Automotive mergers: necessary, welcome or a threat?

Sergio-Marchionne-Chrysler-FiatLet’s talk about automotive mergers again, because Sergio Marchionne, CEO of Fiat-Chrysler Automobiles, keeps going on about them being necessary to achieve the economies of scale needed for automakers in the current, highly competitive marketplace, and in order to spread the cost of investments in fuel efficiency, connectivity, autonomous driving and electrification. Okay, in all honesty, Sergio isn’t the only one saying it’s becoming “too expensive to make cars”, but he is the most outspoken one on the subject and he keeps flirting with other automakers to merge, most notably General Motors, so he’s an easy target for my rants.

And to a certain degree I can relate with him. Like he says, it doesn’t make any sense at all for every single automaker to develop -for example- hydrogen fuel cell technology in-house, so each of them has to “invent the wheel” by all themselves. Of course it would save tons of money for the automakers, and therefore for new car buyers, if development costs of a new technology could be spread among a cooperation of automakers, but guess what? This already happens a lot without any of them having to actually merge. Besides that, a lot of technologies in vehicle safety or fuel efficiency already get developed by suppliers, like Bosch, Magna or Denso, who then sell a license to the technology to a number of automakers, and thus spreading the development costs.

General_Motors-Ford-cooperationBesides that, cooperation between competing automakers already happens a lot, for example between General Motors and Ford. These companies are each others greatest rival in the highly competitive North American auto market (and other markets for that matter), but they still work together on, among others, the development of 10-speed transmissions to be used in their next generation rear-wheel drive trucks and cars. They work together on these specific technologies because it makes economic sense for them to spread the development costs, but they then deploy the technology in competing cars and trucks, and will attempt to outclass each other in other areas when marketing the cars that feature these technologies.

Renault-Nissan-Group-car-sales-figures-EuropeDon’t get me wrong, I don’t principally oppose industry mergers, because I believe there are certain advantages to be achieved when companies become deeply intertwined, but it does take a lot of effort and a lot of coordination. A lot of mergers from the past have failed miserably at achieving the synergies projected at their inception, and both Fiat (with General Motors) and Chrysler (with Daimler) are no strangers from those deceptions. Carlos Ghosn has made it work with Renault and Nissan, two midsized automakers who combine to make a large one: currently #4 worldwide, and who have achieved synergy savings of € 3,8 billion just last year (up from € 2,87 billion in 2013). And at 8,5 million annual unit sales, they’re currently almost twice as large as Fiat-Chrysler is at 4,75 million units.

I would be able to relate to Sergio’s need to quickly grow north of his “bare minimum” of 6 million units, which would be achieved by merging with for example Suzuki, Mazda or, like I’ve said before, a Chinese automaker. But his advances at GM are simply irrational: not only would anti-competition agencies oppose a full merger of this size, it would be like trying to connect the Titanic to an iceberg. The company would become a 14 million unit Juggernaut, too large to manage, there would be too many (competing) brands, too many platforms and it would take decades to merge the two cultures.

Infiniti-Q50-G-auto-sales-statistics-EuropeIn my opinion, cooperation is the key word for automakers, and not mergers. Competing automakers can work together and help each other in certain areas where they feel the need, but compete in areas where they can. Take for example the cooperation between Renault-Nissan and Daimler, or more specifically, that of Infiniti and Mercedes-Benz: Infiniti is the luxury brand of Nissan, but doesn’t have the worldwide volume of Mercedes-Benz, BMW or Audi to directly compete with those brands. And for Renault-Nissan Group to develop high-end engines they won’t need for their volume brands would be too costly to develop just for Infiniti.

Besides for the obvious savings in development costs, Infiniti might even benefit from a marketing perspective by claiming to offer Mercedes-Benz engines and transmissions. However, in the long run, when (if) Infiniti becomes large enough, they will want to distance themselves from their tutor and actually make better engines themselves, and therefore become a full-blown competitor by challenging and eventually beating their former partner. Because that’s how competition works.

