China: While Uncertainty Remains Over Future Deal, Saab Must Focus On the Present

  • Future hurdles to setting up the Manufacturing Joint Venture (MJV) between Saab, Pang Da, and a Chinese domestic manufacturing partner include getting past the NDRC. However, Pang Da has suggested that they will be asking the NDRC themselves who they would recommend as a partner– casting doubts over the reports that suggest the NDRC would get in the way.
  • No matter what happens with the future MJV, Saab’s focus continues to be securing short and medium term financing to ensure a smooth production in Trollhättan and continued development of the NG 9-3. The distribution agreement with Pang Da for Chinese importation of Saabs is a needed cash infusion, and sets the stage for future cooperation. In the meantime, Victor Muller recently suggested that his focus will return to Trollhättan and the EIB loan. “After the Pangda deal is implemented, my focus is going to be finding a new CEO and getting a commercial loan to take out the EIB,” Muller said. “We cannot be dependent on the government or the EIB for whatever we do with the company. We have been paralyzed, we cannot move left or right.”

No doubt the Chinese auto market is complex and difficult to navigate, certainly for a small automaker from Sweden. The deal between Swedish Automobile (formerly Spyker) and Pang Da has multiple arms, the first are solely based on distribution and sales. Pang Da as one of the largest dealership groups in China as we know already sells a number of brands. Several news reports filed over the weekend with more expected to come this week suggest that Saab’s future partnership to produce cars for the local Chinese market will meet resistance with China’s regulatory agencies. Two articles emerged in particular, one from Bloomberg and the other from Automotive News that cast doubt over the future of the MJV Saab and Pang Da intend to form. But should we even be worried about deals that were crafted to take place a year or two from now when there are much more pressing matters happening in Sweden now?

I suspect the arrangement with Pang Da to distribute cars happened for many reasons beyond just distribution– first and foremost for Saab to gain immediate liquidity, but also for them to have a solid Chinese partner to develop a sales and production strategy in the future. Having an additional €65 million vote of confidence down the road also quiets the skeptics who like to say Saab has no future. For Pang Da, while Wang Yin, Pang Da’s board secretary said in a phone interview that they wanted a future ownership stake “mostly to ensure the constant supply of these cars,” it certainly has other advantages in that they can leverage their relationship with Saab to develop ties to more established Chinese auto companies. With the coming consolidation of the industry, Saab and their advanced Phoenix platform, not to mention millions spent on clean diesels and electric vehicles, definitely are of interest to Chinese companies looking for an edge in the market.

For those unfamiliar with the recent headlines coming out of China about their auto industry, while sales are forecast to increase 9.3% to 12.9 million this year (even though there are suggestions they may be plateauing), the government wants to ensure that the now fragmented companies consolidate into about 10 strong organizations. China wants to improve the quality of their cars and rapidly increase their industrial capacity while at the same time developing advanced and environmentally-friendly technology. By pushing aside the weaker ones and concentrating on the strong large companies, they believe they will achieve success. There are several differing views on how quickly this will be achieved, and you can weigh them for yourself by reading this blog post.

Whatever the case, the weak will die and the strong will survive in China, their top down model only helps that process along. For Saab to be able to build and sell cars in China, they will have to partner with a manufacturer that is clearly going to be part of the future landscape. Muller knows this, and so does Pang Qing Hua, CEO of Pang Da. If you haven’t yet read his interview in its entirety, I highly recommend it. It pretty much clarifies every single point of contention we’ve heard from industry analysts in the last few days. For Pang Da, the process looks like this:

1. First Three Months: Saab and Pang Da form Sales Joint Venture to get the first round of 2011 Saabs on the market in China.
if that is completed successfully and Pang Da’s team is satisfied, then….
2. Within First Year: Seek regulatory approval from NDRC and once approved, seek a partner (or use the one suggested by the NDRC itself).
if that is completed successfully and Pang Da’s team is satisfied, then
3. Within Two Years: Production of Saabs in China for the local market commences.

I can’t stress enough how important the first step is in the process. Right now steps two and three are almost irrelevant considering the other hurdles Saab faces over the next three months. Victor Muller himself spelled the same in an interview with Bloomberg over the weekend.

“The agreement ‘is first and foremost about distribution,’ and any concern that the carmaking portion contradicts industrial policy ‘misses the point,’ Spyker Chief Executive Officer Victor Muller said in a phone interview on May 19. ‘No one knows who the manufacturing party will be. Maybe it’ll be one of the top three carmakers.’”

