Penske to Buy Saturn from GM

Back in the early 1990s, Chrysler CEO Lee Iacocca seriously considered naming Roger Penske to succeed him. But Penske, a legendary figure in auto racing, was not about to give up his life around race tracks, which Iacocca made a condition. "I wouldn't take on any job that would take me away from racing," said Penske.

Now Penske is about to take on a decidedly less racy piece of Detroit. On Friday, June 5, General Motors announced that Penske will buy its Saturn brand of passenger cars and SUVs for an undisclosed price. After months of falling sales and rising speculation about the future of Saturn, the brand that 25 years ago was supposed to transform GM is in the hands of a truly diverse auto magnate.

Penske, 72, is a billionaire whose company, Penske Automotive Group (PAG), has a market capitalization of $1.3 billion. His auto businesses run the gamut from exclusive distribution of the tiny Smart cars in the U.S. for Daimler-Benz to worldwide car and truck dealerships representing 40 different brands. Although Penske himself hasn't raced for years, he continues to run a team that has won the Indianapolis 500 fifteen times.

From Hot New Thing to Also-Ran

Carl Galeana, who owns two Saturn dealerships north of Detroit, says he is thrilled that Penske is taking over Saturn. "Roger Penske is an icon in the business world," Galeana said. "I've worked with him personally. Nobody works harder than Roger Penske."

Saturns will never be confused with race cars. Despite boasting one of the most honored sedans on the road today, the Aura, and the highly acclaimed Outlook SUV, Saturn's overall sales have been falling. The unit has been a thorn in GM's side for years. It started out with a bang, created from scratch in the 1980s to compete with Japanese small cars and inject entrepreneurial spirit into a lethargic company. Its cars were sold in upgraded dealerships that fostered a sense of community; thousands of customers would flock each year for a reunion at the Saturn factory in Spring Hill, Tenn. But GM starved the brand of competitive new products throughout the 1990s. By the time management tried to reinvigorate Saturn with new car designs after 2000, the brand's image had taken a huge hit.

"When Saturn launched in the 1980s, it was the new, new thing, with the best dealer service and no-haggle pricing that put customers at ease," said independent marketing consultant Dennis Keene. "But in recent years, it has just been another GM division, operating the same as Chevy or Pontiac, with nothing to differentiate it and a marketing message that keeps changing, so that people haven't been able to get a handle on what the brand is supposed to be."

"No Legacy Costs to Worry About"

Saturn sales are down almost 60% this year, worse than most other brands. GM has substantially cut back its sales to rental fleets—where cars command a lower price—while consumer demand has waned, especially since GM made it clear earlier this year that it would sell the brand. At the current pace, fewer than 100,000 Saturns will sell this year.

Penske thinks he can change that. "We will be able to bring totally fresh and unique product to Saturn, and we can leverage what is still an excellent dealer network and the fact that we have no legacy costs to worry about," he said in an interview Friday.

First off, he won't own any manufacturing plants. Saturn will continue to buy today's vehicles from GM for at least two years. Penske will talk to other auto manufacturers in Europe and Asia about supplying new products after that. "We are going to be a sales, service, and marketing company, not an OEM [original equipment manufacturer]," he said. Eventually, Penske explained, he wants at least some Saturn vehicles to once again be manufactured in the U.S., though that may not be the case in the short run after the agreement with GM runs out.

Outsourcing All Production

As Penske looks to replace, say, the Saturn Vue SUV, his team will talk to auto manufacturers such as Nissan (NSANY), Peugeot (PEUP.PA), Suzuki (7269.T), and possibly Chinese manufacturers to see which has an attractive vehicle-engineering platform for an SUV. Penske will solicit designs from that company—or perhaps from a contracted design studio—for a plan that differentiates the vehicle from any the manufacturer is selling under its own name. Penske will take care of selling and servicing the vehicle for customers.

"Our success has been with handling the business that is closest to the customer, so I don't want us to get into our own manufacturing business," he said.

On those terms, Penske—known and respected by every auto industry CEO in the world—is likely to have a lot of companies knocking on his door. Auto companies have far more manufacturing capacity than they need, so all would be eager to add Saturn's current sales volume to their factories. The brand, said Penske, should be able to rebound toward the 200,000 level it enjoyed, on average, during the last five years.

Penske may not want to be considered a Detroit auto mogul, but buying Saturn will change his status in the marketplace. Already he has dealerships that compete in the same markets served by Saturn. Now he is also "the factory:" He will supply Saturn dealers. He will have to approve, for example, rebates and other sales incentives that affect how his various auto "stores" pursue the same customers.

Penske Wasn't Saturn's Sole Suitor

As romantic as owning a car company sounds, Penske rattled off more rational reasons for buying the business from GM. He pointed to the fact that some 3.5 million Saturn customers have vehicles on the road today, meaning that he can count on steady demand for parts. Also, Saturn's more than 300 dealers have modern, up-to-date facilities and sell only Saturn vehicles. "It is incredibly valuable to have an established business like this without all the legacy costs GM had to worry about covering," he said.

Details of what Penske is paying for the business won't be released until the third quarter.

Penske wasn't the only one interested in Saturn. Private equity firms were also talking with GM. Overtures were made by GM to Renault-Nissan as well as to Indian truck and SUV maker Mahindra & Mahindra (MAHM.BO), which is entering the U.S. market next year.

Saturn, under Penske, will fare better than GM's Pontiac brand, which is expected to be phased out altogether in the next two years.

The Cult of Saturn Turned no Profit

GM Chairman Roger Smith first unveiled the Saturn idea in November 1983, describing it as a revolutionary new way to build and sell small cars in America. But the project was slow to develop and the brand did not officially launch until 1990. It featured the well-known tagline: "A different kind of car company."

GM hoped Saturn would lure younger buyers away from imports with smaller, hipper cars. The new factory in Spring Hill had more flexible work rules than traditional GM plants. But despite the cult-like following that grew up around Saturn, the brand never made money for GM. The factory stopped making Saturns in 2007 and currently builds only the Chevrolet Traverse crossover vehicle.

"This is still a good business and we are going to make it better," Penske says.

Eric Hirshberg, president and chief creative officer of Deutsch/LA, Saturn's ad agency, says the brand should do far better now that its future is settled. "This just proves that ultimately the market decides which brands survive and which brands don't," says Hirshberg.

A $400 Million Operating Loss in 2008

Penske began his racing career in 1958 and was named Sports Illustrated SCCA Driver of the Year in 1960. He retired from personally racing cars in 1965, but his organization operates a NASCAR team that now comprises Kurt Busch, David Stremme, and Sam Hornish Jr. The company also operates an Indy Racing League team. Penske won his first Daytona 500 in 2008. He was inducted into the International Motor Sports Hall of Fame in 1998.

As a dealer, Penske scored as much success as he has on the track. Based in Bloomfield Hills, Mich., Penske Automotive operates 310 retail automotive franchises and 25 collision repair centers. The company posted $10.6 billion in revenues for 2008, a tough year for the auto industry. Operating income topped $300 million in both 2006 and 2007, but the company lost $400 million on an operating basis last year.

Shares of Penske Automotive closed up slightly Friday at 14.65. They have traded as low as 4.82 and as high as 23.58 over the past 52 weeks.

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