The Hype About Auto Mergers Is Just That
Nonsense. Predictions that the world automotive industry will consolidate into a handful of companies in the next few years are mostly nonsense.
A great buzz storm has blown up in financial markets and the business media in the last year that some of the world’s best-known automotive companies, such as BMW, Fiat, Nissan, Renault and even Honda, will be pressed inexorably into merging into bigger companies, such as Ford, General Motors, Toyota, Volkswagen and DaimlerChrysler, to survive.
Thus Munich, Germany-based BMW, which fired its chairman two weeks ago, is said to be shark bait for GM, Volkswagen or Ford.
But BMW in all likelihood won’t be acquired by anybody--and its special talents would be smothered if it were.
Most nonsensical are analyses in BusinessWeek and the Economist magazines that Honda, the Japanese auto maker that sells 2.3 million cars and 5 million motorcycles annually, will have to find a merger partner to survive.
In fact, Honda may be the global automotive company with the brightest prospects in the next few years. At a time when car buying in Asia has been postponed by economic depression, Honda’s motorcycles and small Civic models remain affordable.
The auto business is changing in many ways, and companies changing with it--a list that includes Ford, Honda, Toyota, General Motors and Volkswagen--stand to prosper in the next five years.
Other companies, ranging from French and Italian giants Renault and Fiat to Japan’s Nissan and Mitsubishi Motors to South Korean companies Hyundai and Daewoo, will have to restructure their operations if they are to prosper.
But claims that such companies will have to merge because of overcapacity--roughly 20 million more cars can be produced each year than can be sold--are wide of the mark. Car gluts have been chronic in the auto industry for decades, but mergers haven’t depleted them.
And the current merger frenzy, kicked off last May by the merging of Daimler-Benz and Chrysler, has nothing to do with reducing capacity, either. No Chrysler plants are being closed. On the contrary, Daimler bought Chrysler to gain a position in the U.S. market, a position it intends to expand.
The success of that merger will take years to prove out. Industry experts in Detroit already report that Chrysler executives, car designers and production managers who worked so imaginatively to make that firm successful are finding Stuttgart, Germany-based Daimler management to be stifling and bureaucratic.
Undaunted, DaimlerChrysler Chairman Juergen Schrempp is contemplating an investment in Nissan, the debt-ridden Japanese motor giant. But that too could be trouble. Schrempp reportedly sees a Nissan investment giving his German-U.S. company access and assets in Japan and other Asian markets. But in Tokyo, Nissan backers see a DaimlerChrysler investment as a bailout that would give the Japanese company worldwide distribution through Mercedes dealers.
Mergers in the auto industry are never easy. Ford bought Jaguar in the late 1980s and has poured some $6 billion into the brand to achieve what looks like success ahead. General Motors bought a 50% interest in Sweden’s Saab in 1990 and the brand still loses money.
“It’s hard in this industry to make one plus one equal three,” observes leading auto analyst Maryann Keller of ING Barings, a global investment company. “Brands don’t merge well. A Mercedes buyer doesn’t want to think Chrysler parts are now making up his premium-priced car.”
But that is not to say that really big changes aren’t occurring in the industry. Auto parts suppliers are being forced to provide whole sections of vehicles as opposed to individual parts. So parts-making companies now have to hire more engineers, designers and other staff, and spend more on machinery and tooling, Keller says.
That’s why the most instructive merger of the day is TRW’s proposed $6.6-billion acquisition of LucasVarity of Britain. Both make many parts for motor vehicles.
“The big manufacturers want suppliers to do more for them,” says Dirk Koerber, vice president of Unova, a maker of machine tools for auto production with $2 billion in annual sales in the U.S. and Europe. “That reduces Ford and GM’s needs for capital and for employing huge work forces.”
The big auto makers want to concentrate on pushing their brand names and getting closer to the customer. Jac Nasser, president and chief executive of Ford, talks of his company becoming a “consumer company that happens to provide automotive products and services.”
That’s why Ford, GM and other auto companies are moving to own dealerships for their cars and trucks.
And it’s why Ford is willing to pony up $6.5 billion to purchase the car operations of Sweden’s Volvo. Ford sees Volvo as an attractive brand name with acceptance among women and family buyers in Europe and the U.S. East Coast. Far from reducing capacity, Ford plans to expand Volvo’s product line by adding a sport-utility vehicle and other models.
So as the most emblematic industry of the 20th century enters the 21st, there will still be a Volvo and a Ford--and a BMW, Honda, Nissan, Mercedes and scores of other brands.
The car makers’ new focus on customer relations has deep roots. It is in part a solution to the industry’s problem of low return on invested capital. Car companies earn very low returns on the money they put into their business--Ford and GM at 8% to 9%, DaimlerChrysler at 9%, Toyota at 6%.
That’s not because they sell cars at a loss but because of all the money they put into plants and equipment to produce vehicles, which are then sold through independent dealers, who share in the vehicles’ profits. That system is now changing, as is the relationship of manufacturers to parts suppliers. Such changes over the next five to 10 years could produce a more profitable auto industry. Only change is certain.
James Flanigan can be reached by e-mail at jim.flanigan@latimes.com.
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Highway 1 returns Thursday with a guide to preventive maintenance and a look at the new Dodge/Plymouth Neon.
