Saab’s Sad Story: the Last Episode

Abstract

This report is divided into 5 sections. The first section aims to summarise the article, ‘SAAB’s sad saga: The last episode’ and look at its consequences it has had on the business community. Secondly, it will examine whether or not, this type of consequence is a product of globalisation. It will also look at how emerging economies are growing and why large companies look to them for financial help. The term ‘creative destruction’ will be explored and how it is related to SAAB. In conclusion, we will examine different strategic choices that could have helped SAAB stay in business.

Once admired Swedish car brand SAAB is on the verge of bankruptcy due to various factors. The brand, once innovative, has fallen behind the competition and become somewhat out-dated and unfashionable in the current market. The productive scale of SAAB is too small to be profitable on its own, recently only producing 120 000 units per annum with minimum required 200 000 for any mass volume car maker.

Its acquisitions by various large companies over the past few years have had a perceived negative impact on the brand notably on its once innovative technology and somewhat unique image. These factors, in conjunction with theglobal financial crisis have left SAAB on the brink of liquidation. Desperately hoping for a financial lifeline from Zhejiang YounGeneral Motorsan Lotus Automobile and Pang Da Automobile Trade in China to rescue the floundering carmaker, their investment plans have been put on hold as they currently wait for approval from the Chinese authorities.

As SAAB has struggled financially, they have not been able to pay their suppliers. This has led to suppliers having no choice but to stop supplying SAAB with the parts needed to continue production. This will have a significant impact on the supplier businesses, their employees and any companies within their supply chain. Service centres and sales yards will also be adversely affected depending on how diverse their business is. The demise of SAAB’s production will also no doubt have some positive effects for companies as they lose competition and or pick up service contracts for existing cars.

Another implication regarding SAAB’s situation may have had on the business community exists within the economies of the countries it has been bought and sold between. As ownership of SAAB has shifted, their operations base have changed. When this occurs, high level management jobs will be moved into the countries where the new owners are based and jobs will be lost in the country of previous ownership.

Globalisation is the way in which the world is becoming more and more interconnected through trade, investment, production, and finance and politically through organisations like the United Nations, the World Trade Organisation and other governmental organisations.

Globalisation can have both a positive and negative effect on a small carmaker. One of the benefits of globalisation is that it is a truly worldwide market place. This can potentially mean huge sales opportunity for a manufacturer such as SAAB. On the other hand, the cost of global marketing and logistics for smaller niche companies like SAAB can be prohibitive and lack of local knowledge can lead to disastrous pitfalls that a smaller company can ill afford.

Global marketing requires intensive, country specific research and marketing in order to determine local needs and service expectations etc. A smaller niche company like SAAB is less likely to be able to afford a full sales infrastructure unless relative sales volume was expected and attained. In addition, once new markets are opened up, the issue of logistics can be very expensive if items are shipped in small volumes. It is easy to see how a relationship with a larger carmaker could be attractive to a failing, small carmaker if they already have global logistics and marketing channels in place.

In light of this, Saab looked to General Motors to help the company compete in an industry dominated by a number of large auto manufacturers. When this ultimately didn’t have the desired effect, they had no choice but to sell the remaining 49% of the company to General Motors. In hindsight, due to the failure of General Motors, this can be compared to a smaller sinking ship tying onto a massive sinking ship.

Saab had, prior to the acquisition by General Motors, differentiated itself in the market with its focus on creating safe vehicles with quirky, environmentally friendly technology while maintaining a driver-oriented design. While the acquisition was necessary to keep the company afloat, it would seem that the identity of the smaller company was lost as a result of the acquisition by General Motors. This could be one reason why Saab has had difficulty even maintaining a market share ever since.

Emergent economies like China and India currently have much lower levels of gross domestic product than developed countries, which tend to have slower growth and much higher levels of debt. It is this that makes emerging markets very important drivers of growth for the global economy. These large, emerging economies have not had the ability to raise finance and or increase debt levels; they also have very large populations of people who are hungry for consumer goods. The sales potential for desired goods in these countries is extraordinary and as the population becomes steadily more affluent; the desire for aspirational luxury goods is likely to escalate.

