Signs Point to More Merging

For auto makers around the globe, it’s a small, small world--and getting smaller all the time.

The agreement expected to be announced today to combine Germany’s Daimler-Benz and America’s Chrysler Corp. will, analysts say, rev up further efforts to consolidate auto companies across international boundaries. The industry’s standard wisdom is that to succeed, “you’ve got to be worldwide,” said George M. Magliano, director of automotive research for the economic consulting firm WEFA Group of Eddystone, Pa.

Driving the urge to merge is the global problem of too many auto factories and too few auto buyers. Analysts say manufacturing capacity already exceeds consumer demand by about 25%, and with new plants still opening, there’s no end in sight to that costly mismatch.

The rising cost of designing new vehicles also is prodding companies to link up as a way to reduce expenses.

Analysts say industry giants such as General Motors and Toyota are likely to shun acquisitions or make them very selectively. And the deal between Daimler-Benz and Chrysler probably would dwarf many of the other prospective combinations in the industry.

Still, over the next 10 to 15 years, the international auto manufacturing industry probably will be reduced to about 20 major companies from 39 now, said Sam Fiorani, an automotive market analyst with Standard & Poor’s/DRI in Lexington, Mass.

If executed effectively, a Daimler-Benz-Chrysler combination--creating the industry’s fifth-largest company--would be likely to prompt defensive alliances because it would pose a more serious competitive threat to GM, Ford and the top Japanese auto makers, across such product lines as luxury cars, minivans, sport-utility vehicles and mid-price sedans.

Fiorani said that among the first of the auto companies likely to be snapped up are some of the smaller, struggling ones in Asia. Especially vulnerable--and already in talks with Ford and GM--are South Korean manufacturers, including Kia and Hyundai. Meanwhile, analysts say, many auto makers not interested in full mergers are likely to team up in more joint ventures.

Although it would probably be dramatically stepped up by a Chrysler-Daimler deal, the merger wave in the auto industry is hardly new. For more than a decade, companies have been hooking up or buying up or trying to acquire competitors in other countries.

The labyrinth of linkups, in addition to literally hundreds of international joint production ventures, includes Ford’s ownership of Britain’s Jaguar and its controlling interest in Japan’s Mazda, along with General Motors’ stakes in Sweden’s Saab and Japan’s Isuzu. More recently, German auto maker BMW has been trying to close a deal to buy Britain’s Rolls-Royce auto operations.

Although the American auto industry had consolidated by the 1950s into a handful of giant companies, new competitors have continued springing up, notably in Asia. They have been spurred by national governments eager to promote manufacturing and create relatively high-paying jobs.

At the same time, Japanese auto makers have led the way in opening plants in this country. And U.S. and European auto makers have flocked to Latin America and Asia. They went there seeking lower-cost labor and new consumer markets but, along the way, aggravated the overcapacity problem.

“There’s so much excess capacity in the industry, at some point it’s going to be taken out,” said Malcolm Salter, a Harvard Business School professor and the lead author of a 1989 book on the international auto industry titled “Changing Alliances.”

Salter said political pressures in Europe, North America and elsewhere have so far hindered auto companies from closing domestic plants, but more shutdowns eventually will come.

Analysts say government-backed companies in some developing countries could fail or be swallowed up by acquirers in coming years.

Fiorani said South Korea’s Kia, Daewoo and Samsung are likely to buy one another or be bought up themselves as a result of Asia’s economic crisis. Other candidates, he said, are such second-tier Japanese auto makers as Mitsubishi, Fuji and Subaru.

Aside from the problem of too much manufacturing capacity, Fiorani said development costs--including efforts to meet tougher emissions standards--have made the industry prohibitively expensive for smaller companies. Rolls-Royce, for instance, will stop manufacturing its own engines after this model year.

Fiorani added that operating internationally is increasingly necessary to balance, say, weak sales in Europe against strong business in North America.

The merger mania, analysts caution, could eventually be sidetracked if too many deals turn sour. Onetime joint-venture partners Chrysler and Mitsubishi, for example, parted company after repeated spats. Experts note that big mergers in general have a high rate of failure and that the cultural issues raised by merging complex industrial firms across international boundaries complicate matters further.

Harvard’s Salter said mergers won’t make sense for everyone. He said industry giants such as GM and Toyota, although they might want to snap up small companies selectively, have little need to expand through big acquisitions.

The big merger trend “is not inevitable across the board,” he said. “Consolidations are inevitable when there are tangible benefits, such as an increased revenue stream or a reduced cost structure.”

Like other industries with overcapacity, including banking and retailing, consolidation will take place, Salter said. “But you can’t paint it with a big, wide brush,” he said. “It won’t affect everybody.”

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

A New Car Club?

A merger of Stuttgart, Germany-based luxury car maker Daimler-Benz and Chrysler Corp., the No. 3 U.S. car maker, could help each company gain a foothold in the other’s markets. A combined company would have a 7.4% share of the worldwide automotive market.

Possible benefits for Daimler-Benz:

* Would dramatically expand Mercedes-Benz’s manufacturing and dealership operations in the U.S., the world’s largest and most profitable single auto market.

* Would create opportunities for joint development, at significant cost savings, of mass-market vehicles aimed at the North American consumer.

Possible benefits for Chrysler:

* Would boost Chrysler’s virtually nonexistent position in Europe and Asia, giving it new places to sell its minivans and other vehicles.

* Might gain from the luster of the Daimler-Benz name and its luxury car lines.

* Daimler’s engineering expertise may help improve car quality.

* Would create opportunities for joint development of vehicles aimed at European customers.

* Would give Chrysler the manufacturing base in Europe that it abandoned in the 1970s amid financial crisis.

Cross-ownership by U.S. competitors

* General Motors: Negotiating to buy as much as 50% of South Korea’s Daewoo Motors. Owns 50% of Sweden’s Saab and 37.5% of Japan’s Isuzu Motors and has a 3.5% equity in Japan’s Suzuki.

* Ford Motor: Holds 33% of Japan’s Mazda Motors. Owns 17% of South Korean auto maker Kia Motor with Mazda. Owns British manufacturers Jaguar and Aston Martin. Owns 70% of Taiwan’s Lio-Ho Moto and 30% of Malaysia’s Associated Motor Industries. Holds a 20% stake in China’s Jiangling Motors.

*

“Anybody that doesn’t tell you this is a surprise is not being candid. Chrysler has had talks with BMW. This certainly was a different approach.” ADAM BAUM, analyst with automotive consulting firm IRN.

“The product lines of the companies are entirely different--they’re like two ships passing in the night. Immediately at least, there will be no synergies, no merger savings, no layoffs, no consolidations, no restructurings, because there’s no overlap.” DAVID HEALY, automotive analyst with Burnham Securities.

Sources: Times research, Ward’s Automotive International, Bloomberg News, wire service reports. Researched by JENNIFER OLDHAM / Los Angeles Times