Saab: A slow motion replay of the MG Rover crash? I hope I'm wrong.

By David Bailey on Sep 8, 11 05:30 PM in Automotive

Beleaguered Swedish carmaker Saab today had its request for protection from its creditors turned down. It's another step on the firm's bumpy road towards bankruptcy. The fate of the firm is now effectively in the hands of its creditors, including Saab's 3500+ loyal workers, who have yet to be paid their August wages.

In making the decision, the court concluded that "there is not enough reason to believe that a company reorganisation would be successful. The company's request is therefore rejected." The court noted that Saab was unable to pay its debts and that there were significant doubts about whether it would be able to raise necessary funds.

Saab parent firm, Swedish Auto NV, stated today that it would appeal against the court's decision, and has until 29th September to do so. But recognising that the firm was at the mercy of its creditors, Saab's CEO Victor Muller today appealed to creditors to remain calm.

Cash-strapped Saab had applied for bankruptcy protection in Sweden in the hope of buying time to come up with a refinancing plan and reorganisation. It was a last roll of the dice before the firm goes bankrupt. The firm owes some €150 million to suppliers.

Production has been stalled for months. Essentially the firm has run out of cash, and it awaits a short-term financial lifeline from China in the form of investments from Pang Da and Youngman Lotus, and support from a European bank.

The parallels with MG Rover seem uncannily accurate. The firm, which had a distinguished pedigree, was gobbled up by a bigger foreign player (GM), which couldn't make money with it, then was sold off to a small local player (Spyker), with assets handed over in the process. The small local player then runs into difficulties, doesn't meet sales targets, and has to sell off assets and suspend production, looking for support from China.

And in another parallel with MG Rover, last year Saab sold off its 9-3, old 9-5 and powertrain technology and tooling to Beijing Automotive Industry Holdings (BAIC) in a move that raised some much-needed cash (think of the sale of Rover 25, 45 and 75 IPRs to Shanghai back in 2004). Meanwhile it has been trying to sell of its land and property and lease them back - again like MG Rover.

The question is whether Saab is going the way of MG Rover (i.e. ultimate collapse, bankruptcy and closure, then maybe a buyout of the assets by the Chinese or someone else) or whether Swedish Auto NV can still - against the odds - keep things going and find a bigger partner (as the Phoenix 4 tried but failed to do) thus keeping production and R&D in place. I really hope for the latter, but increasingly fear the former.

Rumours have been circulating for months about possible investors. First it was over a possible role for the Russian businessman Vladimir Antonov. Antonov was stopped form taking a stake in Saab over a year ago by GM when it sold the firm to Spyker, as GM had concerns over its intellectual property rights. Then it was a possible deal with Chinese firm Hawtai. Now it's possible investment from Pang Da and Youngman Lotus from China, after Saab's energetic CEO Victor Muller pulled off some surprise deals.

Meanwhile, having guaranteed the EIB loan that kept Saab going last year, the Swedish government has repeatedly said that it doesn't want to be lumbered with Saab's deepening financial problems.

Looking back it was clear that GM's foray into the premium market through Saab was nothing short of a disaster. It has failed to make a cent in profit on Saab, and the extension of bland GM platforms to Saab models is viewed as having diluted the Saab brand over the last 20 years or so.

Saab sales peaked at 133,000 in 2006 and fell to just 98,000 in 2008 and 32,000 in 2010 - a much smaller number than MG Rover made in its final year of life (some 100,000 units in 2004). However, loss-making Saab still hopes that new models and new markets could boost sales and help it return to profit next year.

Spyker / Swedish Auto NV of course sensed an opportunity to get its hands on a tarnished yet still valuable brand at a knock-down price, along with cash and investment from GM as well as government support. The deal also depended on agreements on engines, manufacturing and technology with GM.

The big question was always going to be about cash - whether the firm could find the cash both to make cars and to develop new models (getting a new car to market is hugely expensive), and whether it could find partners to develop new technologies and models.

Until buying Saab, Spyker had been a successful but ultra-niche producer of expensive super-cars. With Saab it was trying to move into the mass market. That is not an easy market to make money in at the best of times, let alone in the current environment.

Back to the current crisis at the firm, any short-term deal to keep creditors on board will need funding from Chinese to allow it to re-start production and launch new models including the '9-5 Sport Combi' estate and the 9-4X SUV.

Sales of the new 9-5 and existing 9-3 were not generating anywhere near enough cash to pay suppliers as well as the expected start-up and launch costs of the 9-5 Sport Combi and 9-4X. Both new models are key for Saab: the estate is critical for European sales and the 9-4X for the US SUV market.

Add in the new 9-3 (due next Autumn) and you can see that Saab's financial position might actually improve if it got the new models to market. Ironically the firm is now stuck in something of a Catch-22 situation. That's where Pang Da and Youngman Lotus come in, in that their investment could get things moving again - if the money ever arrives.

But that investment has been delayed and it isn't clear why. Officially Saab says it is hopeful that the investment is still coming. But whether regulatory approval in China has been forthcoming is not clear. The Chinese government may be wondering about whether an investment in Saab makes sense or whether to press Chinese firms to pick up Saab's assets after the latter went bust, as happened with MG Rover. The government anyway thinks the Chinese car industry is too fragmented, and may not want Youngman going off on a foreign adventure with Saab.

But even if the Chinese money does arrive, the investment by Pang Da and Youngman Lotus only adds up to a few hundred million euros. In car industry terms that's peanuts and won't change the underlying fragility of the position that Saab is in and the competitive space that it occupies unless Youngman is willing and able to finance new model development on a much bigger scale, and support production in China.

To succeed today, auto firms either have to be huge, producing over different models and brands using a platform sharing approach, or they have to occupy the low-volume premium end of the market. Saab does neither.

Firms 'stuck in the middle' like Saab today or MG Rover six years ago - find it increasingly difficult to generate the cash for new model development and hence to survive.

So short term Saab now desperately needs a re-financing plan to generate the cash to restart production and get new models to market. Whether that cash will actually arrive, and be enough to satisfy creditors will determine the firm's immediate future. Bankruptcy awaits otherwise.

However, longer term the firm will anyway struggle unless it can find a much bigger partner with which it can develop new models and share platforms. Whether Youngman can be that partner is not yet clear.

Meanwhile, Saab's chances sadly look increasingly grim.

Professor David Bailey works at Coventry University Business School.

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