Marques get set for the carve-up

Rumours of a shake-out are rife in the car industry, and ultimately, says David Brierley, the speculation will be proved right

IF RUMOUR can be trusted, the European car industry is heading for a wave of bids, deals and restructuring. Robert Eaton, joint chairman of DaimlerChrysler, forecast last week at the Detroit motor show that there would be a new merger in the European car industry "within 90 days". Since that statement, Volvo has put its car division up for sale and everybody who is anybody in the car industry has been accused of match-making.

Ford was supposed to be merging with Honda and BMW, then that rumour was denied. Then Ford or Fiat or Volkswagen was buying Volvo. As was BMW, assuming it had not been acquired by Volkswagen, Ford or Fiat first. And loss-making Nissan was heading for DaimlerChrysler, Ford or Renault.

Not everyone found the rumours amusing. Wolfgang Reitzle, the charismatic head of BMW cars, was clearly angry that press attention had wandered from the launch of BMW's new X5 off-road vehicle. He insisted BMW was not for sale.

"We are, and we will remain, a fine, independent car brand," he said.

If BMW were sold to Ford, car making in Britain would be hit hard. BMW's ailing Rover subsidiary could hardly expect to sustain a full range of models. Rover Longbridge, Britain's largest automotive plant, would face closure. And Ford's ambitions for Jaguar to take on BMW would have to be scaled down.

So it is just as well for the Midlands that Mr Reitzle stated: "A merger or co-operation with another manufacturer will not happen in the foreseeable future. I cannot bear to hear the stories from so-called industry experts that poor little BMW, this tiny specialist producer, has to be bought by an industry giant, if it is to survive."

Nevertheless, the mega-merger of Daimler-Benz with Chrysler has shown what is possible. And there is a need for cost-cutting consolidation, particularly in Europe. Jac Nasser, the new Ford chairman, predicted last week that the world car industry by 2010 would consist of six global giants producing more than 5million cars. He also admitted the speculation over a deal with BMW was "currently without foundation".

Mr Nasser is not alone in foreseeing the global rationalisation of car manufacturing. Overcapacity could amount to 20million cars, around half of current production. This means plants are not maximising profits. Booming car sales in Europe and America are not producing booming profits. And, with the Japanese market seriously depressed, many fear the next downturn may be just around the corner. A severe recession might make many plants unviable.

Professor Garrel Rhys, director of the centre for automotive industry research at Cardiff Business School, comments: "Profitability is just not what it was 10 years ago. Even car makers such as Mercedes and BMW, who can demand a premium for their products, find that this is smaller. They face serious competition from mass-market producers."

New cars are the key to keeping plants at capacity, but they cost ever more to develop - up to pounds 500m per model. So it is vital to spread development across several cars.

"We have launched 20 new cars in the last 24 months," proclaimed Ferdinand Piech, Volkswagen's chairman, in Detroit last week, where the annual auto show focused widespread attention on the global car industry. The new Beetle, with which Volkswagen has roared back into the North American market, was acclaimed as the Car of the Year at the show. This is a magnificent confidence trick. Underneath the bonnet, the Beetle is a Golf. Moreover, it is strongly related to its cousins at Skoda, Audi and Seat.

Using the same basic platform - chassis and engine - for different brands means that mass-market producers can compete with specialist car makers for their profitable markets. Volkswagen is to launch a limousine. Its Audi brand has already unveiled its top-of-the-range A8. At the same time, Mercedes is entering the European mass-market.

This remorseless competition for new segments, higher market share and economies of scale is already taking its toll on weaker companies.

"We are watching to see who will disappear," said Mr Piech. "Some of our European competitors are struggling because of heavy discounting. Some have to sell cheaply even though the market is still healthy."

The market pressure can only increase. Prices of European cars will fall as the euro enables easy price comparison. Once there is a genuinely free, pan-European market supplied by efficient producers, cars should be as cheap as in North America. That will, however, take time and will not be easy to achieve.

"Eventually, market forces will get through," said Professor Rhys. "There will be rationalisation. There are just too many players competing in Western Europe."

