Expanding the Volvo Way

Economics CA2
Expanding the Volvo
Way
The luxury car segment in India is witnessing significant growth, with
renowned brands like Mercedes Benz, Audi, BMW, and Jaguar Land Rover
leading the market. Volvo, a Swedish automotive company under Geeky of
China, has been strategically expanding its presence in India.

In a bid to enhance its market share, Volvo has introduced a range of models
tailored to the Indian consumer, such as the V90 Cross Country, with plans to
launch the XC60 and XC90 Cross Country in the near future. To further solidify
its position, Volvo is considering establishing local assembly operations in India
to mitigate production costs and offer more competitive pricing.

Despite facing challenges like high import taxes, Volvo's diverse product lineup
in India, spanning from affordable small cars to premium SUVs, showcases the
brand's commitment to meeting varying consumer demands. As Volvo gears up
to scale its operations and sales in India, the company navigates a landscape ripe
with opportunities and obstacles.

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Expanding the Volvo Way

Introducing the Economic concept

explained in the case
In the case study "Expanding the Volvo Way," an essential economic concept
at play is the impact of import duties on Volvo's operations in the Indian luxury
car market. Volvo, unlike its competitors, does not have local manufacturing or
assembly facilities in India. This lack of local production facilities results in
Volvo having to import its vehicles as fully-built units, subjecting them to high
import duties ranging from 100-180 percent.

The high import duties significantly affect Volvo's pricing strategy and
competitiveness in the market. Despite facing these hefty import duties, Volvo
manages to keep its product pricing aggressive to attract consumers.
However, the absence of local manufacturing facilities puts Volvo at a
disadvantage compared to its rivals who have established assembly plants in
India, such as Mercedes in Pune, BMW in Chennai, and Audi in Aurangabad.

By delving into the economic concept of import duties and the impact on
pricing and market positioning, the case study highlights the challenges Volvo
faces in the Indian luxury car market due to its import-dependent model. It
underscores the importance of local production and assembly in mitigating
costs and enhancing competitiveness in a market dominated by players with
local manufacturing capabilities.

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Economics of Scale

Economies of scale refer to the cost advantages that a

company can achieve by increasing its production levels. In
the case study "Expanding the Volvo Way," economies of
scale come into play when considering Volvo's lack of local
manufacturing facilities in India. Companies that produce at a
larger scale can spread their fixed costs over more units,
leading to lower average costs per unit. This concept is
crucial in understanding Volvo's challenges in the Indian
luxury car market, where competitors benefit from local
production facilities and economies of scale, allowing them
to lower their costs and offer competitive pricing.

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The Production Function Theory

The production function describes the relationship between
inputs and outputs in the production process. For Volvo, the
production function would encompass the process of
importing fully-built units, marketing, and selling luxury cars
in India, considering factors like demand, pricing strategies,
and competition.

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The Production Theory

The production theory relates to how a company combines

inputs, such as labor and capital, to produce outputs. In
Volvo's case, the production theory would involve analysing
how the company utilises its resources, including imported
vehicles and distribution channels, to produce and sell cars in
the Indian market.

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The Law of Variable Proportion

The Law of Variable Proportions, also known as the law of diminishing

returns, states that if one input in the production process is increased while
keeping other inputs constant, there will be a point where the marginal product
of that input will decrease. In the context of the case study, this law could
apply to Volvo's operations in India if, for example, the company increases its
marketing expenses significantly without a proportional increase in sales,
leading to diminishing returns on marketing investments.

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Questions:

Q1.Discuss expansion plans of Volvo with respect to

advantages of localised operations.

1. As the Case suggests, Volvo is looking to boost its presence in the

luxury car market in India by expanding its operations. Currently,
Volvo faces high import duties on fully-built units, making their cars
more expensive compared to competitors with local manufacturing
facilities. By setting up local assembly operations, Volvo can avoid
these import duties, reduce costs, and enhance its competitiveness in
the Indian market.Looking it from an Economic viewpoint, localising
operations can bring several benefits to Volvo. By establishing local
manufacturing facilities, Volvo can benefit from economies of scale,
leading to cost reductions as production volumes increase. This cost
efficiency can translate into lower prices for consumers, making Volvo
cars more appealing in the Indian luxury car segment. Additionally,
local operations can help Volvo navigate exchange rate fluctuations
and trade regulations more effectively, providing stability and control
over pricing strategies.

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Q2.Is Volvo looking at increasing returns to scale? Would it

eventually face diminishing returns or can it avoid diminishing
rate of returns to scale?

2.By diving in the depths of the Case we were able to analyse that Volvo's
move to establish local assembly facilities is a clear indication of its aim to
increase returns to scale. By setting up local manufacturing operations,
Volvo can benefit from economies of scale as production volumes
increase. This can lead to cost reductions, making Volvo cars more
competitive in the Indian luxury car market. The reduction in costs can
also translate into lower prices for consumers, potentially boosting sales
and market share.

However, the risk of facing diminishing returns to scale is present. As

production scales up, there may come a point where the additional output
does not result in significant cost savings or revenue increases. This could
happen due to factors like inefficiencies in production processes, resource
constraints, or market saturation.

To avoid diminishing returns to scale, Volvo needs to focus on efficient

operations, continuous improvement in production processes, and effective
cost management. By maintaining a balance between increasing
production volumes and managing costs efficiently, Volvo can sustain its
growth and avoid the negative impacts of diminishing returns.

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CONCLUSION
Through the detailed study of the Case we could conclude that Volvo's goal is
to double its market share in India's premium car segment by introducing new
models, expanding dealerships, and establishing local assembly plants.
However, the absence of local manufacturing in India has led to Volvo dealing
with high import duties, affecting its competitiveness in the market. By
addressing this challenge and focusing on local production, Volvo can enhance
its market position and achieve its target growth in India's luxury car segment.

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Possible solutions to the issues faced by Volvo

To address the challenges and enhance Volvo's presence in the luxury car
market in India, the following strategies can be implemented:

Establishing Local Assembly Facilities:

- Setting up local manufacturing operations in India can lead to economies
of scale, reduced import duties, and lower production costs.
- Local assembly facilities can help Volvo price its vehicles competitively
and improve its market position against competitors with local
manufacturing units.

Forming Strategic Partnerships:

- Creating strategic partnerships with local companies or suppliers can
streamline Volvo's supply chain, reduce costs, and enhance production
efficiency.
- Collaborating with Indian companies for components or assembly
processes can further reduce import costs and improve competitiveness.

Expanding Product Portfolio:

- Introducing new models tailored to Indian market preferences can attract
a wider customer base and drive sales growth.
- Launching environmentally friendly and technologically advanced
vehicles can cater to the evolving luxury car market in India.

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Marketing and Branding Initiatives:

- Investing in marketing campaigns to boost brand awareness among
Indian consumers can strengthen Volvo's presence in the luxury car
segment.
- Highlighting Volvo's unique selling points, such as safety features and
Scandinavian design, can differentiate the brand and attract discerning
customers.

By incorporating these solutions, Volvo can strengthen its market position,

expand its market share, and establish a more robust presence in the
competitive luxury car market in India.

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Thank You

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