Global Auto Growth Shakes Up Companies

It will be no consolation to fired executives at Chrysler’s headquarters in Auburn Hills, Mich., to know that there is method to the madness of Juergen Schrempp, the Stuttgart-based chairman of DaimlerChrysler, who is now restructuring their old company.

Schrempp, who led the maker of Mercedes cars to acquire Chrysler two years ago, is correct in seeing motor vehicles as a worldwide growth business in which companies must become global players with operations on many continents or fade competitively.

In buying Chrysler and later acquiring one-third of Japan’s Mitsubishi Motors Corp. and 10% of South Korea’s Hyundai Motor Co., Daimler--which manufactures Mercedes vehicles in Alabama--has been putting together a car and truck maker capable of benefiting from global growth.

Even now, as German executive Dieter Zetsche takes over the reins at Chrysler, his job is not to replace American managers with German ones but to push joint projects with Mitsubishi and Hyundai.

To be sure, Daimler has blundered repeatedly in handling the Chrysler deal and now is caught up in a dispute with the United Auto Workers over plans to cut jobs.

Other companies, notably Renault of France, have coped better with the industry shift now underway worldwide.

The hard fact about the auto business is that car and truck sales growth this decade will be many times faster in Asia, Eastern Europe (including Russia) and South America than in mature markets such as the United States and Western Europe. Mexico is an expanding market and will become a major automotive center in this decade.

So motor vehicle companies “need to make alliances to have operations in every area,” says J. Ferron, Detroit-based head of the automotive practice for consulting firm PricewaterhouseCoopers.

In Asia’s market, “almost one-third of all the sales growth will be supplied by South Korean companies,” Ferron says. The companies are troubled now--Daewoo Motor Co. is in bankruptcy while its labor unions oppose a sale of the company to General Motors Corp. But South Korean firms can produce cars at a relatively low cost--roughly $7,000 per vehicle--that gives them an edge and attracts investors. Samsung Motors Inc., for example, was acquired this year by Renault.

Renault, the world’s 10th-largest auto company, acquired 36.8% of Japan’s troubled Nissan Motor Co. last year, but did so with none of the ego-driven fanfare with which Schrempp bought Chrysler.

The French company sent Carlos Ghosn, its Brazilian executive vice president, to Nissan, and in collaboration with Japanese executives and government officials, he has turned the firm from a loss to a profit and reformed many Japanese business practices.

Now Nissan is investing $930 million to build a truck plant in Canton, Miss., a companion to its factory at Smyrna, Tenn. The new capacity comes into a highly competitive U.S. market. Thanks to a prosperous economy, U.S. vehicle sales have topped 17 million in recent years, a record level. But that has attracted a host of competitors and widespread price-cutting, seeming to confirm that the business is hobbled by an auto glut, with too many producers chasing too few consumers.

But Ghosn sees things differently. “The demand for cars and trucks is higher than ever,” he points out, “and new markets like Mexico are rising.” That’s not a glut, but a good, competitive business in which “you must invest and you must risk,” he says.

Nissan is notably more successful in the U.S. market now than in recent years. “Nissan is picking up market share very fast here,” says Fritz Hitchcock, a major Southern California auto dealer who owns Nissan, Toyota, Ford, Mazda and BMW dealerships.

Now Renault, which has never been successful in the U.S., has a strong entry through its relationship with Nissan. And the Japanese company is benefiting in Europe through ties to Renault, which holds an 11% share of the whole European market.

The trend today is for auto manufacturers to spread their risks, says consultant Ferron. He points to firms that have sprung up to supply auto components to all companies, relieving manufacturers of the need to have parts operations of their own.

Visteon Corp., recently spun off from Ford, is such a company, as is Delphi Automotive Systems, formerly part of GM. Also, Valeo, a Paris-based firm, is a worldwide supplier of electronic systems.

Honda Motor Co., a master developer of engines for its own use, has begun supplying engines to others--notably to GM.

The Daimler acquisition of Chrysler doesn’t fit that cooperative pattern, however. And that may be a reason the relationship is so troubled, with Chrysler falling into losses as U.S. auto markets slow down and Schrempp crowing in public that he had always intended not a merger but a mere takeover of the U.S. company. The ruckus has caused investors to flee the stock, which has fallen 66% in two years.

Still, Daimler may be more sinned against than sinning. Chrysler, with little overseas business and with aging innovations, such as minivans, that were meeting more and more competition--may have wanted to sell out as a way of coping with the demands of today’s global auto business.

In Daimler, the Detroit company got a well-heeled, well-regarded global buyer, and the possibilities of the merged company could be impressive. Perhaps its German and American managers should study Renault and Nissan.

Finally, there is a big reason auto companies now need greater size and resources: They must all invest in reforming the internal combustion engine. The growing use of cars in the decades ahead will worsen air pollution problems on a global scale. “Companies need to be big to invest in research and development on fuel cells and alternative fuels,” Ghosn says.

Nissan is investing $790 million in research on fuel cells, the propulsion system that would use hydrogen as fuel, leaving plain water as exhaust. “It is an elegant solution” that will be in general use within this decade, Ghosn predicts.

So the outlook for the automobile industry is not only for sales growth but also for technological change and challenge. No wonder it attracts big egos--and big investments.

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James Flanigan can be reached at jim.flanigan@latimes.com. An archive of his recent columns can be found online at https://www.latimes.com/flanigan.

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Coming Down the Road

The outlook for vehicle sales through 2007 shows that the fast-growing markets will be Asia, Eastern Europe and South America. Here’s a look at projected sales growth:

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Eastern Europe: 53.1%

South America: 46.8

Asia: 16.0

Mideast and Africa: 7.3

Western Europe: 5.7

North America: 0.3

Source: Autofacts service of PricewaterhouseCoopers

More Cars, More Roads

Motor vehicles remain a big growth business in the world, even though markets in the industrialized United States and Europe are projected to start cooling down later this decade. But markets in Asia, Eastern Europe and South America are about to boom, according to the following projections of vehicle sales (in thousands of units) by the Autofacts service of consulting firm PricewaterhouseCoopers.

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2000 2001 2002 2003 2004 2005 Asia 15,409 15,788 16,186 16,649 17,009 17,496 E. Europe 3,208 3,619 4,021 4,143 4,399 4,717 Mideast and Africa 786 838 845 864 862 855 N. America 17,842 17,950 17,989 17,953 18,179 18,012 S. America 2,111 2,292 2,484 2,711 2,855 2,986 W. Europe 16,488 16,275 16,903 17,340 17,566 17,649

2006 2007 Asia 17,685 17,879 E. Europe 4,890 4,911 Mideast and Africa 852 843 N. America 17,913 17,897 S. America 3,066 3,100 W. Europe 17,497 17,432

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Source: Autofacts service of PricewaterhouseCoopers