Volvo and Saab: Too slow for the fast lane?

Swedes sometimes describe their country as a land of eight million people and 80 million mosquitoes. But that doesn't precisely describe the situation. The people population is closer to nine million, and while there may be that many mosquitoes, they are a minor irritant compared with the problems caused by a much heftier Swedish critter--the moose. Signs warning motorists to watch out for moose dot Swedish highways, because when a car collides with one, both sides lose. The front bumper hits the moose in the legs, then throws it onto the hood and into the windshield. It takes a very stout vehicle to stand up to a flying moose.

Sweden's two automakers, Volvo and Saab, specialize in stout vehicles, and their safety engineering has won them an enviable reputation among consumers. But that wholesome image can't obscure serious problems at both companies: shifting strategies, revolving-door management, mediocre new products. As Volvo and Saab drove erratically through the first half of the 1990s, Japanese and German competitors successfully attacked them in the U.S., their biggest market. Despite introducing a slew of new models this year and next--the usual prescription for ills in the auto business--both companies face an uncertain future. Volvo and Saab don't fill any obvious unmet customer need, and they are burdened by high costs, poor financial performance, and a tiny home market. Their biggest assets are their names, but they are competing against even bigger names--like Mercedes-Benz, BMW, and Lexus.

To regain momentum, the Swedish automakers are trying something bold and risky: inventing new personalities that will make them more popular with upscale customers. Volvo wants to shed its reputation for boxy, boring cars by replacing sharp edges with curves and by rolling out a sexy new coupe and convertible. It hopes the new specialty models will revive interest in the entire Volvo line, enabling it to supercharge sales to 500,000 cars by the year 2000 (it sold just 368,000 last year). Saab would like to shed the adjective "quirky" that is invariably used to describe its cars and replace it with "fast," "technologically advanced," and "individualistic." By moving more into the mainstream, Saab hopes to sell 150,000 cars in 2000, vs. 98,000 in 1996.

Put another way, Volvo is counting on its retooled designs and expanded product line to transform itself into another Mercedes. Saab, which makes fewer models and pitches itself to driving enthusiasts, is trying to emulate BMW. Those strategies have the advantage of being proven--but Mercedes and BMW are still around and doing just fine. Furthermore, by moving upscale and increasing volume, the Swedes appear to be violating a fundamental law of economics. Dan Jones, a professor of management at the University of Cardiff in Wales and a veteran observer of the European auto industry, isn't optimistic about their chances. "I'm not impressed with Volvo's sporty coupes," says Jones. "The market is pretty flooded right now, and I'm not sure what Volvo's image is. And it's going to take a lot of time and money to make Saab into an upscale challenger."

Both companies have gone into a skid in the U.S. In 1986, its peak year, Volvo sold 111,100 cars in the U.S., vs. 87,600 last year. Despite that disappointing decline, Volvo expects sales of 125,000 by the end of the decade. Saab also topped out in 1986 with 47,414 cars; last year it sold 28,439 and lost money for the second year in a row. It is shooting to get back to 40,000. Volvo and Saab have also sacrificed goodwill because of their reluctance to acknowledge the whims of American customers. They were slow to add options like electric windows, because Swedes value simplicity over complexity and didn't see the need for them. They didn't install cupholders, again, because Swedes don't eat or drink in their cars. "The problem with these companies is that their brand images are not strong enough to command large premiums in the luxury market," says New Jersey- based consultant Susan Jacobs.

Some of the automakers' problems can be blamed on their location. Geographically and psychologically, Sweden stands on the periphery of Europe. Diffident in their relations with outsiders, Swedes prefer to go their own way. The Swedish language, for instance, has three letters that don't appear in any mainland European alphabet. While Swedes like to brag about their engineering tradition, service industries and the government now employ nearly twice as many people as does industry. A recent survey by the International Institute for Management Development in Lausanne, Switzerland, ranked Sweden sixteenth in economic competitiveness, well below its Scandinavian neighbors.

Sweden is an unusual environment for carmakers. Together, Volvo and Saab account for the country's five top-selling models, but as much as 70% are sold as company cars because most Swedes can't afford to buy products that, counting a 25% value added tax, cost up to $44,000. Swedish companies give the cars to employees in lieu of compensation, since cars are taxed at a more favorable rate than salaries. Swedish autoworkers are, to put it politely, idiosyncratic. Their wages are relatively low--$14 an hour, $2 less than office clerks make--and they can be difficult to manage. They like to figure things out on their own and don't respond well to direct orders.

Safety is a religion in family-oriented Sweden. Exceed the speed limit by 18 miles per hour, and you lose your license. Have more than one drink before driving, and you could wind up in jail. Volvo maintains a research team that has investigated 200,000 traffic mishaps. Saab tests its cars for moose collisions by suspending an 850-pound bundle of electrical cables from a crane and driving the car into it at 36 mph. Other automakers are catching up on safety issues, although the increasing popularity of trucklike sport-utility vehicles has blurred the question of who makes the safest car (see box).

