Cash Crunch Simultaneously Prods, Prevents Castoff of Swedish Automakers
November 06, 2008
By Bill Visnic
With operating revenue becoming an increasingly scarce commodity in Detroit, General Motors Corp.'s and Ford Motor Co.'s luxury of maintaining their premium-brand but low-performing Swedish automaking units is likely to earn deeper scrutiny in the coming months.
Skepticism regarding the wisdom of retaining Saab Cars has been around at parent General Motors Corp. almost since the day GM purchased 50 percent of Saab's automaking unit (actually underbidding future GM partner Fiat Group) in late 1989 for the paltry sum of $500 million. GM acquired the rest of the company 
in 2000, and at that time, Saab was losing money and it has been widely believed Saab has never returned a profit under full GM ownership.
But rumors and innuendo about GM cutting Saab adrift have reached a higher pitch in the past weeks as GM, openly seeking cash injections, has shopped its Hummer brand and storied AC Delco aftermarket-parts division, and recently dealt with a crumbled plan to offload its commercial-truck business to Navistar International. The potential for a government cash injection -- never mind the complication of a proposed merger with Chrysler LLC - now seems GM's best near-term option.
And what of Volvo? Data from Edmunds.com shows sales have dipped to precipitous levels: by the time this disastrous year for the entire industry is finished, Volvo is certain to sell fewer than 100,000 vehicles for the first time since cracking that barrier a decade ago; Volvo sales in October were down 51 percent compared with last year, to a paltry 3,717. And sales for several Volvo models have plunged to the "why-bother" stage. In October, Volvo moved 140 V70s, 187 V50s -- and Volvo's best-seller for the month was the XC90 at 901 units.
Under the watch of GM and Ford, sales for both Saab and Volvo have been declining for several years -- making it difficult to imagine them being anything but a high-visibility drag on now-precious corporate resources: Volvo sales have declined each year since 2004 and will finish 2008 at a level Volvo hasn't seen since 1993. Saab sales have been slipping since 2005 and the company is tracking to sell just 23,000 units for the entire year. GM's Chevrolet division sells that many Impalas in a month.
Source: Edmunds.com
Swedish Merger Pondered -- Again
Just prior to the Paris auto show in October, United Kingdom-based just-auto.com reported Saab was considering the possibilities for engineering a platform for its own use to produce an all-new, entry-level model. It would be a departure from standing norms: all current Saabs are derived more or less directly from GM-sourced chassis.
GM's tenuous -- and financially dysfunctional -- rationale for holding Saab, combined with an almost similar situation for Ford and its wholly owned Volvo (the last remaining brand from Ford's grand-vision Premier Automotive Group, or PAG), has led to increased speculation one or both companies should, or soon will be forced to, unload their Swedish baggage.
At the Paris show, in fact, there was speculation the two companies might be better to be cut free of their troubled owners. Cut free, perhaps, to create their own Swedish car-making conglomerate. Some even speculated that with democratic-government intervention in industrial matters now not only acceptable, but commonplace, in the interest of having newfound control over a substantial portion of the country's manufacturing base, the Swedish parliament might look favorably on the potential.
The idea is not new. Various reports at the time said Volvo informally floated the notion of taking over Saab in 1989, just prior to GM's acquisition of 50 percent of Saab. And it is reputed the two companies also considered merging in the late 1970s.
Irresistible Forces Say Sell?
Sources at GM and Ford currently offer no clue as to whether Saab or Volvo is actively being shopped, but the option must be on the table, although executives from both companies have underscored the corporate will to retain their Scandinavian operations.
In 2006, when militant investor Kirk Kerkorian became interested in guiding GM, Kerkorian advisor Jerome York, who was later to serve a brief stint on GM's board, publicly agitated for GM to cut loose Saab, effectively calling the company a penny-ante play.
Apart from corporate ego, another issue is money -- and access to it. Any entity of a mind to buy either Volvo or Saab might currently find access to credit problematic. And while Saab, bought cheap, might be released for a comparatively reasonable amount, Ford paid nearly $6.5 billion for Volvo in 1999 -- and as such might think a similar sum, or larger, would be appropriate now, nearly a decade later.
In early October, Volvo instituted what appears to be a desperate cost-slashing effort, cutting some 6,000 employees, about three times the amount the company announced in June. Ford dispatched Stephen Odell, recently Ford of Europe COO, to take over as Volvo CEO, a move some interpreted as an attempt to apply a tourniquet to slipping Volvo, whose sales have collapsed some 25 percent this year in the U.S. alone and also have suffered in Europe.
It was rumored last year that BMW AG was interested in Volvo. But 2007 might well be a century ago, given the fractured global financial situation and the compounding but related issue of rapidly eroding new-car sales in all major world regions. It is doubtful BMW, itself tussling with slowing sales, flagging profits and mounting capacity concerns, currently would consider taking Volvo off Ford's hands.
Too Intertwined To Cut Loose
Meanwhile, a source familiar with both Swedish companies and their European operations says Saab and Volvo are not necessarily in the same situation. He suggests Volvo is more intertwined with -- and more integral to -- Ford's operational and engineering structures than is Saab, which functions more like a satellite division.
The source says, for example, Volvo's longstanding emphasis in safety research and development has become the linchpin of Ford's safety-engineering initiatives. And Ford also can leverage Volvo's reputation for safety leadership across all its brands -- although the company has not made much of a definitive marketing connection. And in truth, many in the industry believe the notion of safety, in the minds of customers, is becoming generic as a high degree of safety is assumed for all vehicles, thanks largely to regulations.
But Ford also currently employs Volvo-development platforms: The S80 underpinnings are used for several Ford and Lincoln models, and Volvo's small-car platform has been successful for several Ford of Europe and Mazda models.
Saab, it could be argued, contributes far less to the corporate beehive. GM does take advantage of some of Saab's longstanding knowledge of turbocharging and Saab also is a leader in safety advances, although GM has effected scant technology transfer in that area.
Some sources say an exchange rate moving in favor of the Swedish kronor has improved the profitability of Sweden-made vehicles sold in the U.S. But actual sales have dwindled such that even an improved exchange rate cannot brighten the overall profit outlook of either operation.
One analyst says the current financial crisis has created a vicious Catch-22 for potential sellers and buyers: it is both the cause of sagging sales and profits -- yet also is severely restricting the ability of companies that might be interested in acquiring either Volvo or Saab from actually doing so.
In the end, does that spell eventual government intervention if Ford and GM become more eager -- desperate, even -- to raise cash or at least excise these money-losing operations from their books?
In such fluid times, no option is absolute. Although many believe that while GM and Ford both probably should shed their Swedish car-making units, getting value for them -- or even finding willing and able buyers at any price -- might be as much a challenge as soldiering on with them.
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