Features International News — 23 October 2018

Volvo AB HAS reported stronger than expected third-quarter earnings  but its share price has dipped on the back of announcing an emissions  problem apparently caused by a faulty component from an outside  supplier.

The truck maker reported net income of 7.46 billion Swedish kronor ($AUD1.17 billion) up from a forecast SEK6.9 billion  ($AUD 1.08 billion).

Volvo truck and bus sales rose 21 per cent  to the equivalent of  $AUD14.47 billion while demand for trucks, Volvo’s biggest revenue driver, had a boost from higher European transport activity and customer profitability, while in North America, a strong freight environment with high transport volumes and good freight rates has led to customers both renewing and expanding their fleets.

Volvo says these trends are expected to continue into 2019. Truck orders grew 26 per cent  to 65,348 units in the quarter while deliveries rose 14 per cent  to 52,993 trucks.

Volvo said that given current strong truck demand, it expects previously flagged supply-chain constraints, in particular in North America, to remain in the near-term.

Volvo raised its full-year market forecast for heavy-duty trucks in Europe to 315,000 vehicles from a previous estimate of 310,000. The 2019 market is still estimated at about 300,000 vehicles. The North American market is forecast at 300,000 heavy-duty trucks this year, while the projection for 2019 is for a market of about 310,000. In China, demand for trucks has started to slow, and the 2019 market for heavy- and medium-duty trucks is projected at 1.15 million vehicles down a little from this year’s forecast for for China at 1.25 million trucks.

Volvo’s shock announcement last week that it had found an emissions-control component fitted to some of its engines which is ‘prematurely degrading’, sent shockwaves through the market.

On the back of the ‘Diesel-gate’ scandal at VW, investors have been particularly sensitive to emission mistakes or errors by automotive manufacturers. However it has to be emphasised that Volvo’s problem has been caused by a component failing rather than a wilful flaunting of the system as in VW’s case.

The prematurely degrading component could potentially cause engines to exceed emissions limits for nitrogen oxides.

Volvo CEO, Martin Lundstedt said the company has identified and ring-fenced the faulty component and it is now analysing why and how it is degrading faster. He added that the component issue is an isolated problem and the company has solutions.

Volvo is the world’s second-largest truckmaker and the Gothenburg-based company has started informing authorities about the issue,.

The cost to fix the problem with the part, which comes from an outside supplier, “could be material,” the company said in a statement.

The stock fell by as much as 9.3 per cent, the largest drop for its share price in in more than two years.

The revelation by Volvo comes after the VWemissions scandal in 2015, when the carmaker was caught using software to circumvent pollution controls. VW’s Audi unit has this week agreed to pay 800 million euros ($AUD1.27 billion) to settle a German probe, while the Peugeot PSA owned Opel offices in Germany were also raided this week .

Truckmakers like Volvo have so far escaped scrutiny, and in Volvo’s case, it says a component made by another company is to blame.

While parallels may be drawn with the issues that have plagued carmakers, Kepler Cheuvreux analyst Mats Liss said Volvo’s problems are based on the failure of a component and not willful tampering with software.

“It’s hard to know exactly at which level of the supply chain this issue has occurred,” Liss said. “It may take time to determine the responsibility and if a component from a supplier has failed the cost burden should be shared.”

Most of the Volvo vehicles that were potentially affected were sold in North America and Europe, Volvo’s two largest markets, which represented a combined two-thirds of deliveries last year. Volvo is still assessing the extent of the problem, spokesman Claes Eliasson. The failure apparently showed up as a result of the company’s own diagnosis system, which throttles the engine when an issue occurs that could cause the truck to exceed emission limits.

 

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