Current speculation suggests that the global winners will be GM and Ford from North America, Toyota and Honda of Japan, together with Volkswagen and DaimlerChrysler. This leaves Fiat, Peugeot, Renault and BMW as takeover or merger candidates - as well as Volvo.

However, little has happened, except rumours. For years, the six main European car makers - Volkswagen, Renault, Fiat, Peugeot, Ford Europe as well as GM-owned Opel/Vauxhall - have carved up 90 per cent of the market, each holding market shares around 15 per cent. This market structure is beginning to look fragile. Low-cost producers from the Far East are entering the market. And nationalistic car-buying is waning. Fiat has less than 40 per cent of the Italian market, Volkswagen less than 30 per cent of the German market. Even Peugeot and Renault are losing their dominance in France.

Meanwhile, Volkswagen is roaring ahead thanks to a series of exceptional cars. It has raised its European market share to 18 per cent, forcing Ford and Opel/Vauxhall, in particular, on the defensive. Ford now ranks number six in Europe, with less than 11 per cent market share. Yet Ford is fighting back. It has jettisoned its wind-tunnel jelly mould to produce eye-catching cars such as the Puma, the Ka and the Focus, which is being launched in the US this year. It may not be, as its president Bill Ford claimed, "the Model T of the 21st century" but it has every chance of becoming a genuine world car - like Volkswagen's new Beetle.

General Motors, the world's largest car company, has had a horrendous year with management problems at Opel and a summer strike at its North American plants. Nevertheless, it has the size, financial strength and global presence to recover strongly.

Renault, the car company most often cited as the weakest in Europe, is performing notably well. Last year, it confounded its critics with record sales figures. Thanks to the Megane range, Renault has become the best-selling single brand in Europe, out-selling even Volkswagen. Speculation over Renault's future, deafening at the time of the recent closure of a Belgian factory, has waned.

John Lawson, an analyst at Salomon Smith Barney, comments: "Renault had a fantastic 1998. The question is whether it can keep it up."

BMW attracts the strongest rumours because of the Rover debacle. Yet it, too, has had a record year, although the new 3 Series was only launched in the summer. Its performance in the key North American market remains stunning.

Nevertheless, BMW's core business is now under attack from all quarters. And the continuing losses from Rover and the aircraft engine joint venture with Rolls-Royce leave the company seriously weakened. Its apparently infallible management has committed an expensive gaffe in its softly-softly approach to Rover. Now there are signs of public discord between Mr Reitzle and BMW's chairman Bernd Pischetsrieder.

Even BMW's success in wresting the Rolls-Royce car brand for pounds 40m from Volkswagen's grasp looks an embarrassment. Currently, BMW has no factory and no workers with which to produce a new generation of Rolls-Royce cars. It cannot easily match Volkswagen's commitment to invest pounds 500m in Bentley over the next three or four years.

According to Salomon Smith Barney, BMW's profits this year will slide from DM1.3bn (pounds 450m) to DM1.1bn. Rover looks set to lose nearly pounds 200m both in 1998 and 1999 and is unlikely to break even in 2000. While BMW looks weak compared with the global giants, it is unlikely to be sold now. The Quandt family, which owns 46 per cent of BMW, has repeatedly stated its commitment to the company's independence.

As Ford's experience with Jaguar, Volkswagen's with Seat and BMW's with Rover show, mergers among car makers are not guaranteed instant success. Mr Piech does not expect another huge deal after the DaimlerChrysler merger.

Unlike Daimler and Chrysler, there are significant overlaps between the European merger candidates. To make any deal work, costs would have to be cut, plants closed and jobs lost. Combining Peugeot and Renault would be a nightmare for the French and might well not work. The companies are too similar. The same applies to combinations involving BMW and Fiat.

