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Saab Reinforces Cost-Reduction Drive

Dec. 1, 2013 - 01:03PM   |  
By GERARD O’DWYER   |   Comments
The Saab UAV Skeldar deployed aboard the Spanish offshore patrol vessel Meteoro.
The Saab UAV Skeldar deployed aboard the Spanish offshore patrol vessel Meteoro. (Saab)
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HELSINKI — Faced with the twin challenges of a harsher competitive international marketplace and reduced national defense spending, Saab is launching a battle plan to increase profits and sales. The program will include cost-reduction initiatives and a greater focus on expanding high-in-potential niche business areas such as drone design and production.

The underlying risks to Saab’s growth prospects, posed by austerity economics, was flagged when Saab released its third-quarter financial results in September. Group chiefs conceded that the lull in defense spending by western nations, including most European states, would likely continue until national economies show some permanent signs of growth that warranted the lifting of austerity measures.

“Within the defense sector, investments in the land area are declining, and there is a stronger focus on the air and naval area,” said Saab’s CEO Håkan Buskhe.

Saab hopes to maintain a high level of investment in research and development (R&D), said Markus Lanners, a Brussels-based economic analyst.

“Saab is making these cost efficiency changes at a time of strength. It has booked significant orders for the Gripen-E from Sweden and Switzerland this year. Its decision to increase R&D monies to its unmanned aerial vehicle programs reflects a lot of ambition in this niche area. It must also be remembered that despite the difficult economic climate, the group managed to raise its order intake by 59 percent, year-on-year, in the first nine months of 2013 while retaining its R&D spend at 20 percent of turnover. That is impressive,” Lanners said.

The stand-out orders in this nine-month period included Swedish contracts linked to the development of the Gripen-E, an order to deliver electronic security systems to Australia’s Defense Ministry, and the supply of Saab’s Skeldar UAV to the Spanish Navy’s offshore patrol vessel Meteoro, which is supporting EU-mission related anti-piracy surveillance operations in the Gulf of Aden.

The primary focus for cost-reduction and efficiency programs will fall on several key Saab divisions, including the group’s business areas Dynamics and Electronic Defense Systems. A weakened performance within several core business areas, but in particular in Dynamics, which reported a third quarter loss, contributed to Saab’s lower-than-forecast operating profit in the first nine months.

Saab’s operating profit fell to US $94.5 million in the first nine months of 2013, down from $212 million in the corresponding financial period in 2012. Moreover, the group’s operating margin also weakened, dropping to 4.9 percent from 8.4 percent year-on-year.

Planned efficiency measures are aimed at generating savings of around $76 million by the end of 2014. Cost-reduction initiatives will result in 70 layoffs at the Saab Dynamics’ plant in Karlskoga. Electronic Defense Systems (EDS), in Gothenburg, will lay off 150 to 175 personnel. Similarly, sluggish orders is behind a decision to layoff around 50 personnel within Saab’s business area Support and Services.

The reorganization at Gothenburg will be carried out under a competence shift program based on voluntary participation. Staff will be encouraged to take up other positions within Saab or opt to leave the company with the help of various support initiatives.

The cost-efficiency project is driven by a need to re-adjust to lower business volumes, said Micael Johansson, the head of business area EDS, which includes Saab’s radar technologies business.

“Reduced business volumes have resulted in under-utilization of resources and staff. We must constantly adapt our business to ensure that we stay competitive on the global market,” Johansson said.

Outside Sweden, Saab is set to realize operating savings from its move to bring its US-based defense subsidiaries under the new organizational and management umbrella of Saab Defense and Security USA (SDAS), which will serve as a unified provider of defense and homeland security equipment and services to the American market.

SDAS will include Saab Training USA, Saab Barracuda, Saab Support and Services, and the defense units within Saab Sensis. The value of the restructuring will go beyond cost efficiency, said Jonas Hjelm, the head of Saab’s Americas Market Area.

“Even when viewed against the background of the current budget situation, the US defense and security market represents nearly 50 percent of the total global market. This makes it very important for Saab to solidify its position and grow its presence in the United States,” Hjelm said.

While order-flows from land system operations could further weaken, Saab can expect to generate stronger growth in sales from its combat aircraft and UAV divisions, Lanners said.

“The sale of 22 Gripen-E aircraft to Switzerland has a value of $3.4 billion, while the Swedish Gripen-E development program that includes 60 aircraft is worth around $7.4 billion. These are long-term revenue streams, and Saab will argue that the Gripen-E has the potential to attract new buyers,” Lanners said.

Future decision-making around the group’s R&D spend will determine how ambitious Saab is likely to be in commercializing its drone technologies to become a significant player in the rapidly growing multi-billion dollar UAV market, Lanners said.

“Based on Saab’s plans to elevate R&D spending on the UAV side of its business, this would suggest the company has global and not localized Nordic ambitions. The recent Skeldar deployment by the Spanish Navy is the level at which Saab wants to be,” Tanner said.

Saab plans to scale-up its UAV activities beyond the realm of its existing Skeldar. Saab Aeronautic is now looking to expand in to medium-altitude, long-endurance aircraft in cooperation with international partners, said Carl-Henrik Arvidsson, the head of business development at Saab Aeronautic.

“Saab is looking at various forms of cooperation and opportunities in different continents.

We are highly efficient here at building cost-effective systems that our clients can afford,” Arvidsson said.

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