Why Big Car Mergers Rarely WorkDavid Welch
As he pressed rivals to merge with Fiat Chrysler Automobiles NV, Sergio Marchionne faced a fact his counterparts at General Motors and Ford know all too well: auto mergers and alliances fail at least as often as they succeed.
Among the duds are Daimler-Chrysler, GM’s ill-fated tie-up with Fiat, and Ford’s rollup of Volvo, Jaguar, Land Rover and Aston Martin. Carmakers are dauntingly complex -- transnational enterprises building machines with thousands of moving parts. Their engineering cultures resist being blended. The promised savings often don’t materialize. That’s partly why GM and Ford haven’t jumped at Marchionne’s proposal. Toyota isn’t interested either, according to people familiar with the situation.
Marchionne says his proposed tie-up would save up to $6 billion a year, most of it within four years. But Maryann Keller, a veteran industry watcher and independent analyst, says “these are simplistic numbers on a page. It works on paper, but this is reality. It’s very difficult to merge up operations.”
Fiat Chrysler spokesman Gualberto Ranieri says Marchionne’s Italian-American merger proves combinations can succeed. There were plenty of skeptics in 2009 when the marriage of Fiat and Chrysler was in the works, Ranieri says.
“There is a tangible example,” he says. “We did it.”
Plenty of executives have oversold deal pitches. Last year, Bain & Co. studied 150 deals announced in multiple industries between 2000 and 2013. Missing a cost target was the second most common complaint among dealmaking CEOs, the consulting firm found upon surveying 352 executives, and more than half of them said synergies missed their estimates.
The 1999 Renault-Nissan combination is considered an industry benchmark. But it’s still a work in progress. Using the same parts in as many vehicles as possible is a key component of any proposed industry tie-up -- and a big part of Marchionne’s pitch. By 2020, about 70 percent of Renault-Nissan vehicles will be built from a common pool of parts. That means it will have taken the French-Japanese behemoth 21 years to achieve the parts-sharing synergy GM already enjoys.
Making multiple car brands from common parts can backfire, especially when some models are luxury and some are pedestrian people haulers. In the late 1990s, Ford tried to build Jags, Volvos, Fords and Lincolns on the same platform. The Ford Mondeo, a so-called world car, was the underpinning for the compact Jaguar X-Type and served mostly to cheapen the British brand. Needless to say, the resulting vehicles sold poorly. (A decade after spending more than $9 billion buying the European brands, Ford sold them for less than half that.)
Merging up product lines also requires closing plants. Unions and governments, especially in factory-packed Europe, are good at keeping plants open. It took GM two years and $700 million to close one German factory.
Size and scale aren’t necessarily attributes. The combination of Renault and Nissan created the world’s fourth-largest carmaker, which last year sold 8.5 million vehicles. In an interview Wednesday at Bloomberg’s New York headquarters, deal architect Carlos Ghosn said that together his two companies have greater economies of scale, squeezing out costs and boosting profit.
Yet Renault-Nissan margins trail Honda’s, which sells about half as many cars. In the fiscal year ending March 31, 2015, Nissan generated margins -- as measured by earnings before interest, taxes, depreciation and amortization -- of 12.1 percent; Honda’s Ebitda margins were 12.5 percent. Renault, which runs on a calendar year, managed a 10 percent Ebitda margin in 2014. GM, which sells even more vehicles than Renault-Nissan, generates even weaker margins.
Marchionne says the industry spends far too much money on engines and transmissions, which can cost billions to develop. It’s a fair point. But his solution to share engines among vehicles and companies doesn’t require a merger -- which can be counterproductive.
Engineers see engines as the car’s soul, says Tom LaSorda, a former DaimlerChrysler executive who now runs IncWell LLC, a venture-capital firm in Birmingham, Michigan. They don’t like to take someone else’s work. LaSorda recalls Daimler-Chrysler’s effort to build a V-6 for Chrysler and Mercedes vehicles. The infighting was epic, and the project foundered. That doesn’t mean automakers can’t work on engines together. Time and again car companies have jointly developed basic engines and then tuned them for their own vehicles, LaSorda says.
Marchionne wants a fully integrated tie-up. But when auto companies merge, one typically tries to assimilate the other, generating resistance, Ghosn said in the interview. “You will get ‘My way or the highway,’” he said. Ghosn noted that Renault and Nissan have their own management teams. “We have a partnership,” he said. “That way I get synergies but I am preserving the culture of each company and the identity of the brands.”
Marchionne is a talented, savvy executive. He acknowledges auto mergers have an awful track record. Yet he hasn’t explained how he would overcome them. “If you go back and look at the graveyard of failed deals, there’s enough to create concern,” Marchionne said in an April 29 presentation. “But the problem I’m having with all those concerns is the benefits associated with this are really too large.”
Which brings us to Marchionne’s own merger between Fiat and Chrysler. There’s no question that the deal saved Chrysler from collapse (although a federal bailout sure didn’t hurt). It’s also true sales are booming and Fiat Chrysler is gaining market share faster than rivals. But margins are weak, meaning Marchionne will struggle to generate the cash to develop the next generation of vehicles and technologies on his own. History tells us doing another deal probably won’t change that.
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