M&M's Saab story
The Mahindra & Mahindra (M&M) machine is at it again. No, no not the string of bad TV commercials. The Cheetah inspired XUV 500; a getaway car in a lonely forest, where babes want to eat you up. Ah! Come on M&M, that ad doesn’t need carrots. It needs sticks. And I mean real sticks to beat up you know who. Anyways, this piece is not about the ad. It is about M&M’s business interest in Saab, the Swedish car company which is now up for grabs.
Both parts of the news, that Saab has gone bankrupt and is on sale or that M&M is interested didn’t come as a big surprise. If you have followed M&M in recent years, you will notice that it has set a fairly predictable trend. It has looked at just about every significant asset on sale in the auto industry. Remember Jaguar & Land Rover. How about Kinetic, the two wheeler company-- which is now Mahindra 2 wheelers? Bangalore-based electric car maker Reva. An Italian design firm by the name of Engines Engineering. Also the troubled Korean sports utility vehicle manufacturer Ssangyong? M&M has been on a hyper active M&A drive.
The drive to acquire assets and diversify is probably because M&M understands its strengths and weaknesses. A senior automotive consultant puts it aptly. “They knew they are not in a great position when it comes to R&D. So for the last 4-5 years the idea has been just to invest in it. The technical center in Chennai, the 600 odd engineering set up at Ssangyong, the Italian design firm buyout or the projects they do with others like Ford, Renault or Navistar…M&M is building a huge organization capable of doing development work.”
M&M’s interest in Saab proves this. In the utility vehicles strategy, M&M has done well. The XUV 500 has beaten the company’s own expectations, to the extent that two other products slated to be launched have been pushed back. “Suppliers will take time to ramp up their capacity,” says Deepesh Rathore, MDof consulting firm IHS Automotive India. Deepesh adds that Ssangyong is a good fit in the technical department for the SUV business though the styling is somewhat questionable. The 2 wheeler business is well set on the Kinetic foundation. The Navistar joint venture is chugging along. What is left alone and kind of without a plan is the Verito.
That’s the car M&M bought from Renault. “With the little changes they have done, Verito is doing well but it is not going to last forever. They need a newer generation of platform…who knows even shorten the platform. But they have no skill in this area. I think Saab can help them there,” says Deepesh. Fair point! I mean for $ 425 million, you get an established though niche brand, manufacturing facility in Europe and Saab’s technical center. However much M&M will try and convince you that it wants to be the utility vehicles specialist, I think the company’s ambition is far bigger. That is to become a full line automobile player. The question is can Saab help M&M get there?
As things stand today, the answer to that question is not clear. There are quite a few grey areas which gets us to another question. Why did Saab go bankrupt and what does it have today that M&M can use? Very briefly, Saab suffered from the problems of its parent, General Motors. It never had the size or the scale to compete in the modern automotive world. “The 9-5’s last model cycle before the launch of the new car was 12 years (1997 – 2009). Far too long by modern standards,” says Tim Urquhart, senior analyst at IHS Automotive.
At one time, Saab was considered to be competition for Audi. It never lived up to that potential. That Saab has been in trouble is fairly well documented. I must recommend a brilliant paper by the Judge Business School, at Universityof Cambridge. The amount of detail is fabulous. You can read it here: http://www.jbs.cam.ac.uk/news/items/2011/111219_saab.html
However, what’s left of Saab today is a big question? R&D is not about a technical center. It is about the people who work there and products. “They did have a R&D program working on the next generation 9-3 which was the car they always needed and which was to use BMW powertrains. I am not sure about the exact numbers of R&D staff working for the company or how advanced the 9-3 project was (I think they were talking about a launch date of 2013, for a car they needed yesterday. One thing is that any engineer worth his or her salt would have seen the writing on the wall and would have been planning their escape for the last 12 months at least. Especially at a time when good auto engineers are very much in demand globally,” says Tim.
In fact, all Saab has (or rather what the receiver has) is the brand and the Trollhattan factory. It seems the real estate was mortgaged too. What about products? Saab doesn’t really have many in the pipeline. The ones that it does, its former parent GM doesn’t want to part with. Last year, GM vetoed Saab’s sale to the Youngman Automobile Group in China. China is a big market for GM and giving away the product know-how to a Chinese company was and still is a bad idea. If M&M wants Saab, it must do a thorough due diligence of what’s left of Saab. If it likes what’s left then it must negotiate with GM to get access to the product technology. None of this is going to get over very quickly.