Transportation is a major part of the economy. The government has recently decided to invest one trillion yuan into its infrastructure. That marks the biggest investment in transportation sector today. The transportation industry in China has enjoyed rapid growth and expansion over the past three decades. During this time, the highway system has expanded from 890,000 kilometers to nearly 3.6 million kilometers of paved road. Railways have expanded in length by over 50% to 78,000 kilometers, and runways have expanded from nearly 150,000 kilometers to over 2.3 million.China’s continued determination in expanding its transportation sector has attracted a great deal of foreign investors, one of these being the Volvo Group, which has been a key participant in China's past major infrastructure projects such as the Tibet Railway, the Three Gorges Dam，the South-North Water Transfer and the Beijing Olympics. Looking back at the past 30 years of infrastructure development, how has China cooperated with its international partners? Looking forward, facing the ever-growing challenge of combating climate change, how can China continue rapid and sustainable development in its transportation sector in the years to come?

To discuss these issues, we caught up with Leif Johansson, CEO of the Volvo Group. Leif Johansson was born in Gothenburg, Sweden in 1951. He began working for Electrolux in 1983, becoming President of the company in 1991 and later, CEO of the Electrolux Group in 1994. He joined the Volvo Group in 1997 as their President and CEO. Johansson is a member of the Confederation of Swedish Enterprises and the Royal Swedish Academy of Engineering Science.

Return to China

Q: Mr. Johansson, welcome to the Main Talk.

J: It’s good to be with you

Q: How did Volvo initiate its contact with China? I know it actually dates back to the Qing dyanasty, which was a couple hundred years ago.

J: Well, Volvo was created in 1927, and we we’re very early internationally. Sweden is such a small home market, so we came very early into international business, and China was, I believe, in the early 30’s or somewhere, was one of our first countries to be in. But then, of course, in the 90’s it really stared becoming an investment case for us, and gradually transferring China into what we now see as a home market rather than an export market.

Q: You said Volvo actually started their involvement in China in the 1930’s, but the volume… the sales volume wasn’t as big. But, in 1992, you actually set up your first rep office in Beijing that was sort of the beginning of the new round of exploration. What was the triggering factor for that time?

J: The triggering obviously was the change in policies in China, and China had a desire to become part of the world economy, and started building resources and opening up everything for that. And also at the same time, Volvo was making a lot of commercial trucks equipment buses etc. There was a real need for investment of those types of products in China. So, there was the economy on one hand and also the products…the desire for products on the other hand.

Q:  You didn’t start manufacturing until 1994 when you teamed up with the company in Xi’an to set up your first joint venture in this country. Why did you pick Xi’an?

J: Well I think that what happened was that we actually started with buses, and there was, in Xi’an aircraft, there was technology available for lightweight production of buses and bus shells. I think there was really a marriage between engineers there: that we had on the one hand the desire to build lightweight good buses and on the other hand the technology resources available in Xi’an, and that became our first joint venture.

Ever since the first expressway was built between Shanghai and Jiading in 1988, the construction of Chinese expressways has continued to grow and expand at a rapid pace. In the 8th Five-Year Plan concerning the period from 1991 to 1995, China attached unprecedented importance to its transportation sector. It was during this time period that Volvo started to manufacture touring buses in China

Q: Volvo first manufactured buses… touring busses in China and quickly sold out. So, that was good news for the company, but was it simply out of your expectations?

J: I think you can say if I look back to any number that we looked at in the 90’s, the market has actually grown much more than that. The growth rates of the Chinese economy, in almost any category or product that we are represented in, is actually growing much quicker than what we thought in the 90’s.

Q: That could be viewed as your first, your initial success. After that you decided to increase your investment here. What directions did you pick, because first of all you focused on buses or coaches. What about your new investment strategy?

J: The obvious ones to follow up with out of the group’s different business areas were trucks and construction equipment. Trucks because of the gradual sophistication of the Chinese transport needs-containerization, internalization, etc. Building of infrastructure added construction equipment, excavators, wheel loaders etc. So, those two were very easy to say we were coming into China with, and also then, over time, exploring manufacturing there. But, then we also have Volvo Penta in the group, and Volvo Penta makes marine engines and also engines for power generation. For a while in the beginning of 2000, or this decade you can say, there was quite a need for electrical power generation, and we had very good success also with the Volvo Penta arrangement

Q: What about passenger cars back then?

J: Passenger cars have always…we have always had a small sale of passenger cars to China. Very little. Very little. I think I would say between 5, 3, 4, 5% something like that. But then as you know we divested cars in ‘98, ‘99

Q: How’d you make that decision? It’s a small percentage. You said it’s a tiny portion of your total sales to China, but you know, Volvo had always been very well known for its passenger cars. The name Volvo is linked to passenger cars, you know, safety, security everything.

J: Passenger cars are emotional products, and they get recognized all over the world. This is true of Rolls Royce, which is really a much bigger aircraft engine manufacturer than really a car manufacturer. It was true of Volvo also. When we divested cars, it represented about 35% of our sales.

Q: Worldwide?

