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The French later increased their holding to 44%, as Nissan’s industrial debt was cut by profits and by disposal of the firm’s outdated equity stakes in its suppliers. The deal has paid off. Indeed, Nissan’s earnings have been supporting Renault, as the latter has gone thorough a bad period due to the ageing model range and stagnant markets.
So there are several reasons for the end of takeover activity: the binges of the past have left the predators with, at best, no appetite for more or, at worst, with severe indigestion. Moreover, what is left amounts to slim pickings, as GM found when it decided to pay a $2 billion breakup fee merely to go back on a hastily made promise to buy troubled Fiat, after five years of collaboration had shown the Detroit firm how weak its Italian partner was. This surreal episode was a prophetic moment. Once the very fact that brands with the glamour of Ferrari, Alfa-Romeo and Maserati were available would have produced a scramble among potential buyers. Fiat’s financial difficulties would have been regarded as an opportunity, not a threat. Today no one wants to take them on.
The Brand News
The lesson of two decades of frantic M&As in the motor industry is that acquired brands, however strong and attractive they might appear, take years to restore. They first need refreshing, then bending to the shape and behavior of the new family. And they need to be refitted with the new products worthy of the badge on the front.
GM’s unhappy cohabitation with Fiat was concurrent with its ownership of Saab, which it bought as a consolation prize when it was beaten to Jaguar by Ford. 15 years later that, too, looks like a mistake. A frantic upgrade program is underway to reduce costs through platform and component savings with other members of the GM alliance group. But using the corporate parts bin is a quick way to cheapen a brand.
And then there is Volkswagen, pride of the European predators. It used acquisitions to expand geographically – first southwards to acquire SEAT in Spain, then eastwards to take over Skoda in the Czech Republic. In parallel with a masterful 20-year rehabilitation of Audi as a prestige brand, VW also snapped up Bentley and Lamborghini from their distressed owners.
Bentley has been a fabulous success with its Continental coupe. Lamborghini has a couple of new street racers that look good but have not yet turned a profit. Critics want to know how VW will cope with Volkswagen, SEAT and Skoda brands all fighting for the middle market and competing with each other, and what it can do to recover from the recent slide in the share of the American market, where only a few years ago it was zooming ahead. Expected job cuts in Germany, maybe up to 10,000 of them, will not begin to address that problem, but might provoke damaging strikes.
In-breeding as a Virtue
The most sensible of the carmakers has spurned the consolidation game. Toyota is still not the world’s largest by number of cars built, but given the speed at which it is growing (output has expanded by 1.5 million vehicles in the past five years, half the total growth in world production) and the speed at which GM is shrinking, the day when Toyota becomes the biggest is probably no more than five years away. Investors already recognize it as the leader. Its market capitalization, at $150 billion, is greater than that of GM, Ford and DaimlerChrysler combined ($90 billion).
This superiority was achieved by concentrating on organic growth. Apart from scooping up Daihatsu years ago, Toyota concentrated solely on renovating its own offering, with a relentless focus on efficiency, cost-cutting and new variations of successful models brought to market at an increasingly rapid rate.
Toyota’s luxury car business, Lexus, was created from scratch, rather than by the purchase of some other firm’s famous, but tired, brand. Lexus is now the best-selling prestige brand in America.
People laughed when Toyota announced its plans for creating its own luxury brand rather than paying for some other firm’s glorious history. But Lexus was spared all the tears and sweat associated with a takeover. And it succeeded by following a policy that many carmakers seem to find hard to copy: give people cars that don’t break and treat customers like royalty.
Buying brands and additional international reach have been the strategies behind many takeovers. But so was the aspiration of using volume to achieve economies of scale. Analysts are no longer sure, however, that there is any great merit in that. Keith Hayes of Goldman Sachs reckons that 500,000 copies off a single platform is about the point at which scale benefits start to drop away.
In the past, making large numbers of a few models was the way to thrive. Now it is all about making a few copies of a lot of derivatives. Look at the dozens of model categories in today’s Mercedes and BMW ranges – a few years ago they had just three each. Yet total sales of each brand are still only around 1 million. Creating niches from common platforms is the new way to compete. BMW now sees strong competitive advantage in maintaining differences between all the cars it sells. It is investing in infrastructure so that customers can change the specification of their car as late as 100 hours before it is built. That encourages customers to spend more on optional equipment. For the carmaker it also means that every assembly plant has to be surrounded by its own suppliers. An engine cannot be shipped across continents within 100 hours of a request. Separate factories allow for more variation, but at the price of fewer economies of scale. However, the greater the specification by consumers, the higher the premium price the carmaker can command.
The obvious conclusion might be that the 100-year-old car industry has done its rationalization and consolidation and that what remains must therefore be leaner and fitter. It should be, but it isn’t. John Murray from Trinity College, Dublin, points to a worrying loss of power by the carmakers, rather than the expected gain. The makers have pushed much of their intellectual property away to the first tier of component suppliers, which have taken physical assets along with the necessary skills. And the new multi-brand retailers and the Internet-savvy consumers are together gaining power and a bigger chunk of the value chain. The so-called car manufacturers are going to be left to take care of just design, marketing and brands – a long way from the traditional skill of managing big manufacturing business.
Of course, there is just a chance that GM will be renovated to become the next Nissan. Implausible recovery stories have happened every decade and have paid returns far greater than any takeover bid ever did. More likely is that GM will go on struggling with the consequences of the industry’s consolidation. In future, as the global industry expands, new names will join those of Toyota and a few others. Yesterday’s predators, obsessed by their takeovers and mergers, will give way to nimbler, smarter carmakers that will reshape the global industry.
Source: The Economist (on line), Sept. 8, 2005 (abridged)
Essential Vocabulary
1. controversy n –
controversial a – противоречивый, спорный, дискуссионный
2. retool v – переоборудовать, оснащать новой техникой
3. refurbish v – переоборудовать, переоснастить
4.legacy n – наследство, наследие
5. wholly-owned subsidiary – дочернее предприятие, на 100% принадлежащее материнской компании
6. inverse correlation – обратная корреляция
7. in the red – с убытком
8.in the black – без убытков
9. cost base – база затрат
10. market capitalization (cap) – рыночная капитализация