Henry_Ford-assembly_lineCompetition breeds innovation, and innovation is what has taken this industry to where it is now. So while a merger between two automotive giants may prove beneficial for them both, the industry as a whole might suffer in the long run. Henry Ford developed the assembly line because he wanted to be smarter and more efficient than his competitors. Can you imagine where we would be if it weren’t for his competitive spirit? And if it wasn’t for his competitors, our only choice of color would still be black. I think cooperation between competing automakers is what will shape the future of our industry, and not mega-mergers creating corporate juggernauts with too many managers to actually manage and too little competition to breed innovation.

About Bart Demandt

Bart is a 36-year old Dutchman who's always had a thing for cars, the automotive industry and statistics. He’s combined these passions by writing about them on CarSalesBase.com. His daily driver is an Alfa Romeo GT 3.2 V6 which he just can't seem to say goodbye to thanks to the mesmerizing exhaust note.
You can find all his articles Here.

Comments

  1. I would agree that FCA would be best to merge with a Chinese manufacturer, GM is too, big and too unwieldy and a merger would require that several brands be axed, most likely Chrysler itself, Dodge and RAM (GM would only really be interested in Jeep, Fiat and the Italian exotics).

    Suzuki would be a good option in some senses, it would give Fiat a chance to dominate India, but is realistically too small outside India and Japan, Mazda is similar to Suzuki in this aspect, smaller in India (I’m not actually sure if they’re present) but bigger elsewhere, realistically Mazda needs better penetration in China and other emerging markets, FCA won’t (and can’t) help much there (and Mazda is partnered up with a much better bet now, Toyota, personally I’d prefer to see them regroup with Ford, imho Ford should seek to buy back into Mazda but anyway). Mitsubishi is similarly now tied up with Renault-Nissan so they’re a no as well.

    Hyundai-Kia would be a great option in most aspects, but again their key interest would like GM, be in Jeep and the exotics (and probably RAM as well). Google and Apple would bring in heaps of capital, but also no industry experience.

    Of the Chinese makers; there are several that stand out as being good options;

    Dongfeng – likely to one day soon control PSA entirely, and having several key partnerships; notably Nissan and Honda could soon have a huge conglomerate of brands; Dongfeng (including it’s sub-marques), ZNA, Venucia, Ciimo, Peugeot, Citroen, DS – to which they could add Fiat, Dodge, RAM Chrysler, Alfa, Maserati and Ferrari and their Nissan, Infiniti, Renault, Honda and Kia JVs.

    FAW – similar to Dongfeng several brands that could expand overseas with FCA help; Besturn, Hongqi, Haima as well as JVs with Mazda, Toyota, VW and Audi.

    BAIC – a brand that should be stronger than it is – Fiat, Dodge, RAM Chrysler, Alfa, Maserati and Ferrari added to Senova, Weiwang, Huansu, BAW and Foton.

    ChangAn – probably the best choice for FCA, big but lacking in a variety of brands like FAW, BAIC and Dongfeng; they have a strong JV partnership with Ford, which could become a pseudo-partnership for the US in place of a merger with GM. ChangAn (and potentially other Chinese brands) may seek to bring back defunct brands; Innocenti, Autobianchi, Imperial)

    Other options – GAC, BYD.

    • Bart Demandt says:

      Hi BC87,
      great contribution, thanks for that!
      I agree with you that Mazda and Ford would make a good match again. It would also keep Toyota from controlling the Japanese market too much. They already own Daihatsu and Lexus (for a combined domestic market share of more than 40%), have holdings in Subaru and Isuzu, and are “engaged, but not married” to Mazda.
      The problem with most Chinese automakers is, like you also pointed out, that the biggest and most interesting ones for a merger are entangled with multiple other Western manufacturers, complicating any chance of a merger. They’re also too dependent on those manufacturing Joint Ventures, as most of their production has an “import” badge. Their local brands are too small and too weak on their own to make a successful partner. Except maybe Haval, but that’s an SUV-specialist looking to compete with Jeep, not join them.

  2. A threat for customers. Imagine a world with only one car maker? VW for instance… Such a monopoly is always bad.

  3. And by the way, why people accept to pay a crazy margin for a car? Audi (bad reliability) 10%. Toyota: 10.1% Jaguar Land Rover :18.9%, Huyndai 8.6% and even Skoda 7%…

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