For decades the mantra in the automotive industry has been one of production economies of scale. With greater production volumes come lower per unit costs, and with lower unit costs comes increased market share. Consequently, industry leaders, financial analysts and other observers have also taken the basic position that the industry would be reduced to six major OEM groups via a process of relentless industrial concentration.
Moreover, the process of globalization was supposed to reinforce that inevitable trend, by eradicating the last refuges of the small, the weak, and the unprofitable. Every major merger and acquisition in the industry over the last twenty years has been hailed as further proof of this unquestionable law.
It is pertinent to ask therefore, whether such a process of concentration has actually occurred. Table 1 and Table 2 illustrate the key data for the period between 1998 and 2008, surely a decade of concentration if ever there was one.
Whether considering all vehicles (Table 1) or just cars (Table 2), it is evident that the share of the leading five and leading ten OEMs fell over the ten years to 2008. The reduction of concentration was most marked when all vehicles are concerned, but even in the case of cars the top five lost two percentage points, and the top ten lost eight percentage points.
So what is going on? Several possible explanations may underpin part or all of the observed outcomes including:
- Bigger groups have suffered from increased diseconomies of scale, and this has forced the partial break-up of such groups. The 2008 data does not in fact capture all of this dynamic (though of course the dissolution of the DaimlerChrysler combine is included) because not all of the Ford and GM restructuring is included.
- Some OEMs in emerging markets have grown and remained independent, perhaps protected by government regulations on non-domestic ownership, and they have captured a greater share of the emerging markets.
- Medium-sized specialist OEMs have benefited from growth in the non-mainstream segments.
- Real consolidation is hidden because there are so many joint ventures and shared cost initiatives that fall short of outright merger or acquisition, notably of course Renault-Nissan.
At the very least the data suggest that the well-worn discourse of inevitability in consolidation deserves to be questioned. More fundamentally, perhaps the economic basis of competition in the automotive industry is shifting away from production economies of scale and into other aspects of operations. Either way, it shows that the quest for scale is not a valid goal for management or the corporate financial community that often underpins restructuring.
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 firstname.lastname@example.org.
The opinions expressed here are those of the author and do not necessarily reflect the positions of Automotive World Ltd.