Do Mergers Threaten Nations?
Should we worry if Daimler Benz, the German maker of Mercedes, takes over Chrysler? Probably not.
But every decade or so, a new wave of “globalization anxiety” sweeps through the policy community. In the 1970s, soaring oil prices aroused fears that Arab petrodollars streaming across borders would undermine global financial solvency. In the 1980s, surging Japanese foreign investment raised fears that America was selling off its high-tech crown jewels, and U.S. industrial competitiveness would suffer accordingly. News of the Chrysler-Daimler Benz merger has set off the latest ripple of globalization anxiety.
The concern is that giant cross-border mergers show that the global world economy has arrived and that, as a result, national regulatory policies may be undermined. The Asian economic downturn amplifies these worries. The plunge of several high-flying Asian “tigers” show that seemingly robust, high-growth economies can crash. Perhaps, some worry, merger mania is the speculative froth of an overvalued stock market.
In fact, cross-border mergers are the most recent effort by large firms to deal with two trends that push in different directions. International competitive pressures and technological innovations force firms to think globally. Yet, governments still place limits on globalization.
The history of the international automobile sector is illustrative. Europe and Japan protected domestic automobile producers from foreign imports for as long as possible. The United States allowed imports freely until they became competitively significant. Then, the United States pressured Japan to adopt voluntary export restraints. Japanese auto producers complied. Managed trade allowed some marginal automobile companies to survive. Ultimately, however, even restricted global entry by hugely efficient Japanese firms placed great pressure on smaller, less efficient local firms.
Still, the market is not global. The automobile industry is composed of integrated regional markets in Europe and North America and more modest ones in Latin America and Southeast Asia. Japan’s position remains problematic. But, as in many product markets, exports across regions are discouraged. The North American Free Trade Agreement, for instance, requires so much North American content that Japanese firms and their component suppliers had to invest here.
In this context, the Chrysler-Daimler Benz deal represents a daring effort by two second-tier global producers to strengthen their position. First-tier corporations like General Motors, Ford, Honda, Toyota and Volkswagen are capable of bringing cost-competitive products to diversified markets worldwide. Their financial clout allows them to pursue profitable opportunities by buying smaller producers with recognizable brand names. This is how GM uses Saab and Ford leverages its control of Jaguar and Mazda, and it is why Volkswagen is grabbing Rolls Royce. Chrysler, by contrast, is innovative and competitive in the U.S. market but has almost no stake outside North America. Mercedes is a strong global brand, but Daimler Benz is essentially a high-end niche producer.
Substantial market share requires regional production strategies. Neither Chrysler nor Daimler Benz is positioned to become a major global player. So, both companies need to invest overseas to build competitive economies of scale in their supply of components to thrive. Simultaneously, both companies must cope with government regulations that promote environmental protection. The industry is under such pressure to cut carbon-dioxide emissions that it is seriously contemplating reinventing the automobile. A dramatic redesign of the car could include the introduction of lighter-weight materials, the rethinking of the engine and braking systems, and the use of alternative-fuel technologies. The price tag for such an industrywide transformation would be gigantic. Even the largest corporations would flinch.
Increased scale is one of the few ways to reduce the financial risk. In this light, Chrysler and Daimler Benz are ideal suitors. Their decision to merge shows that management has learned that international strategic alliances allowing firms to pool resources to tackle global markets and technologies, while maintaining corporate independence, are fragile. Most such ventures falter because distinct management teams have different interests when facing common problems, especially when more than two companies participate in an alliance. Indeed, more global mergers are likely in sectors undergoing deep changes because a common management vision is needed to act decisively.
As cross-border mergers in keys sectors proliferate, three questions arise: Are companies beyond the rules of governments? Who makes the rules? Who benefits from the rules?
* Global firms are not beyond the reach of national governments. Governments use rules of content and origin to make firms declare a national identity for traded goods. Accounting rules and tax laws force companies to attribute costs and profits on a national basis. Antitrust rules subject market conduct to national scrutiny. Other powers are held in reserve for special situations, particularly when national-security concerns arise.
Thus, buried in the executive branch is the Committee on Foreign Investment in the United States (CFIUS), which can review national-security issues raised by significant foreign investments. The absence of a clear definition of national security gives flexibility to the White House and allows Congress to exert pressure and exact concessions from potential investors, especially in high-technology industries, without appearing to be unduly protectionist. If anything, governments are growing more ambitious in their national regulatory reach, especially in antitrust policy. The European Union recently intervened in the Boeing-McDonnell Douglas merger in the United States, arguing that it could reject the deal if it adversely affected the structure of the European aircraft market.
* As the Boeing case suggests, more mergers will lead to increased conflict between antitrust authorities, requiring them to agree on which agencies have what powers. Traditional regulation of service and media markets especially distorts competition and invite conflicting policies. For example, U.S. and European authorities are jousting over the terms for approving the new partnership between American Airlines and British Airways. The proposed foreign takeovers of Simon & Schuster and Random House presage deals requiring even more difficult regulatory decisions regarding cross-border control of broadcasting properties. Complete harmonization of antitrust policies almost certainly would require greater political unity than is possible across the Atlantic. Cross-border mergers thus will require authorities to cooperate to establish common, minimum standards for the national review of antitrust issues, not a true global code of competition.
* When national governments make the rules, mergers and globalization inevitably skew public-policy benefits. Governments may reasonably require foreign investors to meet national performance requirements to qualify for certain government incentives. Thus, firms may be required to spend government research funds in the country that provided them. But should foreign firms be allowed to participate in special national programs? For example, a U.S.-funded research and development program to create fuel-efficient cars is now restricted to “U.S. owned” companies: GM, Ford and Chrysler. It would be ridiculous to exclude Chrysler, but how can the exclusion of Honda of the United States, a major U.S. producer and exporter, be justified? At the same time, acute cross-border competition promoted by mergers will displace some firms and their workers so that maintenance of social safety nets will require attention in many countries.
The questions of the governability of global firms--who makes the rules and who benefits ultimately--hinge on a changing definition of the responsibilities of government in a global age. Governments have not lost their power, but they are relying more on markets and less on micro-management. There is ample precedent for this global challenge in the history of our own domestic market. The creation of national firms operating on previously unimagined scales challenged the political and market relationships between local interests and national ones in the last part of the 19th century. The solution was a sharing of powers between state and federal authorities, not the end of local authority. In a world of democratic capitalism, a similar sharing of the burden of corporate governance among nations will be a principal challenge for the public order.
