How Ford and GM manage their European acquisitions

Automotive Industries, April, 1998 by Richard Feast

Since their takeovers, Jaguar and Saab have consumed boatloads of cash. The results have been mixed.

The European auto industry provided the stage for an impressive display of corporate muscle-flexing in late 1989. Ford and General Motors battled each other for control of British luxury carmaker Jaguar, an issue resolved only after Ford heaped a mighty $2.55 billion on the negotiating table.

GM then turned its attention to Sweden, where Saab-Scania having rebuffed Mazda over collaboration with Saab, was within nanoseconds of signing an agreement with Flat. No one was more surprised than Fiat boss Cesare Romiti, when it was suddenly revealed that Bob Eaton, then GM-Europe (GM-E) president, had secretly agreed to buy half the Saab carmaking business for $600 million.

These were large sums even for two of the world's most famous automotive icons, but the companies were doing well. Jaguar was solidly profitable before and after separation from state-owned British Leyland in 1984. It hit record sales of 49,500 the year before the Ford takeover. During the same era, Saab was one of the most profitable automakers in the world for its size. Production reached an unprecedented 127,000 units in both 1986 and '87. Above all, Jaguar and Saab were solid brand names. Think of their potential under big company guidance.

Deep-Seated Problems

Appearances were deceptive, however. Within a year of the takeovers, Jaguar and Saab were in deep financial trouble. Then the recession of the early 1990s hit The two companies were kept afloat only by huge cash infusions and loans from their chastened new owners. And despite all the money and manpower expounded on them, neither Jaguar nor Saab has yet returned to the sales levels they enjoyed before being taken over

Ford and GM faced similar problems with their new acquisitions, including tremendous inefficiencies and a global economic slump after the 1991 Gulf War. Both Jag and Saab were handicapped at different stages by unfavorable exchange rates, but this hazard is faced by everyone doing international business these days.

The real Jaguar and Saab problems were more deep-seeded. Both marques were, and are, several times smaller than their obvious German, Japanese and Swedish rivals. That puts them at a cost disadvantage when it comes to economies of scale. Both were heavily dependent on their home markets and the U.S. Neither had made much impact on the Japanese market, or the largest national car market in Europe, Germany.

Their models were aging fast, and there was little in the pipeline to replace them. They were staggeringly unproductive when the decade began. Saab employed nearly 17,000 people to produce under 100,000 cars in 1990. Jaguar used 12,000 people for an output of under 50,000. It was no surprise as the 1990s unfolded that both companies halved those headcounts -- without ceding any ability to make as many cars as they could sell.

Big Volume Plans For Jag

The two companies also had specific problems. For GM it involved Sweden's high wage and social costs and an alarming rate of absenteeism. Costs were not the problem in the U.K., which had undergone social and political transformation under Prime Minister Margaret Thatcher. For Ford, the problem was Jaguar's sloppy quality and old-fashioned work practices. Bill Hayden, a manufacturing veteran who was about to retire after 40 years with Ford, was horrified at what he found when he became Jaguar chairman. He described the Coventry plant as the worst he had seen outside the Soviet Union.

Ford and GM clearly had a lot to do to polish up their newly acquired jewels. Both attacked productivity, quality and reliability. They adopted component-sharing. Ford stamps body panels and makes Jaguar engines Saab's latest 9-3 and 9-5 are based on Opel floorpans. Two of their engines, a V-6 and new direct-injection turbodiesel, are bought from GM.

The companies have enjoyed distinctly mixed results for their efforts.

Jaguar says it returned to profit in the final quarter of 1994 after the launch of the latest XJ sedan. It is impossible to judge just how it is doing these days, because its financial details are hidden in Ford's international figures. It certainly has a large deficit to claw back

Sources suggest Jaguar has so far sucked $6 billion out of Ford in terms of purchase price, accumulated annual deficits (an estimated $1.35 billion in the six years to the end of 1994), loans and investment 'Me commitment required steely nerves at a time when the rest of Fords European operations were struggling.

However, Jaguar's plan to quadruple annual production to over 200,000 over the next four years would not have been endorsed if Ford had serious concerns.

Having launched the XJ sedan, the XK sports model and an in-house V-8 engine to power them, Jaguar is set to double in size after X300 (a BMW 5-Series and Mercedes-Benz E-Class competitor) goes into production at the end of this year. Two years after that, it will double again with the arrival of X400, a 3-Series/C-Class rival. Both moves involve major factory renovations. Neither would be possible without sharing platforms and drivelines with big-volume Fords.