Saab Industrial Options: You Say Good Bye – But I Say Hello?

Early December brought the announcement that BAES is dropping its stake in Saab from 35 per cent down to "at least 20 per cent". At the same time, BAES's participation in Gripen International, the JV to export the aircraft in world markets, would cease to be a 50/50 activity but would be entirely Swedish. Depending on where you sat, this was either an awful shock – or was anticipated, bearing in mind events of recent years.

BAES has stated that it will keep a stake above 20 per cent, and that the company sees this as a long-term investment, not short term, this to demonstrate ongoing and continuing BAES commitment to Saab.

However, it is interesting that talks with senior members of Saab over the past year brought up a constant theme: that the Swedish side is sad that BAES has behaved "as a totally passive shareholder" and that, "they [BAES] could have made so more of these ties but seemed content to sit back".

But divesting of what was a major stake in Saab does seem strange if it is supposed to be a sign of success. Yes, the change in status of Gripen International can be regarded as an obvious move – when the JV was created, Saab and the JAS Industry Group was having problems selling Gripen overseas.

But today, with three customers in Hungary, Czech Republic and South Africa, and with excellent prospects in Thailand, Pakistan and Brazil, there is obviously less requirement to have "Big Brother" looking over Saab's shoulder when it comes to exports. And with greater maturity of the Swedish government and armed forces towards the new generation of exports, there is another reason why the firm, benevolent [sic] hand of BAES may not be needed.

But there are more, deeper, issues to think about Saab and European defence industry. Because even if BAES is maintaining a stake, it is difficult to ignore a feeling that the two companies might be undergoing a trial separation.

The Typhoon Mismatch?

Although it is denied by most BAES spokesmen, there has been a real feeling on the part of Saab and Sweden that of late BAES has not been as supportive of Gripen sales as it might have been, and might even have shown that its heart is firmly with Typhoon against Gripen. These feelings first appeared when Typhoon won in Austria, even though aspects of industrial offset and upfront costs could be seen as having favoured Gripen. As Saab's/JAS Industry Group's collective wings spread, and as they see more export markets potentially opening to them, they also perceive growing conflict of interest between Saab/Gripen, and BAES/Typhoon.

When the Gripen International deal was originally agreed it was said that the two occupied different market segments, and that they complemented each other well. At the time, many were sceptical and as Gripen has matured rapidly it has entered the lower stratum of the Typhoon market, a fact that must have been irksome to those devoted to Typhoon sales.

The Allure Of The Teutonic

Following the logic that arose during the EADS/Thales fiasco, then if Saab is to be less tied to BAES, and even might end up not linked to the British company, then where might a small Nordic defence/aerospace firm look to? And the logic that says, as in the film "Highlander", "there can be only one!" then that one must surely be EADS? Relations between Germany and Sweden would seem far from ill. Remember, Sweden bought the Leopard II MBT from Krauss Maffei Wegmann; the two have cooperated on possible artillery systems, such as the Pzh2000 which Sweden could buy; Germany has bought the RBS-15 anti-ship missile for the K-130 corvette class; the Swedish and German air forces both look set on acquiring the KEPD-350 Taurus stand-off weapon (although Sweden has yet to sign); and the two submarine manufacturers, HDW and Kockums, merged to create a Northern European firm for building conventional submarines.

Also, Sweden has bought the NH90 helicopter, and is a partner in production, and Saab has positions both in space systems for EADS and aerostructures for Airbus. Is there not enough history to suggest that Sweden and Germany can work well together on an industrial as well as a political level? And looking at the recent orders and tie-ups – which are indicative of growing relations between EADS and Saab, does this not reinforce the belief that there could be further strengthening of linkages?

Of course, the fly in the ointment is precisely that which is mentioned when the relationship with BAES is talked of – Typhoon. The win in Austria, which was taken badly by Saab, was pushed by EADS (Deutschland). And future possible areas where the Gripen might yet clash with Typhoon – Norway, Switzerland – are also those countries where EADS (Deutschland) has the export lead. So if this clash was a problem with BAES, wouldn't it be even worse between Saab and EADS? And if the EADS view is that it is inevitable that all major missile players will end up as part of MBDA, then won't this be another sticking point (see below)? Germany as a destination, yes. But EADS …?

Missile Options?

