Autos: The Global Six
Here's how the world auto industry will likely shake out: New economies of scale beef up the big boys, which gobble up less efficient parochial players. So who will be left?
It was a whirlwind first week on the job for Ford Motor Co.'s new CEO, Jacques Nasser. It began Sunday, Jan. 3, with rumors swirling in snowbound Detroit that cash-flush Ford was about to gobble up one of the world's big auto makers. By Tuesday morning, reporters were calling Nasser at home at 6 a.m. to inquire about a tantalizing but erroneous French radio report that Ford was taking over Honda Motor Co. "By Tuesday evening, we were supposed to be acquiring BMW, Honda, Volvo, Nissan--and there was someone else that I can't remember," quips Nasser.
By week's end, Nasser's every move was being scrutinized for hints as to how he might spend Ford's staggering $23 billion in cash. When he called a press conference for Friday evening's black-tie gala at the Detroit auto show, speculation was rife that he would announce a megadeal to rival last November's $35 billion DaimlerChrysler merger. "I'm not sure if I should be speaking to you in German, Swedish, or Japanese, the way the rumors have been flying," Nasser told a packed audience of Detroit swells. "I'm really pleased we're so popular." Nasser's only news was that Ford was bringing the Three Tenors to Detroit this summer. No big deal--yet.
But the green flag is flying for motor merger mania, and a dramatic shakeout is at hand. The top players are awash in cash and eager to buy, while the weakest are drowning in debt and glutted with factory capacity: The industry can make 20 million more cars and trucks a year than it sells, while global auto sales could hit a cyclical downturn within three years. What's more, consumers are demanding lower prices and more high-tech gizmos on their cars, forcing carmakers to squeeze costs. The result: Only a quarter of the world's 40 auto makers are profitable. "You're going to see a much more consolidated industry within the next five years," says Schroder & Co. analyst John Casesa. "The faster the global economy turns down, the faster it will happen."
Speeding the auto industry down the road to megamergers is a group of hard-driving bosses with expansive egos and big appetites for acquisition. Volkswagen's Ferdinand Piech has snapped up European boutique players Rolls Royce and Lamborghini and is believed to have eyes for BMW. Denials aside, Ford's Nasser has at least investigated acquiring Honda and Volvo, and wouldn't mind picking off BMW, too.MATING DANCE. Toyota's President Hiroshi Okuda, a black belt in judo, is particularly aggressive for a Japanese business leader and has started picking up bargains among Japan's struggling second-tier auto makers. And DaimlerChrysler Co-Chairman Jurgen Schrempp, having engineered a big German-American merger, now says he might be interested in hooking up with Japan's troubled No. 2 carmaker, Nissan. "Who knows, eh?" a smiling Schrempp said, following a Jan. 10 speech in Detroit. "We do not exclude the possibility of equity participation" in Nissan's car business. He's already talking to Nissan about its heavy-truck business, and a deal could happen by the end of January.
This automotive mating dance is being triggered by cost pressures and cutthroat pricing on top of the overcapacity problem. "The industry lately has been a giant cotillion, with everybody looking for the best partner," says DaimlerChrysler Co-Chairman Robert J. Eaton, who predicts a big European deal this winter, although not involving his company. "Companies will have to rethink their ability to survive alone," he says.
Indeed, it was the stunning merger of Daimler-Benz and Chrysler Corp. that changed the rules of the road. The two prosperous companies saw that by combining they would have a better chance of growing in each other's home markets as well as in Asia. To make it in the high-cost, tech-intense global auto business, carmakers need vast resources and reach. And old national identities are becoming obsolete in a brave new auto world where size matters above all. "The industry landscape will need to change," says Nasser. "For global players to be really competitive, their sales volumes will have to be over 5 million a year." Predicts Toyota's Okuda: "In the next century, there will be only five or six auto makers."
Who will make it into the elite five-million-plus club? So far, only General Motors Corp. and Ford make that mark. But others are knocking on the door. Many industry leaders believe it will only take a decade for the world's 40 auto makers to collapse into the Global Big Six. To be sure, the shakeout will occur in stages, with profitable players such as Porsche or national champions like Renault holding out the longest. But by 2010, the thinking goes, each major auto market will be left with two large home-based companies--GM and Ford in the U.S., DaimlerChrysler and Volkswagen in Europe, and Toyota and Honda in Japan. Players such as Nissan or Volvo may keep their brand names but won't be running the show.
As the industry reshapes itself, insiders expect the giants to head in two directions: They will seek out healthy but small brands in Europe, while picking up distressed merchandise in Asia. For the top companies, the goal is to establish an all-encompassing global footprint. No auto maker in the world has that now. The Americans and Europeans are mostly minor players in Asia, while the Japanese need a stronger presence in Europe. "The key is finding the right partner, who has complementary products, geography, and a similar philosophy," says auto consultant Christopher Cedergren of Nextrend Inc. in Thousand Oaks, Calif.
Volvo could be the next company to be scooped up. It put itself in play on Jan. 6 by hiring J.P. Morgan to shop its car business. Fiat admits it's talking to Volvo; analysts say the two Europeans could make a good fit. Fiat would gain access to the luxury trade and the U.S. market, while Volvo, which sells less than 400,000 cars a year, would broaden its small base. Fiat needs a boost. With car sales down in its big markets, Italy and Brazil, the Italian company's auto division lost $38 million in the third quarter of 1998, vs. earnings of $245 million the year before.
