Renault and Volvo Merger Case Study: Drivers, Factors, and Outcomes

This case study analyzes the failed merger between Renault and Volvo in 1993, examining the key drivers that led to the initial consideration of the merger, including the need to reduce operational costs, achieve economies of scale, and share expensive research and development expenses in the face of global competition. The study then delves into the factors that caused the breakdown of the relationship, such as differing ownership structures, government interference, stakeholder opposition, cultural differences, and concerns about job security. The analysis explores the strategic implications of the merger, highlighting how the alliance aimed to enhance market share and competitiveness in the global automotive industry, ultimately examining the reasons why the merger did not result in the anticipated benefits. The case study also explores how the merger was expected to help Renault enter the truck business and enter the US market, but failed because of various factors, including the Swedish government's concerns and differing management styles.

Case Study

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1 KEY DRIVERS THAT LED RENAULT AND VOLVO TO CONSIDER A MERGER
..........................................................................................................................................................1
TASK 2 FACTORS THAT LED TO THE BREAKDOWN OF THE RELATIONSHIP
BETWEEN THE TWO COMPANIES...........................................................................................4
TASK 3 MERGER ALWAYS SEEM A GOOD IDEA AT THE TIME, BUT RARELY
RESULT IN GREATER PROFITS.................................................................................................6
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

ILLUSTRATION INDEX
Illustration 1: World's leading car group.........................................................................................2
Illustration 2: Strategic alliance.......................................................................................................5
Illustration 3: Volvo and Renault merger........................................................................................7

INTRODUCTION
In the current era of globalization, businesses which are facing consequences are trying to
undertake strategic alliance or merge with other similar manufacturing firm to overcome the
challenges. However, it is essential for businesses that are operating in a global market to
undertake a better choice such as enter into a new market and enhance both its market share and
global competitive advantage. In the present case, international merger has been implemented
which states the prevailing conditions of two businesses from different countries and their
mergers in order to carry out effective functioning (Eliasson, 2013). Such situation arises due to
certain consequences such as huge cost on research and development, increasing economies of
scale etc. that assists business to integrate with each other in order to create better competency in
global market. Here, the case study has been analyzed which states the merger between the
Renault and Volvo which seemed to be failed in the year 1993. For instance, Volvo was a strong
manufacturer in the large car market while Renault consistently failed to make an impact as it
produces small cars with diesel technology. However, both the companies possess their diverse
market share but probably too small to survive in the global competitive car market (Björnerstedt
and Verboven, 2014).
TASK 1 KEY DRIVERS THAT LED RENAULT AND VOLVO TO
CONSIDER A MERGER
From the case, it can be analyzed that both Renault and Volvo possess strengths in their
respective care segment areas. Such as Renault produces small cars while Volvo manufacturers’
large cars. However, both the companies were too small in order to survive in a global
competitive market and thus face issues from different car manufacturing companies of Japan.
They merely produce unique and innovative technology products as compared to both these
companies and this leads to decline of market share of Renault and Volvo. Therefore, both the
companies undertook a mutual decision to adopt strategic fit and adopt a merger. Volvo
organization was stronger in Northern Europe and especially in North America while Renault
had a larger market share in Southern Europe and South America (Warter and Warter, 2015).
There are varied key drivers that led Renault and Volvo to consider merger situation such as it
helps firm to reduce their cost of operations, enhanced economies of scale and the opportunity to
share increasingly expensive research and development costs. However, all these factors assists
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both the businesses to face issues in global market and thus undergo a strategic alliance or
merger situation so that costs can be minimized up to a great extent.