Oddly enough, in recent years, the best way to get a virulent, often spittle-laden, rise out of a Saab executive was to suggest that the best future for the guided weapons business is simply to become a small sub-division of MBDA. It is not just pig-headedness that has made Saab think in such a way – well, not entirely … But there is a feeling that MBDA might be headed in a direction that suits neither the Saab Bofors Dynamics sub-division or even Saab itself. For that reason, neither has rushed to throw its lot in with MBDA.

But the institutional rationale suggests that to compete, Saab will have eventually to turn to MBDA to create a European guided weapons giant. And this view would suggest that there is no alternative! Really? Is the answer that there are three small players in guided weapons that are not part of MBDA who could work together closely, should they chose to do so?

Or could there be a plan to look at what the three small houses – Saab Bofors Dynamics, Thales and BGT – could each do on their own? If one were to be critical, then with a possible turnover of some e1.4-1.5-billion annually, the merged entity would still be a long way behind MBDA's e2.5- 3-billion. But with niches in VSHORAD on land and at sea, some interesting SHORAD/MSAM systems and sub-systems, a firm land warfare niche, other naval dynamics programmes and strong air-to-air systems activities, there looks to be a good case for saying that there is far more commonality than discontinuities between these three players.

And the ability to access France, Germany, the UK and Sweden, even as a sub-systems prime, is not to be sniffed at. And there is also another factor – the transatlantic one. BGT has good links with Raytheon on several programmes, not least Rolling Airframe Missile, Sidewinder, and Paveway. Thales too has had links with Raytheon, both in the US and as a sub-contractor for some Raytheon sales to European countries. Now, no-one will be under any illusion that transatlantic linkages are easy – talk to BAES, and to Thales for that matter. But existing links to Raytheon might well be a slight sweetener to any moves to bring the three small missile players together – it could be an exciting future.

The Joker?

There is one significant cooperation option for Saab which might not immediately strike others – Dassault. Strange? Perhaps not. Although – in theory – Dassault's Rafale ought to have as many problems with market position as Typhoon as they are in approximately the same class, in practice things have worked out differently. Think of where Rafale has been in a competition: Singapore, South Korea, Greece. None of these were contests with a Gripen presence. Only in Norway, and that after Gripen had been ruled out, was Rafale possibly competing with Gripen. If there is a "problem", then it is that Gripen is coming up against the Mirage 2000/5 on too many occasions, not least in "must wins" such as Brazil. It is vital to remember that at the moment, Dassault makes more money out of selling the mature Mirage 2000 than it does from Rafale, hence multiple offerings of the "older" aircraft around the world in markets such as Greece, which might have been expected to look for a next-generation aircraft.

And is there no case that as Mirage 2000 sales chances fizzle out, there could be excellent market separation between Rafale and Gripen? Possibly? A thought, certainly. And there are indications that show that the two companies have common thoughts. The Neuron UCAV demonstrator programme, a Dassault brainchild, has attracted Swedish attention and Saab will be a major subcontractor. Both companies appear to believe that there is a clock ticking on manned aircraft and both want to be in the technological forefront of the next generation of air vehicles. The enthusiasm with which the two firms, and their respective governments, have grasped UCAVs might well point to why Dassault and Saab could end up working together.

Where Next?

There will have to be a serious assessment of Saab's position by BAES if sense is to be made of the 20-plus per cent stake. About the worst thing that could be contemplated would be Saab choosing to deepen relationships with EADS (although Defence Analysis sees this as unlikely for the time being). A choice of Dassault is hardly acceptable to BAES in the medium term. The question would then be for BAES to establish what it wants from Saab, and how the company's obvious advantages – technology, adaptiveness – can be harnessed for the good of both. Easy? No. But there will be serious need for hard thought. And Saab will have to establish whether it can carve out a more, rather than less, independent life, and if not, who it will look to for longerterm partnerships.

Content featured in this month's Defence Analysis

• EADS Internal Wrangles
• UK Future Carrier Programme
• UK Defence Procurement Problems
• German Industry Organisation Options
• Netherlands CV90 Order
• National Audit Office Urgent Operational Requirement Report
• 2004: The Year In Review
• 2005: The Year In Preview
• Who Did What, And How Well In The UK In 2004
• UK Defence Budget
• DEFENCE INDUSTRY NEWS
• DEFENCE DIVERSITY

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