Separated by only 50 miles of highway, Volvo and Saab engage in a fair amount of commingling. The CEO of Volvo was recruited from an investor group that owns part of Saab, while Saab recently appointed to its board a former top executive of Volvo's North American operation. A number of Saab executives live in Volvo's hometown of Gothenberg (pop. 450,000) because it has more cosmopolitan attractions than Saab's base, Trollhattan (pop. 52,000). Still, the relationship between the two companies is complex. Volvo sells four times as many cars as Saab, which it regards as "a little brother." Saab's feelings are less fraternal. It sometimes describes its cars as "Volvos without the boredom." The two companies discussed a merger in 1977, but the Saab board vetoed the deal, probably because Volvo threatened to gain too much of an upper hand.

Volvo, which had nearly $22 billion in sales last year, gets 42% of its revenues from trucks, buses, and construction equipment. It ranks only twenty-sixth among the world's automakers, and over the years it has attempted nearly as many mergers as Elizabeth Taylor. In 1986 Volvo sought to smooth the ups and downs of the auto business by buying into a large Swedish drug company, but the attempt failed. In 1990 it began a more serious attempt to link up with France's Renault, which led to the announcement of a full merger in September 1993. Volvo's board scuttled the deal when it became apparent that Volvo would be effectively engulfed by the larger company.

With its product pipeline dry after the Renault dalliance, Volvo decided to start fresh with a new strategy. The simplest route would have been to build on its reputation for family safety by developing a minivan or a sport-utility vehicle. Volvo rejected both options because the vehicles would have overwhelmed its engineering resources and were deemed too fuel thirsty for its image of environmental sensitivity.

Instead it chose the Mercedes route, redesigning its cars, expanding its lineup, and moving upscale. Because of its small volume, it needs the higher margins that luxury marketing provides. "We want to make people want a Volvo when they don't need one," says Peter Horbury, the company's English design director. "Swedish design is very function driven: strong, simple, no decoration. That's okay if we're selling cars in Sweden. But when you sell cars to businessmen in Tokyo or ladies in Boston, you need a lot more style."

Volvo has already begun selling a line of sleeker sedans and wagons based on the old 850. Its flagship will arrive in the U.S. this fall, a smartly designed coupe called the C70 that will be the first two-door car Volvo has sold since 1990. The company says the C70 will make even rear-seat passengers happy by giving them ample legroom and visibility. Another striking feature is the expected price: $40,000. That will put the C70 smack up against another imported luxury coupe, the Mercedes CLK. A convertible version of the Volvo coupe will be available in early 1998 with an estimated price of $45,000. Will the same families that trundled their kids around in a Volvo station wagon spend an extra $10,000 to get something racier now that those kids are safely off to college? Says John Bulcroft, a marketing consultant for European cars: "Frankly, we are confused. Volvo appears to be abandoning its roots as it courts the new image of Speed Demon. We are willing to bet traditional Volvo customers are confused as well."

The man responsible for executing Volvo's strategy is Leif Johansson, whose apple-smooth cheeks belie his 45 years. Volvo's fourth CEO since 1990, Johansson, like his three immediate predecessors, was recruited from outside the company. He arrived in April from Electrolux, joking, "I picked the one industry more competitive than major appliances." A prototypical Volvo customer, Johansson has five children and spends his spare time sailing and hunting birds and moose, though he says he has never actually killed one--not even with his car.

Johansson says Volvo must shorten product cycles and reduce costs to compete effectively. "We have to learn to get more out of existing facilities," he says. A visit to Torslanda, Volvo's biggest assembly plant, shows why. Inventory is stacked high, and workers move in slow motion. Volvo spends 35 hours assembling each car; manufacturing consultant James Harbour says it should be able to do the job in 30 hours.

Saab has taken a different road to boosting its brand and increasing sales. While Volvo is adding new models, Saab is trying to squeeze more volume out of its current lineup. And while Volvo is attempting to become more fashionable, Saab is struggling just to become conventional. Given its history, that will be a stretch. Saab began building automobiles after World War II because its parent, Swedish Aircraft AB (SAAB--get it?) wanted to diversify. In 1987, its best year, Saab sold 127,074 cars--fewer than Chevrolet sells in one month. Saab's auto operations have never been more than marginally profitable and last year lost $168 million.

"Eccentric" is probably the kindest way to describe Saab cars. Until the 1960s, all were powered by two-stroke engines, which meant owners had to add oil to the gasoline tank, the way they do to a lawnmower. As a safety feature, Saab installed the ignition lock not on the dashboard or the steering column, but in the center console, where the key wouldn't inflict any wounds in an accident. Such peculiarities came to be described as "Saabish," and led to the creation of a group of devoted owners known as "Saabophiles."

In the 1980s, Saab's existence became imperiled. It explored a partnership with Fiat and was romanced by several other companies until GM, having lost out in the bidding for Jaguar, bought a half interest in 1990 for $500 million. At the time, it planned to market Saab as a luxury brand alongside Opel, a mass-market company that it also owns. GM installed its own CEO, cut the 15,000-person work force nearly in half, and tripled assembly plant productivity.