Illustration 1: World's leading car group
(Source: Eliasson, 2013)
However, both the companies were facing problems to operate its functions in global
automobile industry as it involves a wide range of competitors’ who are available for producing
innovative design and technology products to attract larger market share. For instance, cost of
developing new product in the car industry has risen dramatically. Therefore, it is essential for
businesses to invest a huge investment in order to attain high volume sales as well as attain the
best return on investment. Hence, due to such factors; both Renault and Volvo plan to carry out
merger activity so that desired profits margin can be attained by satisfying the needs of
consumers. Also, the senior officials of both the companies supported the merger activity as well
as the government of the country does not interfere in such act (Sarasini, 2014). However, with
the help of such merger, Renault gained new potential to enter into truck business and enhance
the market share. Also, with the help of merger both the manufacturers were also looking for the
ways to jointly develop future car models. For instance, one of those was likely to be a Volvo
minivan which was based partly on the Renault Espace. Thus, merger situation assists both the
companies to compete in the global car manufacturing market which could not be possible while
operating individually.
Due to this merger between Volvo and Renault, there arise various issues in the
automobile industry such as major shareholders oppose to this merger and all. However, Volvo
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would have retained only 35% stake in the newly developed company after merger and thus
giving it a little control over future plans. Volvo management states that the French government
was being too vague regarding the privatization of Renault. While it was noticing that Renault
was facing serious sales down from long time because of recession. Therefore, merger between
both the companies would led them to unite and become Europe's third largest auto
manufacturing firm with 12% market share (Pereiro, 2016). Merger of Renault with Volvo
provides Renault to make a possible come back into the US market and gain the market share
which was sold to American Motors Corporation in 1987. Thus, merger is considered as an
effective method that benefits Renault heavily by entering into truck business and diversifying its
product range. Both Volvo and Renault formed the world's second largest heavy truck brand in
market and attain high market share. Therefore, merger is considered as the best way that helps
organization to integrate with each other and thus achieve high market share.
It is essential for both the businesses to determine varied factors that led to enhance in
cost of firm's operation. Merger helps in reducing costs, increasing economies of scale and
sharing the high cost of research and development. Thus, all these expenses affect the operations
of business and therefore they decided to merge with another company so that costs can be
reduced in an effective manner. Hence, both Renault and Volvo integrate with each other by
sharing the capital investment so that they can compete in the global automobile industry. With
the assistance of merger, companies tend to increase their sales and obtain high return on
investment within 1980s and 1990s. However, it helps firm to produce innovative products and
services in market and attract customers to achieve results. Merger also helps Renault to reduce
its labor requirements but achieved 50% improvement in productivity between 1985 and 1991
(Chandera and Widjojo, 2015).
Cooperation among Renault and Volvo had begun in 1990 and Renault took 25% share in
Volvo cars and 45% share in their truck division. On the other hand, Volvo took part over 20%
shares in Renault's operations. Moreover, merger helps business to take form of an exchange for
engines, joint purchasing of components and maintaining quality control. Thus, it can be
assessed that the above discusses factors help both the firms to consider a positive sign of
merger. As it helps in minimizing their cost of operations and exchanging their technology to
develop the best engines so that high market share can be achieved (Friedman and et.al., 2015).
However, in terms of market, Volvo was stronger in Northern Europe and particularly in North
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America and Renault had a larger market share in Southern Europe and South America. Hence, it
can be assessed that merger between Volvo and Renault assists them to overcome with their
weaknesses and threats into strengths and opportunities. Thus, cooperation among both the firms
helps them to lead towards success through entering into diversified market and providing better
technology engines to consumers.
TASK 2 FACTORS THAT LED TO THE BREAKDOWN OF THE
RELATIONSHIP BETWEEN THE TWO COMPANIES
It states that Renault and Volvo undertake strategic alliance in order to compete in the
global automobile marketplace. There are different reasons that merger was breakdown among
both the businesses because of economic, social, political and cultural aspects. For instance; in
Sweden, the alliance would favor French ownership to the ratio of 65:35. However, in return of
65% share within the new company, Renault is required to pay nothing in cash. It is because; the
ownership would simply come on the basis of share redistribution. Thus, all this affects the
operations of new company and they broke their partnership in 1993. However, merger between
both the companies showed a high growth for a long number of years of collaboration and
strategic plans to be gained (Mandel, 2012). Also, it was wrongly taking by the government of
both the countries as they want to be in power. For instance; Renault was owned by French
government and wanted to remain in power at the time of strategic alliance. Thus, when the
French newspaper talks about the takeover of Renault, then it affects the company's operation in
market. Also, there is high risk of competitors in automobile industries and thus it causes huge
risk over Renault and Volvo to undertake strategic alliance so that they can solve the current
issue and gain competitive edge over rivals.
