Lesson 20
Global M&As

The star of the huge Frankfurt Motor show in 2005 may well be the luxury Mercedes-Benz s-class, the model on which the German company is relying to repair its faded reputation for superior quality. But the more significant event will be the presence for the first time of three different vehicles made in China and destined for export.

Today’s controversies over high petrol prices and fuel consuming cars in the huge US market offer only a partial picture of the future facing the auto industry. It may well be fully mature in North America, Europe and Japan, where over-capacity continues to undermine profitability. But globally the industry is set for huge expansion with the motorization of China and India. Within a few years China will replace Japan as the second-largest national market after America. Some experts predict that over the next 20 years more cars will be made than in the entire 110-year history of the industry.

Garel Rhys from Cardiff University says this growth will create the need for 180 new factories, each producing 300,000 cars a year – almost doubling the production capacity of the global industry to over 110 million units annually. Today’s car plants, he says, will need to be «renewed, retooled, refurbished and replaced to remain competitive. There is nowhere for the inefficient to hide.»

That is a bleak message for today’s established producers, many of which have merged their way to giant status, but suffer from legacy costs and operating problems and could now be beaten by new entrants and competitors that did not play the merger game. The question is: which of today’s big carmakers will be hurt the most? The question could be an even tougher one: which will survive?

Other industries subjected to similar waves of new competition have seen dramatic shake-ups and the disappearance of famous names – personal computers offer a good example. Some observers predict just that: famous carmakers will own the technology and brands, while manufacture and distribution will be contracted out. (This already happens with a few low-volume cars, such as the Porsche Boxster).

Consolidation in the car industry has been going on since its earliest days when 200 garage-sized firms were bundled into GM. By the middle of the 20th century famous names such as Studebaker and American Motors were closing down or being acquired by stronger companies, leaving the industry in the hands of GM, Ford and Chrysler.

Consolidation in cars is not as starkly obvious to the consumer as it has been in, say, PCs. Many brands still remain, as mergers and alliances between firms have simply bundled, rather than destroyed, them. No fewer than 58 brands survive among the ten largest manufacturers. In fact, if their affiliates as well as their wholly-owned subsidiaries are counted, the top five company alliances account for 75% of the global market, while adding the next five takes this to 90%, with producers in China, India and Malaysia making up the rest.

The strategy of consolidating behind the brands has not been entirely successful: there is an inverse correlation between the number of brands a firm possesses and profitability. GM is still the big beast of the industry, but it is no longer in any shape to acquire others. It has twice the number of brands of its closest competitor, Ford, but it is second to last in the profitability league. Toyota, the industry’s profitability champion, has only four brands and a handful of models, but a huge range of variants on them.

The industry has experienced a 20-year splurge that has seen GM swallow Saab and Daewoo, while signing up Isuzu, Subaru and Suzuki in Japan. Since 1989, Ford, the next biggest brand-acquirer, has taken over Jaguar, Aston Martin, Land Rover and Volvo. But it, like GM, has done more spending than getting. Jaguar still bleeds cash after an investment topping $5 billion and Volvo until recently has been in the red. None of this has done anything for the company’s profitability, leaving it just above GM and weak Fiat.