Merger Between Automakers Volvo and Renault Collapses

THE collapse of the proposed merger between Swedish automaker, Volvo, and French carmaker, Renault, leaves company executives - and industry analysts - scratching their heads and wondering what will come next.

On Thursday, AB Volvo executives called off a meeting at which shareholders would have been asked to approve the merger with the French government-owned Renault.

That move effectively killed the proposed deal, which would have created the world's sixth-largest automaker.

More important, analysts say, it would have provided Volvo the capital it needs to speed up its product development program.

Renault meanwhile, would have gained new might in the truck business, and a channel back into the vital United States market.

Louis Schweitzer, chairman of Renault, warned that Volvo would pay ``a high cost'' for the pullout.

Volvo's longtime chairman, Pehr G. Gyllenhammar, was the first to pay out, handing in his immediate resignation. Mr. Gyllenhammar had been the architect of the deal.

Volvo has been plagued by sharp sales declines in Sweden and the US, its largest foreign market. Worldwide volume slipped to 303,800 last year, down from 406,000 in 1989. As a result, Volvo has been struggling to come up with the cash it needs to upgrade its product offering.

When it released its new 850 sedan in 1992, a cash-flow shortage forced Volvo to delay for a year the addition of a turbo-charged version and a station wagon model.

Even before the proposed merger was put in place, Volvo and Renault had been forming extensive ties. The first step was to rationalize, or share, component sourcing.

By effectively combining purchasing operations, the two carmakers increased volume and lowered costs. The second step was to come in 1994, when Renault was to begin using a new Volvo four-cylinder engine in some of its French-made vehicles.

The two manufacturers also were looking for ways to jointly develop future models. One of those was likely to be a Volvo minivan, based partly on the Renault Espace.

Although Volvo President Soren Gyll has said, ``I assume the contracts are still valid,'' Gyllenhammar warned that over time the alliance - and all previously announced projects - are likely to ``wither'' away.

Susan Jacobs, an auto analyst specializing in luxury and European automobiles, says the first casualty will be Volvo's efforts to bring a minivan to market.

``I don't think the merger's collapse will be fatal to Volvo, but they will probably need to find another partner,'' Ms. Jacobs says.

One possible option is for Volvo to expand its ties with Mitsubishi Motors, the Japanese automaker. The two companies already are working together to develop a new version of Volvo's small car, the 400. It will debut in 1995.

The proposed Volvo/Renault merger began to unravel in recent weeks as a number of major shareholders voiced their opposition. They raised a number of concerns.

For one thing, Volvo would have retained only a 35 percent stake in the newly formed company, giving it little control over future plans. The company said the French government was being too vague about plans to privatize Renault.

Ultimately, the Swedes worried that one of the country's industrial crown jewels was being sold off for a bargain.

As for the French, a company statement said Renault ``deplores'' the decision, and a spokesman suggested that the automaker will begin to look around in the hope of pursuing other alliances.

As with most European manufacturers, Renault is facing a serious sales slump as the continent's recession worsens. But unlike many of its competitors, Renault is still running in the black, reflecting aggressive, ongoing efforts to trim bloated operations.

If the deal had gone through, the two companies would have united as Europe's third-largest auto company, with a 12 percent share.

The merger would have provided Renault with a possible route back into the US, a market it abandoned in 1987 when it sold its stake in American Motors Corp. to Chrysler.

Auto analysts say the biggest benefit for Renault would have been on the truck side of the market. Together, Volvo and Renault would have formed the world's second-largest heavy truck brand.