Time for an exit strategy?
By: Dr Peter Wells, Wednesday, December 16, 2009, AutomotiveWorld.com
It is well understood that the automotive industry has significant barriers to entry, particularly at the level of the OEMs and final assembly of cars. What is perhaps less appreciated is that there are also significant barriers to exit, and that these barriers make a very real difference to the evolution of the industry as a whole.
Put simply, many assets in vehicle manufacturing, distribution and retail are of scant use in other applications. Apart from times of exceptional crisis, such as wartime conversion of car factories to the production of aeroplanes, missiles or tanks, mass production car plants can do only one thing: make cars. In good times, with expanding markets, the lack of an exit strategy need not be a major problem. As soon as problems hit, however, the search for the exits starts in earnest.
For individual companies, one approach is to diversify the risk by having a broader portfolio of operations or to explore the potential in emergent product segments, but diversification fell from favour some time back.
For individual companies, one approach is to diversify the risk by having a broader portfolio of operations (think of Toyota and housing for example) or to explore the potential in emergent product segments (Honda and robots might be an illustration), but diversification fell from favour some time back. For many years the mantra has been of 'focus' on core competence. An alternative approach is to sell up to another stronger OEM, and seek the security of a bigger umbrella. The assets may be somewhat undervalued, but a price of sorts is obtained.
The worst case scenario is to leave the shelter of a bigger group as was experienced by MG Rover and, now, Saab. For sure, it cost BMW a huge sum to exit from MG Rover, just as ownership of Jaguar was probably a net loss for Ford over the years of their stewardship, but at least for the bigger companies that are shedding smaller operations and brands there is the prospect of being rid of a 'problem' - recall how BMW management reportedly termed MG Rover 'The English Patient'.
It will cost GM to remove Saab from its portfolio of brands, but the long-run calculation is that even bigger costs would ensue if Saab remained within the group. The difficulties experienced by GM with respect to trying to sell Saab and Saturn, and indeed the proposed relationship with Magna, are all illustrative of how enormously difficult it is in the modern era to construct an orderly retreat in the face of economic change.
The future for vehicle manufacturing in the established regions of North America, the old EU and Japan is surely one of prolonged, painful, exit.
The future for vehicle manufacturing in the established regions of North America, the old EU and Japan is surely one of prolonged, painful, exit. It is going to be very expensive, both for OEMs and governments. The act of just closing a single assembly plant results in vast expenditures; often the land itself has more value as a site for housing than it does for manufacturing.
Be it individual plants or entire companies and their associated brands, this kind of deep structural and geographic change will intensify the importance of exit strategies or, at the very least, risk spreading strategies. The bigger risk is that a more modern automotive industry suited to the era of eco-austerity will be delayed by the sheer difficulty of restructuring the existing industry.
Dr Peter Wells is a Reader at Cardiff Business School, where he is a Co-Director of the Centre for Automotive Industry Research and leads the automotive industry research programme within BRASS, also in Cardiff University. Dr Wells is also a director of AutomotiveWorld.com's sister website AWPresenter.com. He can be contacted on wellspe@cardiff.ac.uk.
The opinions expressed here are those of the author and do not necessarily reflect the positions of Automotive World Ltd.
Published on Wednesday, December 16, 2009
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