GM to sell Saturn unit to Penske Group
With its pending agreement to buy Saturn from bankrupt General Motors Corp., Penske Automotive Group Inc. may be opening the door on a new business model in the rapidly changing auto industry.
The deal, announced Friday, has Penske purchasing the Saturn brand, along with its parts inventory and the rights to its distribution network, from GM for an undisclosed price.
But the Bloomfield Hills, Mich., company will not buy any of the factories or tooling used to produce Saturn cars and trucks. Instead of making cars, Penske will outsource production, searching for low-cost manufacturers eager to find new markets for their vehicles.
The deal, which GM expects to close in the third quarter, could presage a newfound reliance on contract manufacturing as the increasingly global auto market goes through its most profound changes in decades.
“The proposed acquisition marks the beginning of a new business model in this industry; a model in which the distribution side of the business controls the brand, and manufacturing is conducted by one or more subcontractors,” said Jack Nerad, executive market analyst at auto research firm Kelley Blue Book.
The model would essentially turn Penske into a middleman, owning neither the means of production nor the retail outlet -- akin to the way that some companies, including computer firm Hewlett-Packard, often don’t design or manufacture many of the products they slap their names on and then wholesale to big-box retailers.
For the next two years, Penske will contract GM to build three models -- the Aura, the Vue and the Outlook -- a move that GM said would help it save roughly 2,000 manufacturing jobs at three plants.
Penske is searching for another carmaker it can pay to produce additional models that can be badged as Saturns, with the goal of producing one or two models to fill out the lineup and replacing the poorly selling Astra and Sky models.
In an interview Friday, Roger Penske, a former race-car driver and the company’s chairman, would not confirm a rumored deal with Korean automaker Samsung Motors, which is owned by French automaker Renault.
“We have no deal with anyone,” said Penske, who said he had been talking with a number of manufacturers about producing models that are of “the right quality” while focusing on fuel efficiency and keeping costs down. Instead of creating brand-new cars for Saturn, Penske is likely to slightly modify vehicles designed for foreign markets.
Samsung, for example, makes a model called the SM3, which is sold under the Samsung badge in Korea but as a Nissan in Russia, Ukraine and parts of Latin America.
Experiments with outsourcing production have been few and far between in the U.S. auto industry. Most have ended badly. But with GM and Chrysler in bankruptcy -- in large part because of the huge costs of running a fully-integrated manufacturing operation -- the time may be ripe for change. On Tuesday, GM said it would sell its Hummer sport-utility vehicle brand to a Chinese industrial firm, agreeing to continue building the vehicles on a contract basis.
If the Saturn experiment takes off, it’ll be a dramatic step toward decentralizing an industry long characterized by leviathan companies that control every step of a car’s design and production.
It will also be a coup for Penske, who owns 310 dealerships of his own, has the rights to distribute the Smart car in the U.S., and the racing team that won the Indianapolis 500 last month. Despite all the success, his automotive empire has never actually built cars, although it did successfully turn around Detroit Diesel in the late 1980s and 1990s.
For the owners of Saturn’s 350 dealerships and their more than 11,000 employees, less important than where the cars are manufactured is whether they get them at all. When GM announced in December that it would close or sell Saturn, along with Swedish-brand Saab, the wide expectation was that the brand was doomed.
But dealers persuaded GM to pay for a strategic review of the business, which showed that Saturn could be sold, and to subsequently hire an outside advisor, Stephen Girsky of Centerbridge Partners, to help find a buyer. Ultimately, 16 bidders came forward, including an Oklahoma private equity fund owned by a family of car dealers.
“This is the Seabiscuit story of the auto industry,” said Todd Ingersoll, owner of two Saturn dealerships in Connecticut and a member of the board that runs the brand in conjunction with GM. “This is the result we’ve all been working toward.”
The deal is expected to be completed after GM emerges from bankruptcy, at which point all the brand’s dealers will be offered new franchise contracts. Penske will provide warranty coverage on all existing Saturn vehicles as part of the deal.
The biggest challenge for the new Saturn will be finding a way to reverse its miserable sales performance. Last year, its sales fell 22%, with 188,004 vehicles sold. Through the first five months of this year, only 35,256 Saturns have sold, a 58% decline from the same period last year.
Dealers believe a big part of the brand’s revival will come from an increased marketing push. Because GM has had eight brands to nurture in a time of record losses, it has been forced to starve some of them of advertising dollars.
In an interview this week, GM’s chief financial officer, Ray Young, acknowledged that problem, pointing out that while the company spent a reported $200 million on marketing the new Chevy Malibu, it scarcely did anything to promote the Saturn Aura, a nearly identical car.
“One of the greatest lessons we’ve learned is that for every product, you’ve got to have adequate marketing,” he said.
Ken Croft, general manager and partner at Saturn of Cerritos, said that although he would prefer to sell an American-made car, he’d be happy selling a Korean or Chinese car so long as it’s what the customer wants.
“One of the main reasons we’ve had troubles in the last few years is we haven’t had a good small car to sell,” he said.
--
--
(BEGIN TEXT OF INFOBOX)
At a glance
PENSKE AUTOMOTIVE GROUP
Headquarters: Bloomfield Hills, Mich.
Chief executive: Roger S. Penske
Employees: 14,300
Business: Owns and operates 158 auto dealerships in the United States, plus another 152 in the United Kingdom and Germany. Exclusive U.S. distributor of the Smart Car.
2008 financials: $412 million loss on $11.6 billion in revenue
Times research