Further, another effect increased due to such merger was that stakeholder groups were
opposing in Sweden. However, the merger was to take place before the privatization of Renault
as the French government has not published time table for the sale. Also, Swedish shareholders
feared of either nationalization by the French of Volvo or the fall in share price. For instance, the
shareholders believe that the share price would be devalued because of French government
because they will under price the company in order to make sure that firm can attain high sales
and profitability (Lindsay and Berridge, 2012). Another issue that arises because of merger was
that Volvo employees thought that most of the jobs will be cut down because of merger.
Therefore, it is essential for the government to make strong decisions regarding development of
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the job opportunities and thus achieve desired results. However, Renault had already presented
its ability to make significant improvement in productivity and also there was a belief that all
these methods could be transferred to Sweden which results in yet more restructuring. For
instance; such fear was considerable as there are huge differences in the labor cost within both
these countries. Therefore, it is essential for government to undertake the best options so that
collaboration can be successfully implemented within both the businesses otherwise it will result
into breakdown (Bentley, Bailey and MacNeill, 2013).
Illustration 2: Strategic alliance
(Source: Warter and Warter, 2015)
Furthermore, it can be assessed that the risk of breakdown was high as Swedish workers
enjoyed the highest wages and lowest working hours within European auto industry. Thus, it
assesses that due to this factor, it transfers the jobs from Sweden to France and Swedish
government also wished to provide assistance to Volvo by European Union (EU) competition
policy in which Sweden was not the member earlier. Such type of strategic fit assesses the reason
of breakdown among the two companies i.e. Renault and Volvo. Business also faces threat of
new entrants in the market; therefore it is essential for them to move forward by adopting
innovative technology and stand at strong position in market. Also, the strategic alliance among
both the firms led to breakdown because of its stakeholders and employees who are not satisfied
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from such collaboration (Dunnett, 2013). As stakeholders feel that company will devalue the
price of the shares and thus they will attain losses while the employees of Volvo assess that their
jobs might lose because of collaboration and thus such fear arises the breakdown of merger
among both the companies. Main reason of breakdown was the unsatisfactory stakeholder groups
and thus it is essential for businesses to ensure their stakeholders to have faith in the operations
of firm otherwise it faces issues regarding breakdown in global market.
Furthermore, another difference that led to breakdown of both the companies was cultural
differences because of French and Swedish management styles. However, the French undertakes
more hierarchical, less flexible and open culture. While the Swedish are much more likely to
delegate and push responsibility in order to make effectual decision within organization. This is
because Swedish culture undertakes flat structure while, French reflects hierarchical structure
that involves a huge number of authorities. However, cultural differences results into the
breakdown of Renault and Volvo collaboration. Also, there is a language problem which is one
of the main reasons of failure in merger (Siebert, 2014).
The above stated different issues cause failure of merger among both the firms and thus
their agreement collapsed. Thus, after such failure, both the companies sold their respective
shares within each other's firm. Later, it was assessed that the French government delayed the
full privatization of Renault and moved instead from obtaining ownership up to 50%. While
Volvo has cut back and closed its several plants. However, in the year 1998, Volvo car division
became the part of Fort Motor Company but not its truck division that was remained separate.
On the other hand, Renault acquired 37% share of Nissan (Yang, 2015).
TASK 3 MERGER ALWAYS SEEM A GOOD IDEA AT THE TIME, BUT
RARELY RESULT IN GREATER PROFITS
Here, it states that merger have always been a chance for companies to collaborate with
each other and operate equally per their share. It can be evaluated that the businesses who are
facing declining situations think of merging with other businesses but it faces issues in order to
attain high profits. Therefore, the main reason behind this is the unsatisfied workers and
shareholders who are not happy with the decision of business regarding merging with other
company as it reduces the job opportunities as well as revalue the price of share. Hence, it affects
the business to face the situation of failure. Thus, merger seems to be good from distance but it is
not profitable all the time (Eliasson, 2013). Also, it is essential for organizations to determine the
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market strategy before integrating with each other and thus analyze the costs and differences in
culture that affects the operations of firm in market. For instance, as the merger of Renault and
Volvo earlier seems to be very profitable for both the firms, but it results into breakdown just
after the three years of collaboration in the year 1993. As company faces issues regarding
unsatisfied stakeholders and oppose to such merger and cultural difference which were high and
affects the operations of firm in marketplace.
