Volvo Launches Cost-Cutting Program

Swedish truck maker Volvo AB  Tuesday became the latest in a crowd of European industrial companies to announce deep cost cuts and staff reductions amid a patchy economic recovery and a significant decline in demand.

The world's No. 2 manufacturer of heavy trucks, behind Daimler AG, aims to save around 4 billion kronor ($626.4 million) a year by the end of 2015 under its new restructuring plan. The company said it has worked since January to identify measures to rationalize its business and boost efficiency, mainly in its core truck business.

The Gothenburg-based company has seen demand for its trucks slip 10% this year. Sales fell 4% in August from a year earlier to 12,864 vehicles, as a sharp sales drop in Eastern Europe outweighed growth in South America. That decline follows a 38% decline in profit in 2012. Europe accounts for 40% of the company's truck sales.

As the global economic recovery remains fragile, other European truck makers and industrial heavyweights have also launched measures to boost profitability. Daimler is running a billion-euro efficiency and cost-cutting program, and Swedish engineering firm Sandvik AB  also Tuesday announced plans to trim costs by between 500 million kronor and 700 million kronor in the face of a slow mining-equipment market.

Volvo employs about 115,000 people, and white-collar workers and contract staff will be the primary target of head-count reductions. The restructuring plan is expected to result in one-time charges of about 5 billion kronor.

Sweden's economy has fared relatively well throughout the financial crisis compared with the euro zone, but Volvo's cost-cutting plans still come at a time when the country's economic growth remains stagnant and the state of the European economy remains in flux.

According to the most recent data, Sweden's economic output fell 0.1% in the second quarter from the first, in part because of falling demand for Swedish exports elsewhere in Europe. Still, the country's purchasing managers index rose in August to 52.2 from 51.3 in the previous month, indicating that the country may be heading for a slow but steady turnaround.

Still, Volvo's Swedish rival Scania AB painted a rosier portrait at its capital markets day last week, stating that it has the potential to almost double its yearly truck deliveries to 120,000 by 2020, and announcing plans to invest 1.5 billion kronor in production capacity over three years.