Volvo: the once venerable titan of the Swedish auto industry that is now playing catch-up
with the rest of the world.
There’s a little known story about Volvo and that is how they almost came to own the
majority of Norway’s oil.
In this video, we’re gonna see how Volvo’s pride cost them billions of dollars and the
wealth of an entire nation.
This video is brought to you by Skillshare, where you can watch my two classes on how
the stock market works.
Sweden during the 1920s was a country on the rise.
It had remained neutral during the First World War and while Europe was getting down to business,
the Swedes were selling incredible amounts of iron to both sides, which of course kickstarted
their economy incredibly well.
One of the most popular iron products the Swedes were exporting were ball bearings,
and they were mostly made by one company: SKF.
Sales during and after the First World War were so high that SKF just did not know what
to do with all that money.
They invested in numerous side projects and one of them was to build a Swedish car factory.
The project was aptly named Volvo, which is Latin for “I Roll”.
Starting in 1927, the Volvo ÖV 4 began rolling off the production lines and while it wasn’t
an immediate success, Volvo’s first mover advantage helped it tremendously over the
next decades.
The company quickly expanded into trucks, which were much more successful and became
very popular outside of Sweden as well.
During the Second World War Sweden played the exact same game, selling iron to both
the Allies and the Axis powers, which of course worked to Volvo’s benefit.
Not only did Volvo produce vast amounts of trucks for the Swedish army, its factories
were never bombed and so it was uniquely positioned after the war to supply the rest of the world.
The postwar boom for Volvo made it a familiar name not only across Europe, but also in America
from the 1950s onwards.
They were opening as many new factories as they could afford, but for some people like
Volvo’s CEO, the speed just wasn’t enough.
Compared to other automotive giants like Ford or GM, Volvo was too small to really compete
on the world stage for long.
He realised that Volvo needed extreme amounts of capital to sustain their success over the
next few decades and he had several ideas on how to do that.
First he tried to merge with several other smaller manufacturers, but nobody was biting.
Saab, the other major Swedish car manufacturer was approached by Volvo, and it looked close
to striking a merger deal, but that was scrapped in the last minute as well.
Volvo then went out of country, trying to partner with Renault in France, but that also
fell through at the negotiation table.
Volvo had plans to launch the new 700 series, an executive car that would offer a high end
option to the American market and with profits increasing by 61% in 1978, Volvo looked like
a solid growth company.
Unfortunately, it lacked the cash to finance the new series.
Growing ever more desperate, Volvo’s CEO looked in a rather surprising direction: across
the border into neighboring Norway.
Now, at the time, Norway was looking to make a considerable shift in their economy.
Norway lacked any industrial strength and in fact it had only become a sovereign country
a few decades before.
Norway and Sweden were once a combined state, but independence and the toll of two World
Wars had left Norway struggling to keep up.
In 1978, Volvo took a remarkable path and approached Norway with a deal that was unprecedented
at the time.
Volvo were willing to sell off 40% of the company’s shares to Norway.
In return, Volvo would receive 200 million Swedish Kronor, the equivalent of $80 million.
The Norwegians, of course, weren’t exactly flush with cash, so they present a counteroffer.
Norway was prepared to give 10% of the proceeds from the off-shore Oseberg Oil Field, located
in the North Sea.
Now, that that oil field had only just been discovered in 1979 and it had yet to begin
any sort of drilling.
While Volvo’s CEO was no doubt a visionary and saw the merits of the deal, the Swedish
shareholders were not amused with the offer.
Many of the deal’s opponents protested publicly saying that Sweden was selling off its national
interests for “magic beans” from Norway.
It is worth noting that of the three unprospected areas in which Volvo would have an interest,
none of them were showing any signs of potential oil at the time, just cheap gas.
In the end a shareholder vote was held and in fact 60% voted in favour of the deal.
Unfortunately, in order for the deal to be accepted it needed a supermajority of 66%;
in other words, the deal was rejected.
Both Volvo CEO’s and the Norwegian Prime Minister at the time said that the decision
was “regrettable” and keep in mind Norway was prepared to change 21 laws in order to
make this deal happen.
Just a few years later, the Oseberg Oil Field struck “black gold” and from then on Norway’s
oil production skyrocketed, peaking in output in 1997.
The reserves measured at Oseberg come to around 350 million cubic meters of oil, the equivalent
of 2.3 billion barrels from just one location.
Although fluctuating oil prices make things hard to calculate, that is somewhere in the
vicinity of $140 - $200 billion worth of oil and that doesn’t even take into account
the vast natural gas reserves also present in the area.
Since rejecting the deal, Volvo has sadly not had the best run.
They never managed to acquire their much needed capital and were eventually eclipsed by the
likes of Acura, Lexus, and Subaru Eventually, Volvo sold off their car division
to Ford for $6.5 billion in 1999.
Ford struggled to support the floundering car brand for less than 10 years before selling
Volvo at a staggering loss to a Chinese company for just $1.5 billion in 2010.
Volvo has done well in the past decade under new management, rising to a $30 billion valuation
last year, but when compared to Norway’s oil, well it’s difficult to compete.
What’s not difficult though, is learning about the stock market on Skillshare.
The two investment courses I made on Skillshare are gonna teach you all about how stocks work
and how shareholders can make mistakes like the one Volvo did.
You can watch my classes for free right now if you’re one of the first 500 people to
register with the link in the description, which will give you access to Skillshare’s
vast selection of courses on any topic you might be interested in.
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teasers I post for every upcoming video.
We’re gonna hear each again in two weeks, and until then: stay smart.