In other words, stop focusing so hard on the future deal and start concentrating on the here and now…Saab needs immediate liquidity to ensure smooth production, which will help them reach the break even point as soon as possible (the target is within the next 18 months). Indeed Pang Da’s CEO Pang Qing Hua says much the same thing. When asked in the ChinaCarTimes interview I just cited who he thinks the partner might be, Pang responded:

“Until now, Pangda has not thought about this problem. We need to wait for the report from our new team and the NDRC have given approval, we will then search for a partner factory. Our standard for a partner is basically , whoever understands Saab, whoever is proactive in making Saab vehicles work for China, then we will choose them. So on this issue, we really need to wait for that preliminary report from our team before we can think about this issue.”

Any future partner Pang Da (or the NDRC) selects, Saab approves of, and is OK’d by China’s National Development and Reform Commission, the Ministry of Commerce, and the State Administration of Foreign Exchange would no doubt have to be one of the chosen, consolidated ones. As you’ll recall,  the NDRC recently called together several of the companies that Saab was negotiating with to make sure that the companies weren’t overly valuing or bidding too much for Saabs technology or a future partnership. Reports suggest it might even be BAIC, who GM/Saab already sold the rights of their old platforms to.

Some reports went so far to suggest that Wang Dazong, VP of BAIC flew to Washington during the 9-4X press drive to meet with Muller, something he later denied. In the same article he also says that BAIC is happy with their purchase of Saab technology and that they believe they got what they needed from the deal. Asked whether there could be future cooperation, he left the door open and said anything is possible. Whatever the case, BAIC seems to be a prime candidate to form a joint-venture with Saab and Pang Da, as they had already been in talks for a similar deal with Subaru. Not to mention the fact that they are actively seeking German engineers, looking for 60-100 at business fairs in Stuttgart, Munich and Aachen, North Rhine-Westphalia. A partnership with Saab would certainly fast track their ambitions to have access to world-class technology and talent. BAIC as one of the state-owned auto companies in China (and the 8th largest vehicle manufacturer according to their website) would seem to be at an advantage in securing the deal. Whatever the case, it’s far from clear who Saab’s future partner will be, and at this point I repeat, it doesn’t matter. Whoever the NDRC wants it to be, I’m sure Saab will most likely be happy with.

Selling Saabs in China’s current market won’t necessarily be easy warns Yang Jian, Managing Editor of Automotive News China.

“First, of the international mass-market auto brands, Saab probably is the least known in China. It is not perceived to be as valuable as other global brands.

And this is because Saab has very limited sales in China. Saab has no plant in China, and its vehicles have long been imported into the country by General Motors Co.

With China’s high tariffs, it’s difficult for imported cars to compete with China-built models. Last year, Saab sold only 257 units in China, according to J.D. Power and Associates.”

Considering they’re working with an established partner and their sales targets for this year are still reasonably low (the first order is for only 1,300 cars), it seems that Saab and Pang Da have taken this into account already. The new 9-5 seems perfectly tailored to the Chinese market today though, where premium European brands are chosen by customers who can normally afford a chauffeur and prefer to sit in the back of their midsize sedans. With it’s class leading rear legroom, the 9-5 should fit the bill well. If Saab wants to really succeed in the marketplace in China as a volume player though, they need to find that third party who they can partner with to produce cars locally for the Chinese market.

But should we even really care or try to speculate that much about who their partner is 12-24 months in the future? The whole question of whether Saab even produces cars in China at all is almost irrelevant right this moment because it’s not a near-term solution to their current production problems. Certainly having China as a new market would be an excellent buffer for a future Saab, say a year or two in the future. But it was never a huge part of their business plans. The breakeven point Saab was most recently targeting was shifting anywhere from roughly 80,000-85,000 units, sales were on track to hit 70,000-80,000 based on historical data and current sales before the supply stop. No doubt losing about two months of production will severely cut into that total, but that doesn’t change the fact that the break even will remain extremely low, and that any Chinese production or sales would be a huge bonus for Saab. By the time the NG 9-3 rolls out, the goal is for Saab to be in a stable enough position not to need the Chinese Joint Venture but to have it as a future boon to the company, not depend on it for survival.

Speaking of that model, I hope that by the time the NG 9-3 has its own press introduction, the Pang Da deal will be seen as a well-timed and designed plan with its phased-investment stategy, and that we’ll be able to talk about who Saab’s partner will be. Hakan Matson recently tested the 9-4X for Dagens Industri (English Googletrans) finding it an excellent vehicle, and said much the same thing:

“Next time Saab introduces a new model, whether it is in Jukkasjärvi or in Washington, the event might be done without being hugely overshadowed by talk of poor sales, lack of funds, a closed factory, the threat of closure and the shock of the morning news. The cars deserve it.”

