Autos
By David Welch
GM-Europe's Saab Story
CEO Richard Wagoner hints at an impending renaissance for the auto maker's European business. GM execs have been saying that for years
General Motors (GM) Chairman and Chief Executive G. Richard Wagoner Jr. was making some familiar claims on the floor of the Geneva Auto Show on Mar. 1. With hot new models like the Opel GT roadster and the aerospace-inspired Saab Aero X concept car on display, Wagoner told the automotive press that his long-struggling European business will finally break even -- perhaps this year.
It's a refrain that has been uttered before by top GM execs. For the past five years, during which the auto maker has pulled off two major restructuring efforts in Europe, GM has been forecasting a rebirth for its Old World business. But the results have headed in the opposite direction: steadily falling market share and more than $4 billion in losses during that time (see BW Online, 2/07/06, "At GM, the Kerkorian Effect Already?").
In fact, GM-Europe -- which includes the troubled duo of Swedish Saab and German Adam Opel -- has been such a laggard that its $375 million loss last year was deemed a major achievement. Analysts were bracing for much larger losses, and there was practically a celebration when GM didn't lose market share in Europe. Plus, GM's share has stabilized largely on the strength of Korean-made Chevrolets that it sells successfully in emerging Eastern European markets.
SAAB SELLOFF? But for GM, the work is far from over. While Wagoner was making nonspecific predictions regarding profitability, Opel chief Hans Demant told the Financial Times at the Geneva show that more cuts may be needed down the line, perhaps even the closing of another plant. Opel also needs to prove that the success of the Astra compact, which hit the market last year, is no fluke. Astra's 2005 sales of 527,000 units -- about 25% more than the old Astra -- made big gains on the top-selling Volkswagen Golf.
Another big problem is Saab. GM-Europe Chairman Carl-Peter Forster told BusinessWeek during a January interview that the underperforming subsidiary accounts for a significant chunk of GM's profit troubles in Europe. He said that adding a few more new models will bring sales to a point where Saab can actually contribute something to its parent's income statement, rather than being a drag.
Analysts, investors, and even company insiders have questioned whether Saab is worth GM's investment dollars. Sources say the auto maker has lost well over $1 billion on Saab since buying into the company in 1990. Saab, which gets most of its sales in Sweden, the U.S., and Britain, only sells 130,000 vehicles a year globally, GM says.
Saab's performance prompted GM board member Jerome B. York to say publicly -- before his February appointment to the board -- that Saab should be sold. Industry analysts think it's a turnaround project that needs more time and money than a company like GM, which lost $8.6 billion last year, can afford (see BW Online, 2/06/06, "Kerkorian and GM Team Up").
DIESEL-CRAZY MARKET. There is some logic to that thinking. GM needs a premium brand to sit atop Opel in Europe, where highbrow names like Mercedes-Benz, Audi, and BMW have moved down market with small cars and taken share from Opel and Ford (F). But Saab does poorly on continental Europe, where the German and French brands are strong. Says Global Insight analyst John Wolkonowicz: "That's because no one on the Continent respects Saab."
Saab sold a measly 6,000 cars in Germany last year. And while GM is putting some money into Saab, it still hasn't given its top-shelf Cadillac division all that it needs to fuel its push into Europe. Cadillac has just one diesel engine -- a four-cylinder for the BLS midsized luxury car -- in a market that is diesel crazy. Forster says GM won't have a more muscular six-cylinder diesel for a couple more years.
According to Forster, Saab has enough value for cash-strapped GM to try to rebuild it. It has the very affluent and educated buyers, even compared with some luxury brands in Europe. And Saab isn't snickered at the way some of GM's American brands are. "Why would we want to give up on those buyers?" Forster asks.
THREEFOLD FOCUS. Forster also maintains that as Saab introduces new vehicles, its breakeven point will fall. He wouldn't give specifics, but sources say a large crossover SUV called the 9-8X and a midsized crossover called the 9-4X are slated for 2010. In addition, Saab will have moved beyond some one-time charges for warranty problems that hit the bottom line last year.
But that's not the entire issue facing GM in Europe. While Saab is struggling, Opel still isn't a moneymaker and Cadillac isn't even off the ground. True, Cadillac has potential and Opel has shown signs of strength. For example, the $20,000 Astra sells for at least $1,000 more than the previous model did. But GM has yet to prove that it can build up all three brands in Europe simultaneously. Since Saab can't support itself financially, the brand whose ad slogan is "Born from Jets" could have trouble getting airborne.
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