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The Globe and Mail

Saab's demise a sign of Europe's weakness

A Saab 96 V4 in at Swedish car rally in the 1970s -- the brand's glory days.


Tony Barber is the FT's Europe editor

Farewell, Saab, I knew thee well. Like other western residents of Moscow in the 1980s, when winters were as freezing as the Soviet political climate, I needed a vehicle whose engine would unfailingly start in temperatures of -20C. If it survived the snow-concealed crevices of Moscow's roads, that was a bonus. On both counts the Saab performed better than most cars from the faraway capitalist world.

These memories returned last month when a Swedish court declared Saab bankrupt at the request of the company's Dutch owners, who bought the car maker from General Motors less than a year ago. In truth, Saab -- once one of Swedish industry's most beloved brands -- jolted from crisis to crisis throughout most of its 11 years as a wholly owned GM subsidiary. Its financial condition became so desperate that after last April it did not make a single car. All in all, it was time to put Saab out of its misery -- leaving Mahindra & Mahindra, the feisty Indian sports vehicle maker, or someone else to snap up the best bits of the business.

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Saab was a niche producer, operating in a volatile and ultra-competitive industry in which a couple of dud models can devastate a company. For Europe's car makers as a whole, however, the question remains whether Saab's demise is merely an omen of a bigger industry shake-out that may come to pass in 2012.

Such an upheaval has been waiting to happen ever since the downturn in the European and U.S. car industry that followed the western world's financial crisis of autumn 2008. At that time politicians in Europe and the U.S. intervened, saving factories, protecting jobs and introducing "cash for clunkers" scrappage schemes to prolong a production overcapacity that, for Europe's passenger car market, was as high as 30 per cent.

Desirable or not, state financial support for struggling car manufacturers is not something Europe's politicians are so far contemplating for 2012. But if, over the next few years, it were ever to come to 2009-style government bail-outs, it would be difficult from a political and financial point of view to repeat the operation on the same multibillion-euro scale.

European public purses are far more tightly stretched today than three years ago. Overall, government debt is higher, and austerity is the watchword of political leaders, from London to Athens. With businesses closing and unemployment rising across the continent, many voters would display a lower tolerance threshold for extending financial help to car makers.

As things stand, even Europe's weaker car groups may squeak through this year, although it must be admitted that few will find the going easy. There is little comfort to be drawn from the December data on new European car registrations. Sales of new cars held up reasonably well in Germany, but were stagnant in France and slumped in Italy and Spain.

The overall trend of declining sales that began in Europe in 2007 shows little sign of abating. One reason not to expect much improvement in 2012 is that the euro zone's sovereign debt and banking crises are as present and dangerous as ever. The region is almost certainly already in a confidence-sapping economic recession that, in coming months, will deter millions of consumers from purchasing expensive items such as new cars.

It follows that the car makers which are likely to suffer most are those that rely heavily on European markets for their turnover.

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In this harsh environment Germany's car manufacturers are better placed than most of their competitors. Emerging countries such as Brazil and China, as well as traditional markets such as the U.S., account for roughly half the revenues of BMW, Daimler's Mercedes-Benz division and Volkswagen. Southern European markets such as Italy, Portugal and Spain are of far less significance.

Much will turn on the economic outlook in China, where Volkswagen, for example, sold 27 per cent of all its cars in 2010. For the moment, China's car market looks set to continue expanding this year, though perhaps at a relatively modest rate of 5 per cent.

It is a very different matter for a car maker such as PSA Peugeot Citroën, the French company which rearranged its upper management on Wednesday by installing a new chief financial officer and a new head of brands.

No mass producer depends on western Europe for its sales as much as Peugeot. This year, however, France will hold both presidential and parliamentary elections. It is inconceivable that the political classes will let Peugeot sink into deeper trouble -- or even sanction job losses at French car plants.

Nevertheless, if Europe's politicians and business leaders really believe in the market economy and competition, they should put their money where their mouths are. The strongest car companies will prosper, and the best of luck to them. But the weakest, like Saab, will fade away. So be it.

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