Illustration 3: Volvo and Renault merger
(Source: Dunnett, 2013)
Thus, it can be evaluated from the sentence that merger always seem to be a good idea.
Firm can undertake such strategic option but it only sometimes seems to be a profitable act for
firm. Therefore, it is essential for businesses to undertake effectual decisions so that appropriate
results can be attained. Following are the problems that have been arises among merged
companies such as-
 Flawed intentions- It states that rising prices in the stock market of any business
influence the stakeholders to invest more in the firm. But due to certain conditions,
business started facing issues and thus made strategic decision of collaborating with
other firm. It develops the feeling of high profits on investment as well after merging.
This is so because such type of merger situation arises feeling among stakeholders to
attain high profits as earlier and thus it faces problem at the time of declining condition
(Björnerstedt and Verboven, 2014). Therefore, it can be evaluated that merger is a good
option at some time but it rarely results in profits and thus causes issues for business
because of change in culture or employees.
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 Obstacles arise in merger- It can be evaluated that it is essential for business to develop
effectual strategy at the time of merging with other businesses and thus it develops the
chances of success. For instance, if firm’s working hampers the corporate culture then it
decreases the chance of success and thus business is required to maintain effectual
relationship among each other so that mistake could not be ignored. However, carrying
out merger by firm is essential as it helps business to integrate with other firms and thus
carry out mutual goals (Warter and Warter, 2015). Therefore, it is essential for both the
firms to understand each other’s culture as differences are there otherwise it affects the
profitability condition of firm in market.
Hence, it can be evaluated that merger is a good option some time but it does not provide
profitability situation because firm faces difficulty in making effective decisions regarding
attaining profits. Thus, merger can be proved effective many a times but it is difficult for firm to
make high profits and remain it for long time in business. For instance; such situation arises in
firm when they are facing issues regarding high cost or expenses such as raw materials,
technology up gradation and high market share (Chandera and Widjojo, 2015). Thus, in order to
attain all these factors, it is essential for firm to develop relationship with different similar
industry in order to make high profits and achieve desired goals. Also, it can be noticed that at
the time of merger, stakeholders oppose to such situation and thus it affects the merging
condition in firm. Also, shareholders get affected because after merging situation may arise that
firm can revalue the prices of its share and thus it results in dissatisfaction among shareholders.
Moreover, employees also face problems regarding cultural differences and language barriers;
therefore it is essential for firm to maintain all such factors while merging with other businesses
so that appropriate results can be attained (Mandel, 2012).
At the end, it can be analyzed that merging situation results in both enhancing the brand
image of firm as well as declining of profits. Therefore, it is essential for firm to cope up with
such situations in order to raise the standard of firm in market by providing them better results.
Also, while collaboration, it is essential for businesses to make clear strategic decision so that
organization can attain high profits and thus enhance the sales of firm in market. It also helps
organization to achieve desired outcomes and attain sales targets. Thus, it can be evaluated that
merger always seems to be a good idea but rarely results into profit condition (Dunnett, 2013).
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CONCLUSION
From the above study, it can be concluded that strategic alliance of Renault and Volvo
shows that there is high chance for both the firms to operate effectively and compete in the
global automobile industry. Due to merger, it assists businesses to reduce the costs of operations,
remove unskilled manpower and share the opportunity of research and development so that long
term goals can be attained. With the help of strategic alliance, it helps firm to develop effective
distribution chain for its product range and maintain positive brand image of company in market.
Also, merger assists business to enhance its technology, share knowledge and expertise of each
other so that they can gain high market share and profitability.
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