IMPORTANT NEWS: National Electric Vehicle Sweden has agreed to buy the assets of Saab Automobile and the sale is expected to be finalized during the summer.

Friday, November 4, 2011

Why are Youngman and Pang Da buying Saab?

Here's some weekend reading for you. An article from Swedish news magazine Fokus with a different view on why Chinese Youngman and Pang Da want Saab. If we for a moment forget about brand, design and technology, could the reason for the purchase be the importance of global connections? For example access to a global dealer network? Which could prove important when China actively begin to restructure their car industry, getting rid of small and/or unimportant companies in favor of bigger and more important companies.

Below is an translation of the Fokus article.

Chinese power struggle behind the deal 
Industrial policy. Saab is Youngman's and Pang Da’s last resort to avoid being marginalized in the bloody auto war that are currently underway in China. 
And so in the end Saab has managed to be married off.  The company, which the last few years has created more headlines than cars, is about to become part of the Chinese companies Youngman and Pang Da.
But there is no white knight in shining armor who takes on the battered car maker.  On the contrary.  Youngman last year sold only 40,000 cars and with a market share of 0.2 percent is not even close to China's biggest car company.  Pang Da is no car manufacturer at all, but only a dealer.
And it is precisely the two companies' small sizes that made them so interested in the deal.  Already five years ago Youngman tried to acquire Saab, CEO Pang Qingnian revealed in connection with his visit to Sweden this week.
The reason is not primarily the Saab brand, the design or any other of the factors usually mentioned when Chinese companies acquire European assets. That’s how Geely's purchase of Volvo was explained.  
The main reason that Youngman and Pang Da want Saab seems instead to be the exclusion process currently underway in the Chinese automobile market.  The hundreds of automakers that are fighting for the Chinese consumers are way too many, according to the Chinese government.  The national politicians and planning authorities therefore are  starting a process that involves larger companies buying up smaller producers.
 - Neither Youngman or Pang Da are listed as survivors.  They see the Saab deal as a way to end up on that list, says Ari Kokko, a professor at the Copenhagen Business School and director of the research centre International Business and Emerging Markets.
The idea is that the central government, or rather its planning body the National Development and Reform Commission, NDRC, should get the impression that the two companies have a strong international presence.  For some time now Pang Da also sells Subaru cars in China.
 - Without international connections, these companies can not exist.  They are fighting an uphill battle.
The Chinese car market is reminiscent of a gold rush.  Last year 18 million vehicles were sold in the country and the year before that saw an end to a century-long era when the U.S. was no longer the country in the world where the most cars were sold.
Everyone wants to participate.  General Motors has a partnership with SAIC, Nissan is working with Dongfeng and Volkswagen with FAW, to name just a few of the big. There is also an undergrowth of local and regional manufacturers.
 - The car market in China is highly fragmented.  And several brands are completely unknown to a wider audience, says Philip Nordenström, head of the China office at Applied Value Group, a consulting firm in areas such as automotive, once started by the Stenbeck sphere.
The desire to be in China is understandable.  In relation to GDP, there are still few cars.  In addition, the Chinese government has announced a large number of highway projects; 20,000 kilometers be built by 2025. Unlike the rest of the world the Chinese demand an increasingly number of cars, which tend to generate greater profits for car companies.
The potential is enormous, but the business climate is not very easy to navigate.  As recently as a few years ago, General Motors sued its Chinese rival Chery.  The Chinese company had, according to GM, simply copied one of GM's models and also used a repainted GM car in a crash test to get better results.
The situation in China largely resembles how it looked in the U.S. at the beginning of last century.  Even then, there were hundreds of car manufacturers with varying quality.  But according to the textbooks for economic development, it is a phase that will eventually be replaced by another.
 - Right now there are many domestic cars which costs SEK 50,000 and up.  They are functional, takes you from A to B and look good.  But they would not meet European safety and environmental requirements.  This is how it usually looks at first, but soon the preferences of the Chinese will become more sophisticated, says Ari Kokko.
In western economies, the exclusion of companies has happened more or less naturally, by unprofitable firms either closed or been bought up by larger.  The problem in China is that cheap loans give car companies artificial respiration.  Therefore, the state is forced to clean up the industry.
 - A consolidation is needed to create profitability, says Philip Nordenström.
But it is work that can take a long time.  Many companies are supported by their local and regional politicians, and earlier when Chinese politicians tried to trim the steel industry it did not work out as planned, there are still hundreds of different steel companies in the country.
 - You can say that China works a bit like the EU.  If Brussels tells us in Sweden that we should not make cars, it is not certain that we do as they say, says Martin Ekström, director of the Applied Value Group with responsibility for the metallurgical industry.
Saab has finally gone the same way as Volvo, acquired by a relatively small Chinese car company, but as a pawn in a game of who should be allowed to remain on the world's most important car market. 
It is not necessarily a bad situation, says Ari Kokko.
 - The great thing about this is that Volvo is extremely important for Geely.  In the same way one can hope that Youngman and Pang Da will be able to care for Saab.
For Saab a lot of obstacles remain.  Saab's former owner General Motors can still pull the handbrake if it wants to prevent another car brand to wedge itself into a market where GM already has two joint ventures started.  In addition, the NDRC can stop the deal.
Yet the most difficult issue still remains.  Why would two Chinese companies manage to revive Saab, a brand with a proven inability to make a profit?  This question Ari Kokko has no definitive answer to.
 - There are big question marks remaining.  But Saab is not really in a position where it can pick and choose.