J: Worldwide, and we divested cars because we were number 20 or so in strategy development. So, it was not a difficult strategic decision.

In the early 1990s, many buses in Shanghai were old and worn-out. The first air-conditioned bus was put into service in Shanghai in 1996. Five years later, when Shanghai hosted the 2001 APEC conference, the government decided to replace 200 old buses with new more comfortable, modern ones, in order to create a new urban image. It was Volvo that undertook this project, and now 60 percent of the buses running throughout Shanghai are made by Volvo.

Q: In 2001, you had a big project in Shanghai during the APEC conference. So, in order for that to happen, you had to work very closely with the government. What was the story there?  Were you in a position strong enough to secure that deal?

J: Yeah, I think we were, and we had a very good cooperation then with the city also. So, I think we had really a meeting of two minds; we had, on the one hand, the desire by the city to try to really enhance its public transport, and on the other hand, we had technology and the ability to meet with those demands. So, I think that was a good meeting of the minds. But, generally, I would say it is difficult in itself when you do business in the semi public or public sector, and we do, then it’s always based on a mutual trust and understanding of what the desires of the government, in this case or local government, might be and what the companies might be. So, it’s always a matter of listening and coming together.

Infrastructure growth

Meeting China’s infrastructure investment needs requires greater involvement from international corporations. Thus far, attracting foreign investment has played a critical role in China’s opening up. Although, there are competitive neighbors in Asia eager for foreign capital, China’s adamant opening up policy and vast domestic market have won the country enormous international investment.

Q: Now, traditionally Europe and North America were the primary markets for Volvo. How has Asia evolved as one of your key overseas markets? 

J: Actually, what has happened is that, just in the past year, Asia has overtaken North America as our number two market outside of Europe.

Q: You mean 2007?

J: in 2007 right. And that came on the back of big investments in China and in Asia. So, I think it’s a natural progression that a company like Volvo; we follow where the global demand is developing.

Q: What’s your regional focus?

J: India and China are the two main markets that we are looking at. We are making… we just made big investments in India on the truck side. We are also there with buses and construction equipment, and likewise in China, buses, trucks, and construction equipment also in China, and also then Volvo Penta also in China.

Q: So actually India and China are competing for investments, competing for your bucks. So, how to compare these two markets?

J: China is growing quicker than India, but India has had, if you look at the longer term, has had a slightly more stable growth rate, less of the volatility that we’ve had in China. So that’s…turns out to be about the same in terms of growth rates.

Q: Do you expect this trend to continue in the years to come?

J: Actually, you can say…

Q: Based on your forecast.

J: Yes. I would probably say that I think that there is a greater volatility, to some extent, in China. On the other hand, you can say it is also, if you look at the trend line, it looks very good. I enjoy the trend lines of China.  Then you can say, obviously, in China, we have much, much more government involvement, and it’s another way to conduct business, in some ways. Then you have, in China, which is quite different from India, big investments on the infrastructure side and much, much quicker.

In 2004, China decided to strengthen and improve macro-control in order to cool down the overheating economy. As a result, any investment in transportation over 50 million Yuan must be authorized by the National Development and Reform Commission, and those over 200 million Yuan must be authorized by the State Council.  

Q: As a result, quite a number of large scale construction projects or infrastructure development projects have been halted or been canceled. So, has that affected your business yet, or do you think that will affect your business, and therefore, this could be a point for you to readjust your policy?

J: I think you could say if we are doing anything, when it comes to readjusting, then we are actually looking at bigger opportunities, now, than we were only 5, 6 years ago. And the reason is not so much these big infrastructure projects; the reason is that the economic growth of China must have with it a transport sector, which is operating efficiently, and with that, comes infrastructure of roads and also terminals and being able to switch containers, for example, between different modes of transport. But, it also comes with it a very good and efficient trucks and, to some extent, the public transport. So, I think the correlation thereof… the overall correlation at a very wide spread in Chinese society, for us, is more important than individual infrastructure projects.

Q: Volvo has actually been involved in most of the major infrastructure development in China right: the Tibet railway, Three Gorges Dam, etc. How has this worked in your favor?

J: Well, of course, you can say very big projects like that, and especially projects that are as well managed as those, are very interesting from our point of view, because they provide us with a big enough market and a big enough base to really professionally go in and develop products for those but to also find a good base for population products. They are interesting, and it is perhaps the biggest difference to India that those projects are actually being very well run and executed in China.

The transportation sector has been widely blamed for its negative impact on climate change. Most countries are working hard to meet the target emissions level of cutting greenhouse gases by 50% by the year 2050. Many carmakers have invested millions of dollars in researching alternative fuels and effective engines.

Q: I know you’re big on public transportation. You had a lot of theories on Europe’s public transport system. If you want to make all of the buses in china energy conserving, you know, you have to consider a lot of factors, for example, manufacturing cost, the cost of use. And also, if we have sufficient supporting facilities, and it all comes down to the government initiative you know if their commitment… if they’ve made a commitment to push this forward.

