Swedish Motor Assembly’s Intricate Car Production

How does it come into existence and what procedures forego the distribution of a Swedish Volvo in Malaysia or Thailand? And what does the future hold for Volvo cars in Southeast-Asia? The plant Swedish Motor Assembly in Malaysia is a good place to find out, where the new Managing Director David Stenström explains the intricacies behind getting Volvo cars delivered to its customers in this region.

This auto assembly goes back to the inception of the Malaysian automotive industry. It was actually the first such operator to start in Malaysia back in 1967 – to assemble Volvo cars, which it is still doing today, but along with other brands. Back then assembly plants were set up in order to provide employment and to substitute imports of automobiles. And to further develop the local automotive industry a few policies were put in place; including that a certain percentage of a vehicle must have parts and components that are manufactured locally, and imposing import taxes and putting a tariff system on CBU (Complete Built UP) imports.

Wholly owned by Volvo Car Corporation, Swedish Motor Assembly (SMA) still exists today in order to produce Volvo cars – because of the cost effectiveness.

“Absolutely, it’s more costly to import cars. But this car here is absolutely more expensive than a car from Torslanda [Sweden]. If it were not for the tax rules it would have been cheaper for me to bring a European-produced car over here,” says David as we are about to learn how complicated trade rules can be, which in Malaysia also has to do with protecting their national car industry.

Then, the sales organisation Volvo Cars is a customer of SMA: “For many years SMA has had difficulties showing black figures due to assembly cost at face value in order that the sales company has the edge for more competitive pricing. Nevertheless SMA still needs to be independent and responsible for its financial standing.  This we gain from contract assemblies.”

His optimal result is plus minus zero but the currency fluctuations affect so determining the transfer price in advance is tricky, explains the MD.

Many man hours
Building a S80 in Sweden requires about 20 man hours while they put in 180 here! Labour is inexpensive, though, only a tenth. And yet customers are paying a lot for a Volvo car here compared to in Sweden, partly because of those national policies.

David explains further:  “In order to be classified as CKD producer you must send CKD kits into Malaysia. So our hub in Holland spends 18.5 hours, in Euro salary, re-packing material in order to send in batches of 24 cars. Compare with China which also has CKD, but there you can send part by part, so you can send whole boxes. There only 1.5 hours is spent on packing and sending, so that’s a difference of 17 man hours per car.”

And 30 per cent of the car for Malaysia and 40 per cent for Thailand must be local content.

“We try to control this in a way so that we are at 43 per cent cost-wise, because should a price hike occur we cannot be under 40.”

Certain parts are assembled on site by sub contractors, though with details that can still originate from Europe.

The local content requirement intended to promote the growth of components manufacturing has however not been very successful: low level of technology transfer and development of human resources in the industry. There were too many makes and models for the assemblers, causing too low demand for certain components and leading to the difficulty for the manufacturers to achieve the economies of scale.

“It’s a huge problem for us. We are forced to take certain providers. They want Volvo as a customer but they don’t want SMA! What do I produce, a 1000 cars yearly! They are forced by their mother company to deliver to us but we are sitting in a strange seat; as soon as we get any quality issue their attention level is not that high here.”

“Looking closely at how I assemble a car, there’s no such thing as an effective flow. Working on technical improvements does not have the same leverage as working on ways of avoiding tax. I can outsource a component, which leads to extra costs, but that I can then get back on taxes with a positive effect in the end.”

“One can have emotional feelings, or think strictly business. Without these tax rules one would have to question our existence. It’s difficult to compete with a high volume production plant.”

Today Volvo and Renault Trucks, King Long mini buses and LION light truck vehicles are produced and they paint Hino (Toyota) truck cabs. Volvo car models are currently: S80, S40, S60, V50, XC90 and XC60. V60 will be introduced in August.

Hopes to expand Volvo production
But with David at the helm their ambition is actually to expand their markets and produce more Volvos.

“We went from 300 cars to 1500 cars, and this year we are forecasting to sell a bit over 2000. For 2012 the forecast is 2600 for Malaysia and Thailand.”

“I would hope we are gaining more recognition.  And I think there is more focus from our home organization. During the crisis period the focus was on downsizing and then a region such as this easily gets neglected because it’s too small to get attention from the board. That’s only my personal theory. At the same time as we have extremely low volumes our profit margin is among the highest in the world. We make a lot of money out of small quantities.”

Coinciding with increasing sales volumes the latest ad campaign is also out: ‘The Naughty Volvo’s Are Coming’. Even if focused on manufacturing we get David’s take on this: “It’s a campaign to profile Volvo’s attitude about how naughty you can be.  After only one year in Malaysia I don’t know its image here but we want to get away from the impression of a boxy, boring and safe car, to be exciting – which it has been for quite long already! “

In a test drive for invited motor magazines Volvo S60 was compared with Audi, Mercedes and BMW cars and the Volvo brand got fantastically positive reactions.

“We did not have to be ashamed of our brand; Volvo most definitely has a good reputation for its security – and quality. And that’s my challenge to get the quality even with low volumes, which is much easier with higher volumes. The whole point here is how to teach an operator to know his job when he never gets the chance to practice in large enough cycles.”

New attempt in Indonesia
“For me as factory manager it would be best to have one brand only to serve the region. We only build Volvo for Malaysia and Thailand but now we’re doing a pilot actually exporting to Indonesia in a last attempt. We used to have quite high volumes there before the brand was banned there due to political issues between that country and Sweden.” 

“And could we show that we are cost-efficient we could outcompete agents in Europe on cost. We could take Singapore, Brunei, Philippines, Indonesia and maybe Korea. Then we are talking volumes; I could fill this factory with just producing Volvo, and that would be the ultimate. It’s much easier to control and having a workforce focused on only one brand.”

“Quality-wise the difference between Volvo and the other brands is essentially different.  I cannot even place an operator from any of my contract assembly lines into the Volvo line; it would not work. He would not understand why we would demand a certain fit and finish. “

Coming from previous positions as process development project manager and technical manager David finds his position here to be less stressful than back in Sweden.

“There the pressure is much larger, especially in a high volume factory. One works a lot back home. And it’s great fun and very stimulating in all kinds of ways. But family life was clearly sacrificed, to express myself lightly. Here the scope of work becomes wider; you have it all but on a much smaller scale. We are not manufacturing many cars so you can always catch up,” explains David who as a result has more energy left also for his family and who thrives in Malaysia since day one. At least two more years will they be here, and perhaps longer.

About Joakim Persson

Freelance business and lifestyle photojournalist

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