire a 25% share of the Volvo car operation. Moreover, Renault intends to buy a 10% interest in AB Volvo, the parent company of the Swedish industrial giant.

The value of the transactions was estimated at about $4.8 billion.

The deal is subject to French government approval, but Raymond Levy, Renault’s chairman and chief executive, said, “I wouldn’t be here if I hadn’t been sure about the position of my government.”

Volvo President Pehr Gyllenhammar told reporters that the move “will give (the companies) the size, breadth and depth well above the critical mass necessary to survive in this fiercely competitive industry.”

He added that Volvo and Renault will maintain their headquarters in Goteborg, Sweden, and Paris, respectively.

But he did not rule out the eventual development of a joint new model.

The Swedish-French agreement was expected to have far-reaching consequences for the auto market in the European Economic Community, also known as the EEC.

In Brussels, the EEC Commission, the Community’s executive body, said it would review the proposed deal to assess its impact on competition in the European Community motor vehicle market.

A Commission spokesman said the it had been told informally several months ago that talks were under way between Renault and Volvo.

Under a new law that takes effect Sept. 21, major mergers in the 12-nation Community must be submitted to the Commission for prior approval.

Analysts estimated that the Volvo and Renault companies would produce about 2 million vehicles a year, or about 20% of the European market.

The companies would produce more than 140,000 trucks, beating the current leader in that field, Daimler Benz of West Germany, by about 25,000 units.

In 1988, the latest year for which complete figures were available, Renault more than doubled its net profit to 8.913 billion francs, or $1.59 billion, from 3.689 billion, or $658 million, the previous year.

Last year, the French company manufactured more than 1.6 million passenger cars and 80,250 trucks.

Volvo had an operating profit of 4.06 billion Swedish crowns, or $676 million, for the first nine months of 1989, down 14%.