Automotive World - Auto industry mergers: bigger is not always better

Auto industry mergers: bigger is not always better

By: Dr Peter Wells, Friday, October 23, 2009, AutomotiveWorld.com

As the protracted restructuring between Volkswagen and Porsche rumbles on, it is an opportune moment to ask whether the much-vaunted business logic of mergers really has a place in the contemporary automotive industry.

VW claim that by taking 49.9% of Porsche at a cost of €3.9bn the two companies are demonstrating that:

"…the projects identified for a closer cooperation have been making swifter progress than initially anticipated. This positive development for both companies, which is an expression of the compelling industrial logic behind the merger, is now to be underscored by a larger participation in Porsche AG. Volkswagen is thus securing a higher share of the increase in the value of Porsche expected from the joint projects at an early stage."

Given the multiplicity of models, brands, production sites, supplier relationships, distribution networks and other aspects of the business, it is hardly surprising that creating one entity out of a pre-existing two is virtually impossible.

These are brave words indeed, and bring to mind the rhetoric of the early days of the DaimlerChrysler merger when there was much talk of synergies and cost-savings. It is worth recalling that in 1998 Daimler paid US$36bn for Chrysler; while in 2007 it sold the majority of the business (80.1%) to Cerberus Capital for just US$7.4bn, having endured major losses in the previous two years.

The failed merger was part of a wider strategy adopted by Daimler under the then Chairman Jürgen Schrempp in the mid-1990s termed the 'Welt AG' plan under which the company would seek a dominating role in the key market regions of the world through a series of mergers and alliances including Chrysler, Mitsubishi and Hyundai. Neither was this the only example of a less-than-happy union.

In fact, over recent years the strongest trend has been for de-concentration and the break-up of multi-brand groups. The most obvious cases are of course the break up of GM (losing Saturn, Hummer, Saab, and much of Opel / Vauxhall) and of Ford (losing TH!NK, Aston Martin, Jaguar, Land Rover and in the future Volvo). BMW had a similarly unsuccessful experience with MG Rover, eventually having to part with the company to stem apparently unending losses.

All of which raises the question of whether mergers can deliver in the complexity of the automotive industry. Given the multiplicity of models, brands, production sites, supplier relationships, distribution networks and other aspects of the business, it is hardly surprising that creating one entity out of a pre-existing two is virtually impossible.

the future is one of pragmatic alliances and cross-shareholdings that fall short of outright merger

The way forward is not likely to be that the smaller spin-off companies follow independent survival. It is hard to see Saturn or Saab remaining for long as stand-alone businesses because they simply lack the required scale.

Hence the future is one of pragmatic alliances and cross-shareholdings that fall short of outright merger. These too fall short of perfection in execution, though Renault-Nissan is probably the best example of it working, but at least shareholders are protected from the erosion of value that so blighted the DaimlerChrysler endeavours.

Whether VW, the masters of multi-branding, can really do it again with Porsche remains to be seen.

The opinions expressed here are those of the author and do not necessarily reflect the positions of Automotive World Ltd.

Published on Friday, October 23, 2009