But even a Fiat-Volvo combination might not be strong enough to survive longer-term, analysts say. Eventually, smaller players would need a big brother. Ford insiders say they are talking to Volvo, too, but they scoff at the $6 billion price tag Volvo's bankers are suggesting. Says one Ford insider: "Their car business is worth $3.5 billion, tops."ASIAN SALES. Alongside Volvo, Nissan tops the list of rumored takeover targets these days. Japan's once mighty No. 2 player is on the brink because sales have plunged, thanks to lackluster models and economic distress in Japan. Nissan has been playing catch-up to Toyota and Honda since the mid-1980s and now is so debilitated it can no longer afford the same level of investments as its competitors. The auto maker is expected to lose as much as $626 million for the fiscal year ending in March, and is burdened with $22 billion in debt. Rivals say Nissan could be had for about $30 billion.
Nissan's neighbor, Mitsubishi Motors Corp., is in even worse shape. Struggling with $18.5 billion in debt, a bland product line, and recession in its home market, Mitsubishi, like Nissan, needs a white knight. Mitsubishi Motors President Katsuhiko Kawasoe admits he's talking to potential foreign partners, although he declines to discuss them. All the big global players are seen as prospective suitors for Mitsubishi. DaimlerChrysler heads the list because Chrysler once had a 24% stake in the company and still buys from it.
Others likely to fall quickly include the remaining smaller players in Asia. GM recently increased its stake in Isuzu from 37.5% to 49% and took a bigger chunk of Suzuki--up from 3.3% to 10%. In Korea, meanwhile, Ford attempted to acquire bankrupt Kia Motors Corp. last year but was outbid by Hyundai Motor Co. Now, Hyundai, which piled Kia's $8 billion in debt on top of its own imposing $6.6 billion, is looking to launch discussions with foreign partners. But Ford isn't interested in bailing out Hyundai. "We're not going to do that," comments Henry D.G. Wallace, Ford's group vice-president for Asia-Pacific operations.
Over time, the biggest predators in Asia are likely to be Japanese giants. With $23 billion in cash, Toyota has as much money to spend as Ford. For now, the company is preoccupied with restructuring at home. It is considering creating a holding company that would make it far easier to streamline its vast operations--as well as merge with other auto makers. Toyota already owns stakes in Daihatsu and Hino.
While Honda lacks Toyota's cash, it is blessed with strong growth--particularly in the U.S., where its 1998 sales topped 1 million vehicles for the first time ever. To make it into the Big Six, Honda needs to double its worldwide sales. Japan's No. 3 auto maker wants to go it alone. But with strong profits, the company is positioned to chart an independent future.
Compared to Asian players, Europe's smaller auto makers are likely to hold on more fiercely to their independence. So while the industry remake may be just as profound, the drama is not likely to unfold overnight. That's partly because of government stakes in companies such as Renault, and the opposition to job cutbacks that could accompany mergers. "You would have to see Europe facing economic recession or crisis before it merges volume-car manufacturers," says John Lawson, auto analyst at Salomon Smith Barney in London.
Indeed, analysts believe Fiat can prolong its independence if it can acquire Volvo without taking on too much debt. And Renault is developing breakthrough products such as the Megane Scenic compact minivan, which was a hot seller in Western Europe in 1998. CEO Louis Schweitzer aims to double Renault's sales over the next decade--a goal that could allow it to survive on its own.TARGET: BMW. But a reckoning in Europe could be not far down the road. The emergence of a single currency is changing the rules of competition. Under European Union plans to liberalize its markets, foreign auto makers will gain unfettered access to Europe at yearend. An expected onslaught of Japanese competition could highlight the inefficiencies of Europe's smaller players. "Europe will become a battleground," predicts Furman Selz auto analyst Maryann Keller. "The Japanese are getting themselves ready to do in Europe what they did in the United States." Eventually, many observers believe, that battle will force Europe's smaller players to succumb.
The juiciest European target for the likes of Volkswagen or Ford would be BMW. The profitable brand would help these mass marketers move upscale. BMW made $624 million last year, but sells only 1.2 million cars worldwide. The Munich maker of luxury sedans is struggling to profit from its $1.3 billion acquisition of Britain's Rover Group Ltd. in 1994. Since then, the German company has invested $3.5 billion in Rover. Now, it must decide between investing the billions needed to develop a new line of front-wheel-drive cars for Rover, or seeking a partner to help.
Such a partnership--perhaps with Ford--could open the door to acquisition, but only if the Quandt family, which owns 47% of BMW, would give way to new ownership. For now, there's no sign of that. On Jan. 11, Heinrich Heitmann, BMW's North America chairman, declared in Detroit that his company will still be standing alone in five years.
But going it alone will get more expensive. The biggest wheels in the auto industry have already begun playing by the costly new rules. Advances in computer-aided design now allow them to develop vastly different models from one basic chassis. Consider three of Ford's newest models--the sexy $45,000 Jaguar S-type luxury car, the $30,000 Lincoln LS sedan, and the retro, reinvented Ford Thunderbird, which is expected to sell for $35,000. Each is built off the same roughly $3 billion platform, code-named DEW98, but they couldn't look more different. Thanks to breakthroughs in manufacturing technology, hot models race to market in 14 1/2 months--one-third of what it took a few years ago.
For the strongest and richest auto makers, these are giddy times. Amid the feeding frenzy of rumors at the Detroit auto show, Ford's Nasser couldn't help but sound like a man intent on building a global empire. "We already have a Japanese brand and two very British brands," said the Lebanese-born Nasser, who was raised in Australia and speaks four languages. "We've got the ability to absorb and really be quite comfortable with a lot of different cultures." No doubt. But the question is: Who will Ford, and the industry's other big wheels, absorb next?By Keith Naughton with Karen Lowry Miller and Joann Muller in Detroit, Emily Thornton in Tokyo, Gail Edmondson in Paris, and bureau reportsReturn to top