The Troubles of Volvo and Saab

The iconic Swedish brands could disappear if parents Ford and GM go under. Can Sweden save its carmakers without violating EU rules on state aid?

Boxy and super-safe, Swedish cars have long been a familiar sight on the streets of America's suburban liberal enclaves. But now Volvo and Saab may fall victim to the worldwide slowdown in the auto market.

As US automakers prepare to visit Congress again on Thursday to ask for a $25 billion bailout, Sweden's car industry is under tremendous pressure. The country's two biggest brands, Volvo and Saab, are owned by Ford (F) and GM (GM), respectively—but Congress won't be offering any charity to them.

American lawmakers have made it clear that US tax money can't be used overseas, which means Volvo and Saab could be left out in the cold. "If GM gets money from the American government, then we're convinced that it will be earmarked for American interests," said Paul Akerlund, a union representative at Saab's main manufacturing plant in Trollhattan, Sweden.

Ford may sell its Volvo subsidiary as part of a restructuring plan. "Given the unprecedented external challenges facing Ford and the entire industry, it is prudent for Ford to evaluate options for Volvo as we implement our ONE Ford plan," Ford president and chief executive Alan Mulally said in a statement. Volvo has lost almost half a billion dollars in the third quarter of 2008, making it a prime target for cost-cutting.

Sweden's car brands aren't alone: Germany faces a similar bailout dilemma with Opel, a venerable German brand now owned by GM. Opel was hit hard by its American parent's collapse and the German government is wondering whether to make an exception with Opel to a general no-bailout policy in German industry.

The trick is that state support can run afoul of EU competition regulations, which make it difficult for countries to directly subsidize industry. That's why talks in Europe involve not direct subsidies but loan guarantees, to the tune of hundreds of millions of dollars.

'The Wrong Kinds of Cars'

GM and Ford have also talked with the Swedish government about subsidies and loans. "We are obviously in talks with Saab, Volvo, GM and Ford all the time, considering the difficult situation," Swedish government spokeswoman Lisa Warn said Monday.

But should a failing brand be saved? Last week there was tough talk from Swedish officials, who blamed the car makers for getting themselves into a mess. Volvo—which followed the rest of the car industry into the SUV market with its popular XC series—has been hit hard by the sudden consumer shift towards more gas-efficient models. The company has announced it will lay off almost a quarter of its work force, including 3,900 of its Swedish workers.

"Lots of auto firms have been selling the wrong kinds of cars," Swedish Prime Minister Frederik Reinfeldt said last week. "When someone thinks the state should come in and fix the situation, then I think they're crazy."

If Ford or GM go bankrupt, though, Saab and Volvo could disappear entirely. Their loss would be a blow to Swedish identity. Saab and Volvo account for 15 percent of Sweden's exports.

The car industry in Sweden also stretches far beyond Volvo and Saab: It includes some 700 companies, including truck brands like Scania along with a host of related industries manufacturing ball bearings, airbags and seat belts. In a country of just nine million people, 140,000 are employed in the auto sector.

There's strong support among Swedes for a government bailout—in a poll published this weekend, 70 percent of Swedes wanted to see Volvo taken over by the state temporarily. The popular pressure pushed the government to change course over the weekend.

On Tuesday officials confirmed that they would try to save the brands. "Of course the Swedish government is committed to supporting the carmakers. We can guarantee that we will have car manufacturing in Sweden because it is an important part of our economy," Frank Nilsson, a spokesman for the enterprise and energy ministry, told AFP.

agc—with wire reports

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