Car Mergers Propelled by Technology
The consolidation of the world’s auto industry--demonstrated by this month’s announced $40-billion merger of Daimler-Benz and Chrysler Corp.--is occurring against a backdrop of unprecedented technological change.
In the next two decades, experts predict a dramatic shift away from the internal combustion engine, the power plant of choice for a century, to more efficient propulsion systems that are friendlier to the environment.
The driving forces behind these changes are a tightening of emissions and fuel economy regulations around the world, as well as increasing pressure to reduce greenhouse gas emissions linked to global warming.
To meet these demands, auto makers are devoting billions of dollars for research and development of cleaner gasoline and diesel engines, while exploring more exotic replacements such as fuel cells, flywheels and advanced batteries.
Such a sea change in technology, which would affect hundreds of factories around the globe that produce 60 million vehicles annually, represents one of the most daunting and costly industrial challenges since the dawn of the automobile age.
But only the biggest auto makers--Toyota, Ford and General Motors among them--have the resources to explore all of the most promising technologies. This leaves smaller, weaker players at a competitive disadvantage.
“We are facing a very significant technology race,” said David Cole, director of the University of Michigan’s Office for the Study of Automotive Transportation. “If you are a laggard, you could be in trouble.”
The need for pooling technology is a major factor--along with the need to reduce costs and cut excess production capacity--in the industry’s consolidation. The ranks of the world’s major auto makers could be cut in half, to about 10, in the next decade, analysts predict.
Technology “is the biggest reason for these mergers,” said Csaba Csere, editor of Car & Driver magazine. “It takes a tremendous amount of technological power and processes to build a modern car. It’s enormously complex and will get even more so in the coming years.”
Auto makers throughout Asia, North America and Europe are already feeling the pressure and are seeking out technology-sharing partnerships with sometimes bitter rivals.
Just last week, it was disclosed that Daimler is negotiating to purchase a major interest in Nissan Diesel Motor Co., a unit of Nissan Motor Co. and Japan’s fourth-largest truck manufacturer. Daimler, a leading commercial truck maker based in Stuttgart, Germany, is seeking access to Nissan’s diesel emissions technology.
Mitsubishi confirmed last week that it is negotiating to sell engine technology, known as gasoline direct-injection, to Chrysler and General Motors. Mitsubishi claims the engine improves fuel efficiency by more than 30% and emits nearly a third less carbon dioxide, a primary greenhouse gas.
GM, Ford and Chrysler have collaborated for years through the U.S. Council for Automotive Research, an umbrella group for research on advanced batteries, less-polluting paint processes, recycling and sophisticated crash dummies, among many other areas.
They also are working with the federal government and national laboratories in the Partnership for a New Generation of Vehicles, a $1-billion program to produce prototype 80-mile-per-gallon family sedans by 2004.
The proposed creation of DaimlerChrysler, which would be a German company, is raising questions about Chrysler’s continued participation in these joint research programs, which subsist in part on federal funds. Chrysler Chairman Robert Eaton expects the company would continue its membership.
Chrysler, the No. 3 U.S. auto maker, is viewed as the technologically weak sister among Detroit car makers. Though U.S. auto makers do not break out data on their research spending, Chrysler lacks the deep research and development base of its much larger cross-town rivals.
With limited funds, the company is doing the minimum allowable to meet California’s zero-emission vehicle mandate, offering a heavy and expensive minivan for fleet users only. By comparison, GM introduced its innovative EV1 electric coupe to the state’s retail market.
Chrysler grabbed headlines in 1996 when it unveiled a fuel-cell vehicle that used a reformer, a device that converts gasoline to hydrogen. A fuel cell uses a chemical process to combine hydrogen and oxygen to produce electricity and water vapor. Fuel cells are regarded as the most promising technology to replace internal combustion engines if cost and technical hurdles can be solved.
But Chrysler developed little of the cutting-edge technology for the vehicle. Rather, the technology’s key elements--the gas reformer and fuel cell--were made by outside suppliers.
Chrysler’s acquisition by Daimler, the parent of Mercedes-Benz and a conglomerate with operations in locomotives, helicopters and aerospace, would be likely to give a huge boost to the U.S. auto company’s alternative-fuel program.
Daimler Chairman Juergen Schrempp said the merger would allow the companies to combine their research efforts in fuel cells, electric vehicles, engines and transmissions.
“It makes sense to combine the development work, both for the acceleration of the projects and the cost savings,” Schrempp said.
Daimler was already regarded as likely to be the first to market with a fuel-cell vehicle. It was the first major auto maker to form a joint venture with Ballard Power Systems, a small Canadian firm considered the leader in automotive fuel cells.
Last year, Daimler invested $450 million in Ballard and proclaimed the ambitious goal of mass-producing fuel-cell cars by 2004. Ford subsequently joined the partnership with a $420-million infusion. The partnership plans to sell fuel cells and fuel-cell engine systems to other auto makers.
Development of a new engine can cost up to $1 billion. There will be increased pressure for new engines because of stricter emissions regulations expected from California, the U.S. government and the European Union in the next few years. This is where DaimlerChrysler should reap significant technological rewards and cost savings.
“The important thing is technology that can give them an advantage in propulsion systems,” said James Mateyka, auto consultant for A.T. Kearney.
Chrysler is also likely to benefit from Daimler’s expertise in diesel engines. It is exploring selling more diesel passenger vehicles in the U.S. to meet fuel economy rules and is developing a diesel-hybrid electric car that can get 70 mpg under a federal research program.
In turn, Daimler can benefit from Chrysler’s expertise with smaller engines and front-wheel drive. The German auto maker wants to move into smaller car segments. It recently developed an A-Class subcompact in Europe and plans to introduce the Smart mini-car later this year. Electric versions of both vehicles are likely to be produced in limited quantities.
David Andrea, analyst for Roney & Co., said the Daimler-Chrysler merger would give the two players the size necessary to compete with the American and Japanese technological powerhouses.
“The challenge is to keep current programs going while funding future programs that may or may not pan out,” he said. “This gives them the resources to do that.”
The big fear is that another auto maker will make a technological breakthrough that will give it an edge. Toyota last year began selling the Prius, a gas-electric hybrid, in Japan. Honda announced that it has developed a gas engine with nearly zero emissions.
“Technology is a time bomb,” said the University of Michigan’s Cole. “There are some big players poised to pounce, especially the Japanese.”