Well said Hakan. As for what you can do to further that goal, it would certainly help the current situation if Vladimir Antonov, who was already cleared by Sweden’s NDO, were recommended by the Swedish government as a candidate to officially invest in Saab. Your letters have already caught media attention, now it’s time to lobby the government that Saab deserves action soon. Keep the polite, reasonable, and passionate emails coming.

Bravada from GMI
Member
5 years 4 months ago

Best post in a long time. I guess I will continue to grumble about the length of your posts, but I’ve read this really long one with great pleasure. This is what I come to SU for. Thank you!

till72
Member
5 years 4 months ago

Though your posts seem to get longer and longer they are a great read and worth every minute I spent on doing so. In times like these SU has to line out the facts and put things in perspective. Well done!

I think the best Victor could get out of China in the short term is that distribution agreement. Everything else would take too long in times like these. It’s all about getting the factory running again and selling those cars. Sure some additional cash will be needed but the core is to sell as many cars as possible this year.

Troels, Denmark
Member
5 years 4 months ago

Very informative, balanced and well-written post. Thanks a lot! 🙂

ANA
Member
5 years 4 months ago

Sorry I lost the will to live about half way through this post… Too long for me I am afraid.
Also I really hate titles which state what Saab ‘must’ and ‘must not’ do – in my opinion it just isn’t necessary.

peeceepeh
Member
5 years 4 months ago

Nice reading, and good analysis, thank you.

Btw, will PangDa also sell the 9-4X? I could imagine that this car will sell in China, too. At least di.se seems quite positive (!) towards the 9-4X: http://di.se/Artiklar/2011/5/22/236190/Saabs-crossover-imponerar-mitt-i-krisen/ (sorry, it’s in Swedish)

Börjesson
Member
5 years 4 months ago

This is an excellent question! Will Pang Da sell the 9-4X?

Börjesson
Member
5 years 4 months ago
This was a seriously good post, Jeff! I didn’t really have time to read it this morning, but I did anyway. It was well worth it! The point that this is primarily a sales deal, and that that part of it doesn’t require any government approval, can’t be made strongly enough. The only hurdle to that deal is, as I understand it, that Pang Da need to be reassured by what they see when they visit Trollhättan on Friday. If the plant isn’t up and running by then, then I think we’re in trouble. My one concern is that this… Read more »
fuzzi
Member
5 years 4 months ago

only a strong car manufacturer can help Saab to survive and not a sales distributor ! see Jaguar, Landrover and Volvo !

Bravada from GMI
Member
5 years 4 months ago

Totally untrue. JLR is the best example. On the technical/operational side Tata contributes nothing to JLR, only financing. There is no use for Tata Nano chassis or Dicor engines in Jaguars. Conversely, FWIK Jaguar doesn’t put their V8s in Tata Xenons. There is probably more Fiat tech in Tatas, while Jaguar still relies on their technology-sharing agreements with Ford and PSA to help spread cost. Operationally, JLR is only more independent and swiftly acting due to the loss of the corporate “hat” in Dearborn.

fuzzi
Member
5 years 4 months ago

you really think that only finacing is the solution for Saab ?

Bravada from GMI
Member
5 years 4 months ago
Nope, they also need some fresh blood in the sales, marketing, customer communications, aftersales / service etc. side. Large car manufacturers is the last place I’d look for that, most if not all of them are just as stale and uninventive as Saab’s current approach is. I would look for somebody from outside the car industry, perhaps Apple or Google, who can completely redefine the business model and customer relationship. I am also not sure about the organization on the production and tech side, as well as administrative departments, but if they aren’t working to their full potential, it’s surely… Read more »
Khrisdk
Member
5 years 4 months ago

+1 for looking in all other places that the car industry for new people.

KaiC
Member
5 years 4 months ago
I read the post carefully jeff.It is worth to read and give us the way to analyze what will SAAB`s future be. I totally agree with the three steps SAAB would do after joint venture.And i do think the first step is more important too.But i have full of confidence in this step. According to the datas last year .Volvo sold more than 17000 volvo cars in China.That may be the target of SAAB for the first or second year .And if SAAB car is in the right position (I mean SAAB should let everybody know which car SAAB is… Read more »
fuzzi
Member
5 years 4 months ago

the main problem will remain, financing new models ?

SAABBob
Member
5 years 4 months ago

As usual, Jeff, extremely well written. And spot on.

WooDz
Member
5 years 4 months ago
The headline is absolutely right Jeff. A fantastic read and well worth the time it took to digest it. There the news floating around that Youngman has submitted papers to the Chinese NDRC for Saab production. It would seem logical to think they may end up being the final partners. Maybe there could be a tie-in with Hawtai who could manufacture engines but without echoing your words above, everyone needs to focus on the present; management, customers and the media. SAAB must get the production lines running asap or there will be no 2 years time. suppliers want guarantees yet… Read more »
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