But Saab continued to founder because of its weak two-car lineup. The midsized 9000, which sells for up to $42,000, has been on the market since 1986 but has never found favor with Saab lovers. The product of a joint venture with Italy's Lancia and Alfa-Romeo, it used some of their body panels and thus didn't look like a proper Saab. Worse, the ignition key was moved to the instrument panel. Although the 9000 was marketed as a luxury car, it first arrived in the U.S. with a hatchback instead of a trunk, a style associated with cheap economy cars. The 900, the first Saab developed with GM's help, flopped when it was launched in 1994. Once again Saab lovers complained that the optional Opel-built six-cylinder engine made it less Saabish. And the car was riddled with bugs. Convertible tops on '95 models operated so badly that the independent supplier was replaced.

Last year GM installed its third CEO, Robert Hendry, 52, a soft-spoken, tough-minded veteran of GM's North American wars. Hendry quickly scrubbed a proposed small car and said Saab would meet its volume targets without expanding its lineup. He also ordered a reevaluation of Saab's role in the marketplace, a redefinition of its customer base, and a new product strategy. Henceforth, Saab would go after customers who can pay a premium and want sporty, fun-to-drive cars that emphasize performance and safety.

This fall Saab will introduce the successor to the 9000, called the 9-5. Hendry delayed the launch by six months to ensure that all the bugs were out. "In the premium segment, you can't make adjustments as you go along," he said. With its wedge shape, traditional Saab grille, and awkward rear flank, the 9-5 is immediately recognizable as a Saab, with the ignition switch returned to its traditional place. Yet the 9-5 may be conventional enough in its overall appearance to attract people who were turned off by Saabs before. To succeed, the 9-5 will have to be priced more competitively than the 9000. Saab executives say prices will start around $30,000, and Saab will need every penny because it has a productivity problem too. Although Saab's factory in Trollhattan hums like a proper assembly plant, it is still about 25% less efficient than a GM plant in the U.S.

GM continues to spend a lot of money on Saab. Besides the original $500 million purchase price, it has invested another $500 million, and heavy losses are expected again this year. GM may have to pony up more money in a few years if Sweden's Wallenberg family, which owns the other half of Saab, exercises its option to sell 25% of the company to GM. What the payoff will be isn't clear. Globally, GM sold more than 8.2 million vehicles last year, so Saab's 98,000 cars "amount to little more than a rounding error," cracks analyst Nick Snee of J.P. Morgan's London office. GM wants to market Saab as an imported luxury car. But it is also laboring mightily to establish Cadillac as a worldwide luxury brand with cars like Catera that are more international in character. Since Cadillac has higher volumes, richer margins, and a better-known name, it's hard to see much room for Saab.

By leaving behind their Swedish roots and adopting more international designs, Volvo and Saab are doing the right things. But in trying to jack themselves into the premium-car category, they are abandoning their strengths as makers of family cars. Saab could find itself so integrated with Opel that it no longer resembles an independent brand. Volvo could yet fall prey to an auto company that wants access to its dealer network and its brand name. Despite official denials on both sides, the two most often heard suspects are Mitsubishi and Chrysler. History is not on Volvo's side or Saab's either. In the auto industry, big companies tend to get bigger while the small ones disappear.

The Safest Car May Be a Truck

In most accidents a truck or minivan will protect you as well as a car.

With a Volvo or a Saab, you are indeed getting a safe car. But how safe is safe? In the best-known crash test done by the National Highway Traffic Safety Administration (NHTSA)--a 35-mph head-on collision with a concrete wall--the 1997 Volvo 850 sedan scored nine stars out of ten, while the Saab 900 four-door got eight. That's better than average. But several models scored perfect tens, including the Audi A6 and three U.S. muscle cars: Ford Thunderbird and Mustang, and Chevrolet Camaro.

It's rare for a driver to plow directly into a wall, so the Insurance Institute for Highway Safety (IIHS) tests how well the driver is protected when a car angles into a barrier at 40 mph. In a test of 17 midsized four-doors, the Volvo 850 finished among the top four, along with the Ford Taurus, Chevrolet Lumina, and Toyota Camry. The Saab 900 finished tenth. The IIHS also keeps track of the kinds of vehicles involved in fatal accidents. In a report on 153 vehicles built in the model years 1990-94, the Saab 9000 scored best. The Saab was involved in 75% fewer fatalities than average. Close behind were the Lincoln Continental, the Volvo 900 series, and two BMW models. Saabs and Volvos do well in statistical studies of real-life accidents not only because of their engineering but also because their owners tend to be careful drivers obsessed with safety. Chevrolet Corvette, purchased by people with something else in mind, had a death rate ten times higher.

Sport-utility vehicles and vans aren't advertised for their safety, but they also scored well in the IIHS study. The Ford Explorer was involved in the same low number of fatal accidents as the Volvo 900 series. And when a sport-utility or other light truck collides with a passenger car, 80% of the fatalities occur in the car, according to NHTSA. The reason is simple: Sport utilities outweigh cars by an average of 1,000 pounds. So here's the dilemma: If you run into a wall, a Volvo or Saab will serve you well. But if you collide with a car, you are better off in a truck.

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