George S. May Business Blog

Roger Penske the next buyer in G.M. firesale – But is he setting himself up to fail?

The latest step by G.M. to reorganize while in Chapter 11 bankruptcy, involves the sale of its Saturn brand to one of the nation’s biggest auto dealers and the owner of this year’s Indianapolis 500 championship race car team, Roger Penske.

The price of the deal was not disclosed, however GM did report, Monday during its bankruptcy filing, that in the past month they had received quotes from 16 different bidders.

Along with the Saturn brand, the Penske Automotive Group is acquiring the Saturn parts inventory and the right to sell vehicles through the Saturn dealership network.

“We have agreed upon a framework that we believe will build momentum for the Saturn brand,” Mr. Penske said in a statement. “Saturn has a passionate customer base and outstanding dealer network. For nearly 20 years, Saturn has focused on treating the customer right. We share that philosophy, and we want to build on those strengths.”

This acquisition could prove to be quite exciting for the Saturn brand as Mr. Penske has outwardly expressed his plans not to stand still. For example, Penske Auto Group will begin running Saturn within the framework that has been built, i.e. buying cars from G.M., maintaining and operating the same factories, etc. However, eventually Penske plans to begin buying cars from other carmakers like Renault, through Samsung Motors in Korea.

Mr. Penske’s takeover, at this point, will have no impact on the jobs of 13,000 people at Saturn and its dealerships. The company also has 350 showrooms, virtually all built fresh to sell only Saturn vehicles and Penske plans to keep all of them running.

The move will more than double the dealership holdings of Mr. Penske’s company which already is the country’s second biggest dealership group in terms of sales. Mr. Penske’s dealership company currently owns 310 franchises.

Along with the dealership group, Mr. Penske also owns Detroit Diesel, a manufacturer of heavy duty engines. Penske Racing has teams competing in IndyCar, Nascar and the Grand-Am circuit.

This is third move that G.M. has made to cut itself down to a “core group of brands” since Monday. Earlier this week, it agreed to sell its Hummer brand to a Chinese heavy machinery company and a stake in its Opel subsidiary in Europe to Canada’s Magna International of Canada.

My problem with this acquisition is this, in 25 years or so, GM was never able to turn a profi with the Saturn brand. So, despite the 3-million-something current Saturn customers something will have to be done to (a) reinvent the brand and (b) to the cars themselves if Penske is going to make a single dollar in this transaction. I saw Roger Penske on an interview on CNBC this morning and he said outwardly that the business model would not be “capital intensive”. My question is, how are you going to get the above goal accomplished without pushing money into it. See, there are two ways for Saturn to actually compete and have a chance against its competitors, (the fuel-efficient, economy size Toyota’s and Nissan’s).

1) Drop prices. Toyota’s, Nissan’s, etc., are all far cheaper than Saturn. But, this is not going to happen. If Saturn was already losing money and Penske is not cutting any jobs then it is obviously impossible for them to lower their prices.

2) Design a car with today’s consumer/driver in mind. The reason why the aforementioned competitors stay on top is not only price point, but it is also because they come out year after year with cool, new technology. In order for Saturn to develop something that is worth the higher price point (from a consumer standpoint) then they will have to put money in research and developement.

In effect, I need to see more of Penske’s business plan, because from what I know, the man is setting himself up for failure.

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