On the road to nowhere
The motor industry is in the grip of merger mania, with BMW and Volvo among the big names looking vulnerable. So who will still be driving when the dust finally clears? And what does it all mean for the customer?
Sunday 10 January 1999
Growing up, though, means coming to terms with hire-purchase, service intervals, the M25, gridlock. Cars are sold as dreams, used like garden implements. Ubiquitous, ordinary even, they just become part of the scenery. But every now and then we get a little glimpse of the colossal machinations that go on behind that innocent Cavalier on the street, a little clue to a world where be-suited men talk in billions.
Such a glimpse is possible now, as the car industry goes through an upheaval that threatens to clamp some of the biggest names in the game and remove them to the nearest dump. The players are the canniest and richest going - men such as Jac Nasser at Ford, Ferdinand Piech at Volkswagen - and they are gambling with chips in the shape of car companies such as BMW and Volvo. Simply put, we are in the middle of a buyout and merger frenzy.
So what gives? Well, the notion of one car company buying out or merging with another is just about as old as the industry itself. Even before the Second World War, Billy Durant began to merge hugely diverse American marques under the guise of General Motors. Eventually, GM encompassed Buick, Cadillac, Oldsmobile, Chevrolet and Pontiac. The idea was to cut costs by sharing mechanical bits between ostensibly different makes. It worked.
Still does. The latest round of merger-mania was triggered last May when Daimler-Benz stunned the pundits by taking over Chrysler, one of America's oldest and most venerable car makers. In that deal, the two companies will benefit by sharing new-model development costs, as well as manufacturing plant; the Mercedes-Benz M-Class and Chrysler Jeep Grand Cherokee off- roaders, for example, will be built together in a factory in Austria. So everyone saves money in what the experts call "rationalisation".
And now everyone is at it. Rumours of a Ford buyout of Honda and BMW persist, and even German compatriot Volkswagen could be drawing a bead on BMW; one of the most prolific players, Volkswagen has recently acquired marques as wildly diverse as Lamborghini and Bentley. Five years ago, such a proposition would have been laughed out of court.
NOW IS the time for mergers. Industry consultant Karl Ludvigsen explains that the recent flurry of activity is hardly coincidental. "There are a couple of factors at work," he says. "First, at the end of 1999, Japanese import restraints in Europe will be eliminated, so they'll be able to sell as many cars as they like.
"Secondly, the introduction of the single-currency euro will put a downward pressure on car prices, because it will be much easier to compare price differences between countries." Both of those things will increase competition and force companies to find efficiencies in developing and building cars. That is what makes merging so attractive.
But making the right merger is the really tough bit. You need to find a partner that is complementary - no sense in buying a company with cars that compete with what you build already - and one that won't provide too much of a culture shock when the two management teams get together. Insiders hint that there have already been tensions between Chrysler and Daimler employees over management style.
Professor Daniel Jones, Director of the Lean Enterprise Research Center, says that, in the past, mergers have faltered because of intransigence on either side. "Some years ago, the Renault/Volvo merger failed because the management cultures were so different," he says. "And throughout the Fifties, Sixties and Seventies mergers were frustrated because one partner refused to give up control." No such problem with DaimlerChrysler, though, with Daimler firmly in the driving seat.
Jones reckons that the DaimlerChrysler merger was remarkable for another reason. "When companies get weak, you hear talk of mergers, but Daimler and Chrysler made their deal when times were good. And Chrysler was far- sighted enough to see that things could get worse for it."
For a lesson in how not to merge, Jones points to BMW's purchase of the struggling Rover. "It was flattering that BMW would be interested in a company like Rover. Everyone clapped when it bought, but BMW has fallen flat on its face. If they don't now do something to find a partner to take over Rover, BMW will be weakened even more, and will be more vulnerable to take-over."
