Volvo is set to become world’s largest heavy-duty truck manufacturer following a strategic alliance with Chinese company, Dongfeng Motor Group.

AB Volvo has signed an agreement with the Chinese vehicle manufacturer Dongfeng Motor Group Company Limited (DFG) to acquire 45% of a new subsidiary of DFG, Dongfeng Commercial Vehicles (DFCV), which will include the major part of DFG’s medium- and heavy-duty commercial vehicles business. At completion of the transaction, the Volvo Group will become the world’s largest manufacturer of heavy-duty trucks.

“This is a very exciting venture that will combine the best of two worlds, strengthening the positions of the Volvo Group and Dongfeng and offering excellent opportunities to both parties,” says Volvo’s President and CEO Olof Persson. “Combining Dongfeng’s strong domestic position and know-how with the Volvo Group’s technological expertise and global presence will offer DFCV excellent potential for growth and profitability in and outside China.”

Completion of the transaction is subject to certain conditions, including the approval of relevant anti-trust agencies and Chinese authorities. The purchase consideration amounts to RMB 5.6 billion (£ 569m). The ambition is to complete the transaction as soon as possible and completion is expected to take place within approximately 12 months from today.

The transaction with DFG follows the recent agreement between DFG and Nissan Motors, in which DFG purchased the medium- and heavy-duty commercial vehicle operation from the joint venture DFL (owned jointly by DFG and Nissan Motors). The major part of the re-purchased commercial vehicle operation will be included in the new company, Dongfeng Commercial Vehicles (DFCV). According to the agreement between DFG and Volvo, Volvo will acquire 45% of Dongfeng Commercial Vehicles for a total amount of RMB 5.6 billion, subject to adjustments, to be paid on closure of the transaction. Payment of the purchase price will increase Volvo’s net debt by approximately SEK 6 billion.

The Volvo Group is the world’s third largest manufacturer of heavy-duty trucks with 180,000 units sold in 2011. Dongfeng was the second largest producer of heavy-duty trucks in 2011, with total sales of 186,000 units, of which approximately 142,000 units were produced by the part of the company that will be included in DFCV.

“We are pursuing a clear strategy to achieve our vision of becoming the world leader in sustainable transport solutions,” says Olof Persson. “With this agreement in place, we take a crucial step toward reaching a number of our key strategic objectives such as size and growth in Asia.”

In 2011, DFCV reported net sales of approximately RMB 39 billion (pro forma) and operating income of approximately RMB 1.2 billion (pro forma). DFCV has approximately 28,000 employees and sold 142,000 heavy-duty trucks and 49,000 medium-duty trucks in 2011 (pro forma).

For the first three quarters of 2012, DFCV’s net sales amounted to approximately RMB 22 billion (pro forma) and operating income to approximately RMB 0.3 billion (pro forma). During the same period, 81,000 heavy-duty trucks and 35,000 medium-duty trucks were sold by DFCV (pro forma). At the end of the third quarter of 2012, DFCV had net financial debt of approximately RMB 500 million (pro forma). The AB Volvo holding in DFCV is expected to be reported as an associated company and consolidated in accordance with the equity method, one-line consolidation, within the Trucks segment.

During 2012, the Chinese market for heavy-duty trucks totaled approximately 636,000 vehicles, while the corresponding figure for the medium-duty market was 290,000 vehicles. DFCV occupied a leading position in China in both the heavy- and medium-duty segments, with sales of 102,000 heavy-duty trucks and 45,500 medium-duty trucks, corresponding to market shares of 16.1% and 15.7%, respectively.

“China is the world’s largest truck market with a total market for heavy trucks equivalent to the European and North American markets combined,” says Olof Persson. “The partnership between the Volvo Group and DFG will strengthen DFCV’s already strong position in China and provide the company with the right conditions for successful international expansion.”

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