Nevertheless, market pressure could turn the rumours into reality. But it may take a recession to make it happen. In the meantime, Ford or Fiat will buy Volvo cars.

last year's models

The best-sellers of 1998

Make Total sold

Ford Fiesta 116,110

Ford Escort 113,560

Ford Mondeo 99,729

Vauxhall Vectra 92,179

Renault Megane 82,998

Vauxhall Astra 81,494

Vauxhall Corsa 75,673

Peugeot 306 70,169

Rover 200 64,928

Rover 400 57,318

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
News
Buddy DeFranco
people
Arts and Entertainment
British actor Idris Elba is also a DJ and rapper who played Ibiza last summer
filmIdris Elba responds to James Bond rumours on Twitter
Arts and Entertainment
Lena Headey as Cersei Lannister in Game of Thrones
film
News
i100
Sport
Yaya Sanogo, Mats Hummels, Troy Deeney and Adnan Januzaj
footballMost Premier League sides are after a striker, but here's a full run down of the ins and outs that could happen over the next month
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Selby Jennings: VP/SVP Credit Quant- NY- Investment Bank

Not specified: Selby Jennings: VP/SVP Credit Quant Top tier investment bank i...

Selby Jennings: Quantitative Research | Equity | New York

Not specified: Selby Jennings: Quantitative Research | Global Equity | New Yor...

Selby Jennings: SVP Model Validation

Not specified: Selby Jennings: SVP Model Validation This top tiered investment...

Selby Jennings: Oil Operations

Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...

Day In a Page

A timely reminder of the bloody anniversary we all forgot

A timely reminder of the bloody anniversary we all forgot

Who remembers that this week we enter the 150th anniversary year of the end of the American Civil War, asks Robert Fisk
Downfall of Dustin 'Screech' Diamond, the 'Saved By The Bell' star charged with bar stabbing

Scarred by the bell

The downfall of the TV star charged with bar stabbing
Why 2014 was a year of technological let-downs

Why 2014 was a year of technological let-downs

Security breaches and overhyped start-ups dominated a year in which very little changed (save the size of your phone)
Cuba's golf revolution: But will the revolutionary nation take 'bourgeois' game to its heart?

Will revolutionary Cuba take 'bourgeois' golf to its heart?

Fidel Castro ridiculed the game – but now investment in leisure resort projects is welcome
Ed Richards: Parting view of Ofcom chief. . . we hate jokes on the disabled

Ed Richards: Parting view of Ofcom chief. . . we hate jokes on the disabled

Bad language once got TV viewers irate, inciting calls to broadcasting switchboards. But now there is a worse offender, says retiring head of the media watchdog
War with Isis: The West needs more than a White Knight

The West needs more than a White Knight

Despite billions spent on weapons, the US has not been able to counter Isis's gruesome tactics, says Patrick Cockburn
Return to Helmand: Private Davey Graham recalls the day he was shot by the Taliban

'The day I was shot by the Taliban'

Private Davey Graham was shot five times during an ambush in 2007 - it was the first, controversial photograph to show the dangers our soldiers faced in Helmand province
Revealed: the best and worst airlines for delays

Revealed: the best and worst airlines for delays

Many flyers are failing to claim compensation to which they are entitled, a new survey has found
The stories that defined 2014: From the Scottish independence referendum to the Ice Bucket Challenge, our writers voice their opinions

The stories that defined 2014

From the Scottish independence referendum to the Ice Bucket Challenge, our writers voice their opinions
Stoke-on-Trent becomes first British city to be classified as 'disaster resilient' by the United Nations

Disaster looming? Now you know where to head...

Which British city has become the first to be awarded special 'resilience' status by the UN?
Finally, a diet that works: Californian pastor's wildly popular Daniel Plan has seen his congregation greatly reduced

Finally, a diet that works

Californian pastor's wildly popular Daniel Plan has seen his congregation greatly reduced
Say it with... lyrics: The power of song was never greater, according to our internet searches

Say it with... lyrics

The power of song was never greater, according to our internet searches
Professor Danielle George: On a mission to bring back the art of 'thinkering'

The joys of 'thinkering'

Professor Danielle George on why we have to nurture tomorrow's scientists today
Monique Roffey: The author on father figures, the nation's narcissism and New Year reflections

Monique Roffey interview

The author on father figures, the nation's narcissism and New Year reflections
Introducing my anti-heroes of 2014

Introducing my anti-heroes of 2014

Their outrageousness and originality makes the world a bit more interesting, says Ellen E Jones