Wolfgang Reitzle, chairman of Ford Motor Co.'s Premier Automotive Group, said the lower end of the premium segment is projected to grow, and Volvo is the logical brand within the Premier group to compete for that growth.
"We can't go below the X-Type with Jaguar because we will lose exclusivity. So the only approach for us is with Volvo," he said.
Reitzle did not give details about the small Volvo.
Nor would he say whether it would be a traditionally styled vehicle, a compact minivan or a performance car.
But he said it would be aimed at making Volvo more appealing to younger buyers, while maintaining the Swedish carmaker's reputation for safety.
"Why not do attractive, sporty cars for younger people in a segment Volvo has never been in?" asked Reitzle.
"When you add a little emotion to the Volvo brand, you see what happens. Volvo was based on functional and rational buying arguments. But why should a safe car have to look boring?"
Reitzle did not say when the car would be launched. But he said the Swedish carmaker would introduce the S40/V40 redesign first.
The small Volvo likely will be based on the new Ford Fiesta platform. The Fiesta's front structure was engineered with Volvo's "knowledge base and technology" regarding safety packaging, Reitzle said.
Although Reitzle said Volvo was amid concept work for the car, a Volvo official declined to confirm the project.
"It is still very early at this point," said Ingmar Hesslefors, spokesman for Volvo in Gothenburg, Sweden.
"Right now, we are concentrating on the replacement for the S40 and V40. What comes next or in addition simply has not been decided."
Mark Fulthorpe, manager of forecast services for CSM Worldwide in Byfleet, England, agreed that Premier needs to combat vehicles such as the A class, A2 and 1 series.
He forecasts that Volvo's small car probably could sell 50,000 to 75,000 units a year in Europe.
"Jaguar has gone as far down the segment tree as seems acceptable with the X-Type, in terms of protecting that brand," Fulthorpe said.
"So you end up going straight to Volvo. Since there is capacity in (Ford's) Spain or Germany (plants), they don't have to use a Volvo plant for it."
Entering a new segment is the only way Volvo can attract new customers, said Gilly Filsner, business manager for Morpace International Ltd. in Woking, England.
"You have to look at what percentage of people buy a Volvo because of what a Volvo is for," Filsner said. "The question is, how they can sell a Volvo to someone who would buy something else."