International -- International Cover Story
Autos: The Global Six (int'l edition)
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 A. 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 industry's 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 produce 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 auto 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.DAIMLER-NISSAN? Toyota's President Hiroshi Okuda, a black belt in judo, is particularly aggressive for a Japanese business leader and is already picking up bargains among Japan's struggling second-tier auto makers. And DaimlerChrysler Co-Chairman Jurgen Schrempp, having engineered the giant 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 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 the triple threat of cost pressures, cutthroat pricing, and overcapacity. "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."
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, hypercompetitive, technology-intense global auto business, carmakers need to have vast resources and worldwide 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."TWO FOR THE ROAD. 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. The shakeout is sure to happen in stages, with profitable niche 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 someone else will be running the show.
Behind the urge to merge is an unprecedented mix of factors that will benefit those that have size and scope and punish the small and weak. Manufacturing, once the cornerstone of the car business, is rapidly becoming a commodity operation that can be farmed out to whichever supplier offers the lowest price. For all but the most high-tech content of a car, auto makers can now assemble a vehicle by snapping together modular components from suppliers--like so many Lego pieces. And the biggest auto makers can leverage the best deals from suppliers.
At the same time, consumer expectations are rising as prices fall. Developing a new model from the ground up costs about $3 billion. Consumers want the latest technology--such as satellite navigation and crash-avoidance radar--but don't wish to shell out for it. J.D. Power & Associates Inc. predicts that U.S. car prices will drop 2% this year, to about $20,580 on average, continuing a three-year trend.
To make money in this unforgiving environment, auto makers need to hedge their bets. They must spread the requisite billions in vehicle development costs over a wide variety of products. "Everybody's products are getting better, but there is no pricing power," says auto analyst Nicholas Lobaccaro of Merrill Lynch & Co. "It's hard to keep up with all the advances without the economies of scale."
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.
Deals that lack those ingredients are destined to fail. Indeed, overlapping combinations, such as linking two big regional players like Renault and Peugeot, could result in more trouble than gains. Simply combining to cut costs, without a global expansion plan, is also not a wise strategy. "An acquisition should not be driven by cost savings alone," says Nasser. "If that was the view of Jaguar, we never would have been able to make sense of that acquisition" in 1989.VOLVO FOR SALE. 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, and analysts say the two Europeans could make a good fit. Fiat would gain access to the luxury segment and the U.S. market, while Volvo, which sells fewer than 400,000 cars a year, would broaden its small base. Fiat needs a boost. With car sales slumping in its two 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, but they scoff at the $6 billion price tag Volvo's bankers are suggesting for the car business. Says one Ford insider: "Their car business is worth $3.5 billion, tops."
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, owing 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 to make the same level of investments as its rivals in technology, design, and marketing. 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. Competing auto makers say Nissan could be had for about $30 billion.
Nissan's neighbor, Mitsubishi Motors Corp., is in even worse shape, analysts say. 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 acknowledges he is talking to potential foreign partners, although he declines to discuss them or the nature of any strategic alliances.
All the big global players are considered prospective suitors for Mitsubishi. But DaimlerChrysler heads the list because Chrysler once had a 24% stake in the company and still buys from it. Ford, too, is considered a hot prospect, since it is looking to grow in Asia. Kawasoe, who once boasted he was drawing up a "shopping list" of acquisitions, now admits to a painful reassessment: "I have made up my selling list," he says.
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 beleaguered 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 for help. After cleaning up the company's balance sheet, "our management is interested in having discussions with the big boys in Detroit or Europe," says Hyo Byung Lee, a general manager in the Hyundai-Kia planning office of Hyundai Motor. 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 the Japanese giants. With $23 billion in cash, Toyota has as much money to spend as Ford. But for now, the company is preoccupied with Japan's recession and 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 Global Big Six, Honda needs to double its worldwide sales. Japan's No. 3 auto maker wants to go it alone. But with profits of $2.4 billion on revenues of $54 billion in 1998, Honda is well positioned to target takeovers in the future.
Compared with 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 true 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, given all the political pain," 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 enjoying a renaissance by 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 the company to survive on its own.
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 the end of this year. An expected onslaught of Japanese competition could highlight the inefficiencies of chronic overcapacity and parochial distribution 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."TARGET: BMW. Eventually, analysts believe, that battle will force Europe's smaller players to succumb. They won't be able to keep pace with growing demands for investment in technology, distribution, and marketing in the global marketplace. The weak will be forced into the arms of stronger neighbors or those of U.S. giants with a long European history. "European auto makers will seek a European solution," adds Casesa. "Two or three big monsters in Europe will emerge."
The juiciest European target for the likes of Volkswagen or Ford would be BMW. The profitable brand would help these mass marketers in their quest to 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. Now, it must determine whether it will invest the billions needed to develop a new line of front-wheel drive cars for Rover or whether it will seek 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 become increasingly expensive. The biggest wheels in the auto industry have begun playing by the costly new rules. Advances in computer-aided design have enabled the richest auto makers to develop vastly different models from one basic chassis. GM is developing at least six models off its new "Delta" platform, including a Chevrolet small car, a Saturn sport utility, and a commercial vehicle for Europe. "Manufacturers don't want to reinvent the wheel every time they bring out a new model," says auto consultant Michael Robinet of CMS Forecasting in Farmington Hills, Mich.FAST-TECH. While sharing platforms once led to lookalike cars, today's approach is anything but lowest common denominator. Consider three of Ford's newest models--the sexy $45,000 Jaguar S-type luxury car, the staid $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 new developments in engineering and manufacturing technology, hot models race to market in 14.5 months--one-third of what it took a few years ago.
Even the showroom is undergoing a costly overhaul. GM and Ford are investing billions to overhaul their antiquated distribution systems. In some cases, they are buying up old dealerships and merging them into automotive supermarkets that sell everything from a $10,000 Ford Escort to a $70,000 Jaguar under one roof. For auto makers who can gain efficiencies in the showroom, the payoff is huge: Some 20% of a car's cost is tied up in distribution. But to play in the new distribution derby, it takes the deep pockets that only the largest auto makers have.
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