Gripen warplane manufacturer Saab AB is targeting a quarter of the 40 to 50 submarine sales for which it sees demand from accessible markets in coming years following a foray into naval vessels.
“We can perhaps win contracts from three to four countries, or some 12 submarines, over 10 or 15 years,” Chief Executive Officer Hakan Buskhe said in an interview, highlighting pending fleet renewals in Poland and the Netherlands.
Founded as a planemaker in 1937, Stockholm-based Saab added submarines and corvettes to its product portfolio with the 340 million-krona ($38 million) purchase of ThyssenKrupp AG’s Swedish marine unit Kockums 2 1/2 years ago. The deal was spurred by Sweden’s desire to enhance its military capabilities amid rising geopolitical tensions after Russia’s annexation of Crimea.
Saab began construction of the A26 submarine, a Kockums design that had been put on hold under the ownership of Germany’s ThyssenKrupp, in 2015, and has so far won orders for two vessels from the Swedish Defence Materiel Administration valued at 7.6 billion kronor.
Poland plans to buy three submarines as early as the end of this year, while the Netherlands may replenish its fleet sometime in the next few years. Saab teamed upwith Dutch shipbuilder Damen Shipyards Group in 2015 to pursue a potential replacement for four Walrus-class submarines.
“There’s renewed interest in submarine and anti-submarine warfare capability in and around Europe as the maritime domain becomes a more contested environment again,” said Nick Childs, senior fellow for naval forces and maritime security at the International Institute for Strategic Studies. Asia-Pacific demand is growing even faster as China emerges as a maritime power.
Saab suffered a setback last year when Norway shortlisted ThyssenKrupp Marine Systems and DCNS SA of France as preferred bidders for a potential submarine purchase, in preference to an all-Scandinavian deal. It later said it would proceed with the German manufacturer. That came after Saab also failed to make the shortlist for a A$50 billion ($39 billion) Australian contest which was eventually won by DCNS.
Poland has signed naval cooperation agreements with Saab, DCNS and ThyssenKrupp as it mulls its requirement. Saab has said that the A26 design is “extremely stealthy and very difficult to detect,” making it well-suited to Polish operations in the Baltic Sea.
Childs said the Polish and Dutch requirements are the key programs for Saab, though it faces a “challenging environment” in competing with DCNS and ThyssenKrupp, as well as Russian and Chinese manufacturers on a global basis. At the same time, the A26 has “attractive niche features,” particularly in its ability to support special-forces operations.
While Saab’s group-wide order book shrank from 2006 to 2012, spending on research and marketing has revived sales, according to Buskhe, with the backlog standing at 107.6 billion kronor last year. That’s down slightly on 2015 but far higher than the 60 billion-krona figure in 2014 and 2013.
Saab has also been focused on costs and efficiency as it seeks to achieve a 10 percent operating margin.
The company has said this year’s figure should improve on 2016’s 6.3 percent, and Buskhe said in the interview Wednesday that he expects “a substantial improvement in profitability” this year. He added that he’ll be “very disappointed” if the margin doesn’t reach the target in the next few years.
Saab rose as much as 1.7 percent in Stockholm trading, the steepest intraday advance since Feb. 20, and traded 1.5 percent higher at 2:02 p.m. local time.
Organic revenue growth should also exceed a long-term 5 percent target rate in 2017, Saab said Feb. 13, when it reported that earnings before interest, tax, depreciation and amortization fell 4 percent last year. Buskhe said Wednesday that the company has “had quite an OK start to the year,” so that there’s no change in its guidance.
“We’ve sorted out our order backlog and have a fantastic product portfolio,” the CEO said. “We’ve also demonstrated that we can convert the order backlog into sales, and now we’ll show that we can strengthen our profitability.”
While military budgets are increasing amid conflicts in arenas including Ukraine, Syria and Yemen, heightening tensions across the wider Middle East and East Asia, and pressure from the U.S. for NATO members to devote at least 2 percent of GDP of defense, Buskhe said it would be wrong to assume that the trends are entirely positive for weapons makers.
“Many may think that I would consider that an uncertain world is a good thing,” he said. “I don’t at all think it’s good for anyone in an international industry to view it that way, for the simple reason that it will increase uncertainty and lower the growth pace in the global economy.”
The nature of defense spending has also seen a “dramatic change” in the past five to six years. “Before, military forces would buy their equipment for times of peace,” Buskhe said. “Now it’s for conflicts.”