Weak companies will always prove tempting take-over fodder, and so it is with Volvo. The company had been determined to go it alone when the Renault merger failed in 1993, but with relatively small volumes - Volvo builds about 400,000 cars a year - economies of scale were never going to work in its favour.
In spite of big cutbacks of staff - Volvo has announced that 5,300 are to go worldwide - the company will still struggle to generate the cash necessary for research and development, crucial for survival. In a scenario like that, a take-over can save a company from oblivion. Unsurprisingly, it has been leaked that Volvo might like to try another marriage of convenience.
Mergers are forcing others to retrench, too. Suppliers, overnight, are finding that they have now got one client where they might have had two. That is forcing suppliers themselves to merge and become much more globally efficient. Some industry pundits think that this will lead to cars looking more and more alike, as manufacturers farm out increasingly more responsibility for important assemblies such as dashboards.
And there is another reason for big car companies to swallow small ones that has absolutely nothing to do with cutting costs and sharing the load. It's all about image and prestige. And making sure the other guy doesn't get there first. Last year, Volkswagen's Dr Piech went shopping and he didn't call quits until Lamborghini, Bugatti and Bentley were added to the corporate stable.
As well as enabling Volkswagen to cover absolutely every conceivable niche market, the multi-million-pound shopping spree denied competitors a share in an ever dwindling pool of small, prestigious marques. And he might not be finished, according to Jones; if the Fiat deal doesn't work out, "Piech is well placed to buy Volvo, to prevent somebody else from getting it".
MERGERS are good for the car-buying public, too. Karl Ludvigsen explains: "For the consumer, it's phenomenally good news, not only from the standpoint of quality, but price and variety. I find it hard to support the argument that cars will become more homogeneous, especially when you look at the diversity of what Volkswagen is doing with its SEAT and Skoda marques.
"Those car ranges have better quality and are much more varied than they would have been without Volkswagen. And under Ford's ownership, Jaguar will have four product ranges where it barely had two."
Autocar magazine's editor-in-chief Steve Cropley agrees: "Cars are being made better, and not just from a mechanical point of view. They are being made more desirable. Ten years ago, there were no cheap sports cars and now we've got at least half a dozen to choose from. Car makers are now saying, 'We've got to make cars that people want, not cars that are convenient for us to make'. That, and the fact that they will be made more efficiently should mean they'll be cheaper."
Unless, argues Daniel Jones, the mergers get out of hand. It is unlikely to happen any time in the next five years, but there is always the risk of a few mega companies controlling huge blocks of the market and keeping prices high: "Globally, we're going to see the inevitable consequences of these mergers, with fewer companies dominating the market. If, for example, BMW gets squeezed out, the German market would then be dominated by Volkswagen and Mercedes-Benz."
Ludvigsen takes a brighter view, though, refuting the remark of Ford's former boss Alex Trotman that only five of the world's 20 makers would be around in 10 years' time. "That's crazy talk. There are just too many strong players around. There will be at least a dozen global car producers well into the next decade." But the way those companies build their cars has changed for ever. Basically, a big part of the drive to efficiency between merged companies is about sharing platforms. That means, for example, that the new Jaguar S-Type shares its basic underpinnings with the US market Lincoln LS (a Ford, which now owns Jaguar).
You simply would not recognise the two as being from the same family, and with different tuning on things such as suspension and gears, the two cars have distinct characters. But the cost of development is a fraction of what it would have taken to go it alone.
Some big companies like Nissan are trying to achieve that kind of efficiency by themselves; currently, Nissan has a mind-boggling 25 different platforms on which it builds the whole model range. By 2005, it will aim to have the same range, but on just five platforms.
So what of the future? Undoubtedly, there will be many fewer big players. That will mean more efficient production, much wider choice for buyers and potentially lower prices. That is, if the dominant manufacturers do not use their clout to keep prices high, something the major players in the UK are already accused of doing. So the poker game rolls on, but it will be years before we know who wins the final hand.
Marques get set, Section 2
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