While developed nations remain in financial crisis, emerging markets, with rapid population and astonishing figures in economic growth, are rapidly becoming the economic powerhouses of the global economy. Countries like India and China, which were once sought after for their natural resources and cheap labour, now have great opportunity to develop economies of scale. In order to achieve this, significant investment is needed in industries that have been dominated by developed nations.

Failing global companies in need of investment have few options left in the developed markets due to market saturation, and therefore need to look to new markets. A perfect pairing between the two economies is created with the desire of emergent markets to increase investment in new industries in order to facilitate their development. The relationship becomes symbiotic, with the failing company needing both large investment and the promise of accessing a large and lucrative new consumer market.

As the SAAB situation demonstrates, it can be a risky proposition to seek new ownership in a developed nation with a saturated market. Developed countries that have seen significant growth in the past are more likely to fall into recession than emergent markets.

There is no such thing as unlimited growth in economics, so as a market reaches greater heights, it becomes more and more likely that the only way for its economy is to fall. In addition, markets in a developed nation are saturated and have a customer base that is much more difficult to win over and to maintain satisfaction levels withstanding competition. When consumers are spoilt for choice, manufacturers have to develop branding that works much harder at convincing them to buy.

This is an expensive proposition and can have catastrophic consequences if it fails. ‘Creative Destruction’ is a term that was coined by Joseph Schumpeter. In his book, ‘Capitalism, Socialism and Democracy’, he describes how entrepreneurs bring economic growth to capitalism. He argued that the introduction of innovation to capitalism was the reason behind sustained long-term economic growth, even if this destroyed other established companies.

He believed that the economic benefit from innovation, in spite of ‘destroying’ other companies, was better than if it had never been introduced. Essentially, ‘Creative Destruction’ describes a process of creating economic growth in a capitalist environment where entrepreneurs create more economic value from their innovations than is destroyed as their innovation replaces and supersedes the way things are usually done.

Ultimately, he believed that capitalism would be destroyed by the new innovations and that ‘creative destruction’ was a natural process of capitalism’s future. He defended capitalism as he believed that it created entrepreneurship. This theory explains entrepreneurs as people who innovative, not invent. These are the people who can introduce new ways of production, new products, and new markets. He argues that these types of innovations require just as much thought as process of invention.

With the opening of new markets in the national or international arena, it changes the economic structure from inside which ultimately destroys it from within therefore a new one is created. SAAB was a leader and due to its innovative beginnings, paved the way to open up niche, technologically advanced cars. This essentially created new markets and subsequently new gaps in the car market emerged and many more innovative brands entered the marketplace.

SAAB has always been too small to operate independently and to further its expansion; it allowed itself to eventually become wholly acquired by General Motors. Through this acquisition and General Motors technological infiltration, SAAB lost its quirky and innovative identity and sold out to a larger carmaker that eventually went into liquidation.

If SAAB had kept separate identities from General Motors, they potentially could still be in business. Even though being acquired, keeping a separate identity may be the only thing that could have kept this brand alive. SAAB could have potentially aligned them with another smaller car manufacturer and still have kept their identity. For a long-term strategy, they would have been better off keeping their identity.

Another strategic choice that SAAB could have made was potentially not to go with China. They were not the only ones that could have bought the company. They could have considered other emerging countries like Africa or Latin America as all emerging economies have a potential for growth. China doesn’t have any carmakers so thought that this could have been a good investment for them.

References:

Wikipedia (2012) [Online] Available at:

http://en.wikipedia.org/wiki/Globalization (Accessed 10th July 2012)

Sloman, J. and Hinde, K. and Garratt, D (2010) Economics for Business5th Edition. Essex: Pearson Education Limited

Collins, S. (2011) Governing Business Development: Study Guide 1 & 2Glasgow: ICS Ltd