How Volvo Missed Out On Owning Norway’s Oil
Volvo: the once venerable titan of the Swedish auto industry that is now playing catch up with the rest of the world. There is a little known story about Volvo, and that is how they almost came to own the majority of Norway’s oil. In this post, we’re going to see how Volvo’s pride cost them billions of dollars and the wealth of an entire nation.
How Volvo came to be
During the 1920s, Sweden 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.
During and after the First World War their sales 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 OV 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 decade.
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, but its factories were also never bombed, and so it was uniquely positioned after the war to supply the rest of the world.
The post-war 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.
A stream of rejected deals
Compared to other automotive giants, like Ford or GM, Volvo was too small to really compete on the world stage for long. He realized 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 tries 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 at the last minute as well. Volvo then went out of the country, trying to partner with Renault in France, but that also fell through at the negotiation table.
Volvo had plans to launch a new 700 series, an executive car that would offer a high-end option for 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.
Volvo makes an offer to Norway
Norway and Sweden were once a combined state, but independence in 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 20 million Swedish kroner, the equivalent of $18 million.
The Norwegians, of course, weren’t exactly flush with cash, so they presented a counteroffer: Norway was prepared to give 10% of the proceeds from the offshore Oseberg oilfield, located in the North Sea.
Now, that oilfield 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 by 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).
And Norway says “No”
In the end, a shareholder vote was held, and in fact, 60% voted in favor 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’s CEO and the Norwegian prime minister at the time said that the decision was regrettable. Keep in mind, Norway was prepared to change 21 laws in order to make this deal happen.
Just a few years later, the Oseberg oilfield struck black gold and from then on, Norway’s oil productions skyrocketed, peaking in output in 1997. The reserves measured at Oseberg came 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 to $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 six and a half billion dollars 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 one and a half billion dollars 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.
