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Where Volvo goes, will Chinese follow?

An official announcement could come as soon as Monday that South Carolina has won a two-state competition to land Volvo’s first U.S. auto plant, expected ultimately to employ 4,000.

But Volvo’s decision to build its first North American facility is something of a head-scratcher to the rest of the global automotive industry. Volvo has few U.S. sales, nondescript products, a paltry number of dealers and an American brand reputation that is almost dormant. And there’s the cost – $500 million.

That reported figure for Volvo’s planned investment doesn’t buy much in the way of automotive-manufacturing capacity, amounting to about 25 percent of what other foreign automakers have been investing lately in new standalone U.S. operations.

That leads analysts to suspect that Volvo’s first U.S. plant likely will perform only limited or final assembly of vehicles initially and, ultimately, will serve largely as a U.S. beachhead for an eventual manufacturing operation by its parent company, the Chinese-based Zhejiang Geely Holding Group.

In trying to boost its U.S. sales, Volvo may be planning on pitching heavily – more so than any other company in the U.S. market, in the view of industry players – that the new plant will mean its cars are made in America.

“We have very strong bonds to a lot of consumers” in the United States already, Bodil Eriksson, executive vice president of product, brand, marketing and communications for Volvo Cars of North America, said in a recent interview. “Volvo is a brand that resonates very well with U.S. consumers. But – unfortunately, for many reasons – we’ve fallen out of sight and out of mind.”

But if Volvo’s strategy is to try to win over U.S. consumers by the fact that it has a plant on U.S. soil, it could be disappointed.

“People don’t generally care where their vehicles come from or where they are made,” said Michelle Krebs, senior analyst for AutoTrader. “In fact, many people have no idea about an automaker’s ownership and where the vehicles are made. This is particularly true of the Millennials, who are truly global in terms of their shopping for all goods.”

Too many ‘niche-y’ vehicles?

Volvo has followed a winding road in the U.S. market.

The company was founded in 1927 as part of AB Volvo, which still owns Volvo Trucks, in Gothenburg, Sweden. By the ’80s, Volvo had acquired a niche in the U.S. market – similar to that of the other Swedish maker, Saab – as a near-premium brand with quirky styling that specialized in making safe vehicles.

In 1999, Ford acquired Volvo Cars as part of its Premier Automotive Group, seeking to build a stable of luxury brands, including Jaguar, Land Rover, Aston Martin and Lincoln. But no real synergies developed, and the Great Recession of 2008 forced Ford to shed all but Lincoln. Volvo went to China’s Geely for $1.8 billion in 2010.

It’s taken several years for Geely to get its act together, and one of the biggest casualties for Volvo has been its presence in the U.S. market. Volvo basically missed the boat on the U.S. economic recovery during the past few years, with its U.S. sales continuing to slide.

Last year, Volvo sold 56,366 vehicles in the United States, down 8 percent from the year earlier, in a strong market for near-premium and premium cars. Volvo only stemmed the decline in the first part of 2015.

Besides a lack of focus so far on the U.S. market under its new Chinese ownership, Volvo simply hasn’t had the products to compete with its ever-improving rivals.

“It has too many vehicles, all of them niche-y,” Krebs said. “No small company could give each model the promotional and marketing support they deserved to have its voice heard amid the likes of Lexus, BMW and Mercedes.”

New SUV critical

As Volvo marks its 60th anniversary in the U.S. market, its prospects of improving its American fortunes depend on overhauling its product lineup over the next four years, starting with the launch later this year of an all-new version of its XC90 SUV.

Partly because it will compete in the hot premium-SUV segment, the new vehicle “will be critical for Volvo,” Krebs said. “It will be an indicator of whether Volvo can turn things around.”

Volvo’s Eriksson vows the company has “a very dedicated plan to come back” in the United States. “We are forcing the strongest product change and launch sequence in our history. We will be introducing more cars than we ever have, and they are truly built with American research, with American consumers and clinics prior to development.”

The establishment of a Volvo plant and how it performs will be a crucial step.

It also would comprise yet another milestone in the renaissance of U.S. manufacturing and, in particular, the ongoing boom in auto production.

The U.S. car market is stretching toward sales levels that could equal records set early last decade, even while growth in the underlying U.S. economy has remained low-key and erratic. In the process, the United States has become a post-recession haven for global auto sales, as the European market continues to struggle and even high-flying China cools off.

As a result, not only are Detroit’s Big 3 carmakers building more vehicles in the United States, so are their Japanese, German and Korean rivals, in an ever-expanding industrial footprint that now circles from South Carolina in the east, south and west to the Gulf States and the mid-South, over through Texas, and back north and east to the traditional industrial Midwest.

Additional factors favoring U.S. manufacturing include stable wages, sustained productivity gains, steady monetary exchange rates and a big energy-cost advantage, driven largely by the 50-percent drop in natural-gas prices since large-scale production of U.S. shale gas began in 2005, according to a new report by Boston Consulting Group. It called America a new “rising star” of global manufacturing.

But Mexico is just as quickly becoming the ultimate rising star of North American auto manufacturing. Of the nine North American assembly operations announced by car companies since 2009, eight have been slated for Mexico. The only exception has been Daimler’s announcement in March that it will spend $500 million to build a new assembly plant near Charleston that will make large commercial vans and create more than 1,300 jobs.

“Volvo won’t be selling a plant full of vehicles all in the U.S., so it doesn’t make a lot of sense (to open a U.S. plant) unless they’re planning to export most of them,” said Kim Hill, associate director of research at the Center for Automotive Research, in Ann Arbor, Mich. “Both states (that were finalists for the Volvo plant, South Carolina and Georgia) have Atlantic ports, yes. But if Volvo were going to build in Mexico, it could ship its cars to most European markets and many other nations and not even have to pay a tariff on it.”

The tariff on shipping a Volvo out of South Carolina to a European Union nation would be about 10 percent, or $3,000 on a typical $30,000 Volvo, one industry analyst estimated – about equal to the entire cost of assembling that vehicle. “That’s why this U.S. decision seems strange to me,” Hill said.

Geely ‘right beside Volvo’?

Without clear indications of Volvo’s strategy for its U.S. plant, industry watchers figure that plan must include one or both of a couple of elements.

First, at least initially, Volvo’s plant likely will be a “knock-down” facility that only does final assembly of sub-assemblies of components and systems that are completed in Europe and then shipped to this country. It’s possible the $500-million plant won’t include a paint shop, one of the most expensive parts of a typical assembly plant that, alone, can cost several hundred million dollars to construct.

Second, a small Volvo plant might make exquisite sense if it’s just the first facility planned by Geely for the U.S. and if the U.S. site includes at least 1,000 acres – the minimum needed for a second facility near the first.

Camp Hall Plantation, the site in South Carolina’s Berkeley County that Volvo reportedly has decided on, has 6,800 acres. Volvo’s Phase 1 plan would involve 575 acres. Phase 2 would take another 322 acres.

So far, lower quality standards have kept China-based automakers from making their long-promised entry into the U.S. market.

“But Geely has talked about the need, at some point, to begin selling in North America,” said a top auto-industry manufacturing consultant who was involved in Volvo’s site-selection process. “And once you begin selling here, you’ve got to build here. Geely could come over and plop right beside Volvo.”

Dale Buss is a veteran, Michigan-based journalist and automotive correspondent for Forbes and other publications. Staff also contributed

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