J: Some of it comes down to government policies, but I think you can say there are really two ways to go. One, is to always take whatever fuel you are burning, burn as little of it as is possible. And then, you have really…then you go down the road to technologies, like hybrid technologies. Regardless of which fuel you actually use in those vehicles, if they are more efficient then they are good, from our point of view, that means that they’re our customers who very often have about 1/3 of their operating cost connected to fuel usage. Actually, that is not a conflict between being energy efficient and very good with customers, and the other side, there I think you are right, because they are looking at alternative fuels, which is to use non fossil fuels. I think we will need political decisions, in terms of demonstrators, to build alternative fuel plans or buy refineries, as well call them sometimes, that are enough scalable in terms of technology, so that it provides for a good investment case. So, we need, on the alternative fuel side, we need a lot of input from working together between industry and the political leadership.

Q: How is this rolling out in other mature markets, say Europe?

J: I think we have a situation where what we call 1st generation fuels is rolling out fairly well. 1st generation fuels are alcohols and those that come in by natural progression, you can say. 2nd generation fuels, which is where you can take a more general biomass and transform that into a fuel that you can burn in an engine, is not progressing as quickly as I would like to see it either in the US or in Europe. We have some investments going in, in 2nd generation fuels and there’s quite a lot of research but not enough scalable technology, not enough demonstrators being portrayed.  China actually has quite a leadership in the case of DME, which China is producing from natural gas right now.  The technology there could well lend itself also to do that from biomass so there are areas where China is actually doing very well.

Q: Now this year is the 30th anniversary of China’s opening up and reform policy, and this is a very significant milestone for us. It could also be a very crucial check point for Volvo to rethink its China strategy, and I know you’ve been focusing on green vehicles recently. So, does it signal that “going green” is your future direction here?

J: Yes. I think very much so, and let me say, with the prospective of 25 years having come to China, I think it’s very encouraging to see the emphasis, now, on having green products and environmentally sound policies being introduced, and frankly, quicker than I expected it to be, which is very good news. It’s good news I think for China and the way China is developing, and it’s good news for Volvo because we are in the business. We have as one of our core values to provide environmentally sound vehicles and construction equipment. So, I think that’s probably the biggest change if I look back over a couple of decades here; that there is now a real realization that there is a possibility, for the China, to jump the curve and say, “Let’s not go through the dirty decades that the West went through on technology let’s take the best technology and put it in immediately now.” And that is what I hear now from Chinese leaders and also from customers, and that is very encouraging I think.

President Hu’s visit

In October 2006, a replica of the classic Swedish ship Gothenburg started a 10-month voyage to China, celebrating 55 years of diplomatic relations between the two countries. After attending the return ceremony for the Gothenburg, Chinese President Hu Jintao paid a visit to the Volvo factory in Sweden.

Q: We talk about the economic development in this country. Do you think that has in any way influenced your personal life or career life at all?

J: I think first of all you can say, the way China has come up into the world economy I think has changed all of our lives; professional lives in the sense that we recognize that it’s a new world order, and we have a situation where opportunities are much bigger now in Asia and China around than we looked at and identified before. I think in many ways you can say on a personal base also, because what happens is that you identify with China a complete new country coming in. You know, China was closed for such a long time and now opens up, and that, of course, means also, from a cultural point of view and from a personal point of view, our lives changed. 

Q: In fact, under your leadership Volvo has been playing an ever-important role in enhancing Sino-Sweden relations. We know they sponsored a trip of a replica of an Asian merchant ship Good Bird, and Volvo was the only company that President Hu Jintao visited when he was in Sweden, and they actually showed him the assembly line. What’s the story there?

J: There was a short visit for only 45 minutes we didn’t have the opportunity to go through all of the factory, but he was very much interested in manufacturing.

Q: because he was an engineering major.

J: He is an engineer, and I am an engineer. So we had a very good discussion. I should say he’s a very knowledge full engineer also. So, we had built a little assembly line and showed the different products that we had and how they’re put together, and he had the opportunity to meet with our workers and leadership there, and it worked very well.

Q: Why did you decide to make those arrangements and get Volvo involved in work to enhance the cultural relations between the two countries? Was it out of pure business interest, or was it something that you personally desired?

J: I often say that the richness in my personal life, as you can say coming from professional life, has been the opportunity to get to know different cultures different people, and I’m not saying I find it a great aspect of the last decades, here, that we have again seen China join the world, and, of course, that means that if I can help with that from a professional point of view, it’s good, but from a personal point of view, it’s also very rewarding. You get to know more people. I now have 4,000 colleagues in china who are working with us, and I think that’s probably, from a personal point of view one, of the best things that have happened.

Q: Finally, how would you comment on China’s reform and opening policy, in terms of the challenges and opportunities if offered to foreign companies like Volvo?

J: Well, I think the obvious case is that China has opened up dramatically. There is a very wide range of activities across all aspects of society, and I find that very encouraging. And from an opportunity point of view from a company from Volvo, I think that’s great news it opens up, and our ability to serve a country like China.

This is a model of truck with the engine technology for running on carbon neutral fuels. When we find it difficult to choose between environmental care and economic development, this truck might offer a sustainable solution to the problem.

                                                                                                                  Dec.7,2008   ICS