For Gm, Once Again, Little Ventured, Little Gained

Its small Fiat stake continues a strategy of piecemeal alliances

For Fiat, General Motors' purchase of 20% of its auto business on Mar. 13 is just the breather it was seeking. The Italian carmaker gets a deep-pocketed partner with a reputation as an easygoing, hands-off minority stakeholder, leaving Fiat's managers in charge. And GM's prize? It gets small Fiat diesel engines and a chance to trim its costs in Europe and Latin America--not to mention the pleasure of thwarting rival DaimlerChrysler's effort to swallow Fiat whole. Yet GM's minority stake gives it little clout to force the tough cost-cutting Fiat needs, and it leaves GM competing fiercely with its new partner in key European auto segments. Laments one large GM institutional investor: "It looks like a huge victory for Fiat, but it doesn't do very much for General Motors."

In short, it looks like most of GM's growing network of global auto tie-ups: a puzzling mix of missed opportunities and timid half-steps. As the global auto industry has consolidated rapidly--with DaimlerChrysler and Ford moving boldly to acquire key players--GM has tiptoed into a series of minority stakes and ad-hoc alliances with rivals. GM hopes to reap the benefits of partnership without the messy culture clash, nationalist backlash, and red ink that a full buyout often entails. Says GM Chief Executive G. Richard Wagoner Jr.: "We think we've hit on the right formula."

But its track record so far suggests a different lesson: little ventured, little gained. Consider GM's stake in struggling Isuzu Motors Ltd. After 29 years as a minority shareholder, GM has gotten some diesel truck engines and co-designed pickup trucks. But Isuzu racked up a $200 million operating loss last year and amassed $8.3 billion in debt. A year ago, GM raised its holdings to 49% from 38%. Grouses the GM investor: "GM never exercised the management due diligence it should have, but it was probably unable to."

Even where it has taken control, GM's kid-glove style has brought limited benefit. When it bought half of Saab in 1990, the Swedish carmaker was a money-losing seller of 93,000 cars a year. Cash-strapped itself at first, GM shared major components between Saab and other GM divisions, improved Saab quality, and eventually rolled out new models. But while Saab's small U.S. sales are rising smartly, it barely ekes out a profit on the 131,000 cars it sells annually worldwide.

Still, Wagoner is stepping up GM's efforts to forge alliances. In December, the No. 1 auto maker agreed to buy 20% of Fuji Heavy Industries Ltd., maker of Subaru cars, after tripling its holdings in Suzuki Motor Corp., to 10%, in November, 1998. In January, GM bought the remaining half of Saab. It is also negotiating to buy Korea's Daewoo Motor and has inked a technology-sharing deal with Toyota Motor and an engine pact with Honda Motor.

GM's strategy has some advantages. Buying a small chunk of a company allows the auto giant inside for a closer look before deciding whether to take a bigger plunge. And taking a small stake in a healthy rival to share the costs of developing new technology or gain access to distribution in another region can help meet a strategic need cheaply.

But like elsewhere in life, you get what you pay for. If the partnership isn't a two-way exchange of expertise and capital, the value can be limited. Subaru and Suzuki, for instance, bring GM some small cars without bolstering its knowhow. Says Brandeis University international marketing professor Shih-Fen Chen: "GM's reliance on Japanese alliances prevents the company from developing its own small cars."

Acting as a silent partner is weak medicine indeed when buying into a company that urgently needs fixing. Only a full merger will let GM and Fiat tackle their biggest headache in the European market: overcapacity. To make their alliance pay off, they must quickly ax overlapping models and overhead to cut costs. Since Fiat factories run at just 60% of capacity, some must close. But GM can't make any of that happen--which is just fine with Fiat's managers and the Italian government. DaimlerChrysler execs say privately that they refused to accept such terms.

LOPSIDED DEAL. While GM's partial ownership may ultimately lead to a merger, that's at least several years away. By then, both carmakers will have lost the opportunity to fix their European operations while the market was strong. Moreover, the deal gives Fiat the upper hand: It can compel GM to buy the rest of Fiat any time from 2004 to 2009 at a fair-market price. "How do they know where Fiat will be five years from now, especially since they won't have a hand in running it?" says Deutsche Bank Securities Inc. analyst Rod Lache. "That's a pretty big leap of faith." What's more, Fiat can sell its 80% stake to anyone after a year as long as GM has a chance to match terms.

In the short run, GM and Fiat plan to gain efficiency by sharing chassis and key components, analysts say. While that's a good idea, getting engineers from different companies and cultures to collaborate is extremely tricky. GM has repeatedly stumbled at the far less complex task of fostering in-house cooperation between its North American and European engineers. The task could be far tougher for GM and Fiat, which will continue to battle in the small and midsize car segments. "If you're competing on 40% of your product [lineup], how willing are you going to be to share product information?" notes Lache.

Despite the messy details, merger mania in the auto industry continues at fever pitch. The field of remaining candidates is down to a handful: Daewoo, Mitsubishi Motors, PSA Peugeot Citroen, Volvo truck. That leaves only holdouts BMW and Honda, which are not on the block. But BMW may toss Rover Cars back on the market after trying fruitlessly since 1994 to fix it. Daimler is busily trying to cement a deal with Mitsubishi, and Ford has joined the fray. GM may now seek a partner in its Daewoo buyout attempt. Not everyone has a good economic reason for doing these deals, warns Brandeis' Chen. But until almost everything is snapped up, they're likely to proceed apace.

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