A couple of years ago, the auto industry's biggest companies embarked on a binge of mergers and acquisitions.
According to conventional wisdom, automakers and their suppliers had to get big - or get out. Now it is clear that some of the companies with the biggest appetites have a bad case if indigestion. BMW, for example, felt obliged to sell its Land Rover subsidiary to eliminate huge losses. This month, Jay N. Woodworth, a financial analyst in New Jersey, offers readers a progress report on the automakers who still are playing the merger game.
And as a commentary on mergers within the parts industry, we offer the sad story of Federal-Mogul Corp., a supplier that grew too fast, too quickly. That story appears on Page 22.
Over the past two years, virtually every major automaker has formed at least one new cross-border alliance.
Now these companies will have to make their acquisitions work. In most cases, automakers will require a decade or more to begin to generate profits for shareholders.
The top five automaker groups now account for 80 percent of industry sales, up from 69 percent just two years ago. Only Toyota Motor Corp., Honda Motor Co. Ltd., and PSA/Peugeot/Citroen SA have avoided mergers with other automakers. BMW AG has rejoined their ranks, now that the company has spun off its troubled Rover subsidiary. Toyota has the management and cash to prosper on its own. The other three will face a greater challenge to remain independent.
The plunge in stock prices has undermined the growth strategies of some firms, notably DaimlerChrysler, Ford Motor Co. and General Motors. At best, their acquisitions will offer a payback to investors in the long term. Perhaps the greatest prospects are offered by GM's heavy investments in Isuzu Motors Ltd., Suzuki Motor Corp. and Subaru. Renault's alliance with Nissan Motor Co. Ltd. also appears promising. Further, Renault last year acquired Korea's bankrupt Samsung Motors in a remarkably inexpensive transaction.
But in the short run, such alliances as DaimlerChrysler's partnership with Mitsubishi Motors Corp. and Ford's purchase of Land Rover will require a significant outflow of cash and management talent, with little or no profit in the foreseeable future.
General Motors' stock declined sharply in the spring and early summer, when it appeared it would be the leading bidder for Korea's Daewoo Motor Co. Ltd. Then GM's stock rebounded when Ford was given exclusive bidding rights. Several weeks after Ford pulled out of the bidding in September, GM regained the lead role. But this time, it appears likely that the cost of a successful bid for Daewoo will be a fraction of the $6.9 billion that Ford had initially bid.
General Motors has a deep knowledge of Daewoo stemming from their partnership that ended in the early 1990s after many top management squabbles. Daewoo thought it had achieved self-sufficiency and bought back GM's equity stake, although a huge GM part-supply business to Daewoo continued.
GM knows how little Daewoo is worth, and it appears to be willing to pay only a fraction of the $6.9 billion that Ford had bid. The principal question is whether Daewoo's creditor banks would accept a low bid of $2 billion to $3 billion.
Elsewhere in Asia, General Motors' investments in Subaru, Suzuki and Isuzu show few short-term prospects for delivering returns to GM investors, despite the billions that GM has expended. But General Motors arguably has a sensible blueprint for its long-term presence in Japan and the rest of Asia.
But fulfilling that plan still will cost more money. Truckmaker Isuzu appears to require a cash infusion, which would likely raise GM's equity stake to more than 50 percent. Meanwhile, General Motors holds a 20 percent stake in Suzuki Motors, Japan's premier minicar manufacturer. General Motors is counting on Suzuki to help it design and build new models for the Asian market. Last year, General Motors bought a 20 percent stake in Subaru, ostensibly to obtain access to its all-wheel-drive technology. That move continues to puzzle industry analysts, who are surprised by GM's claim that it lacks the technology.
Last year, General Motors also purchased a 20 percent share of Italy's Fiat, one of the last three of Europe's independent auto groups. Fiat is supposed to help GM's Opel division improve its fast-eroding European business. But it is not clear whether Fiat will solve or add to its partner's problems in Europe. Fiat lacks new-product strength in the European market compared with Volkswagen, Renault and Peugeot. GM Europe was slow to understand the competitive challenge posed by the new products of Volkswagen and Renault, and its once-enviable cost competitiveness was lost.
Ford Motor Co.
Over the past years, Ford Motor Co. engineered the purchase of Volvo and Land Rover. When it combined those brands with Jaguar, Aston Martin and Lincoln Mercury to form the Premier Automotive Group, Ford had what appeared to be a powerful lineup of luxury brands.
And yet, it is Lincoln Mercury - with minimal sales outside North America - that is supporting Ford's Premier Automotive Group. Lincoln Mercury remains profitable, while the European names are likely to endure substantial deficits for years to come.
Ford says its Jaguar brand - bought in 1988 - now runs at an operating profit. But that does not include the cost of overhauling Jaguar. Ford has spent more than $6 billion to buy the company, design new models and retool its factories. In all likelihood, the subsidiary will never generate a positive return on shareholders' total investment.
Meanwhile, it may take years - possibly even decades - to produce a positive return on Ford's massive investment in Volvo and Land Rover. Before Ford's purchase of Volvo in 1999 for $6.5 billion, Volvo's profit margin was less than 5 percent of sales throughout the 1990s.
Ford has spent heavily to freshen Volvo's products, but it needs to do much more.
Ford has a similar problem with Land Rover, which the company purchased last year from BMW for $2.8 billion. Despite the booming sport-utility business, Ford needs to rebuild both the product line and customer loyalty after years of dissatisfaction with an outdated British brand name.
As if that were not enough, Ford's business in Japan continues to weaken, and its Mazda affiliate is at the center of the problems. Mazda was to be the way Ford could expand into Asia, but it has not turned out that way.
The U.S. automaker shared some platforms with Mazda, and it partly integrated Mazda into its parts purchasing network. But with a stagnant Japanese market and a weak product lineup, the company is slipping further behind Toyota, Nissan and Honda. Moreover, Mazda's operations in North America continue to lag.
Toyota Motor Co.
Toyota Motor Co. has avoided entanglements with other automakers, and its market position seems stronger than ever. If Toyota has suffered at all during the 1990s, it was in its home market, which has struggled through a decade-long recession. But Toyota has rebuilt its share of the Japan market to 40 percent, regaining the ground lost in the late 1980s when minicars and recreational vehicles gained favor. Toyota is rarely an innovator, but it is masterful at copying the innovations of others.
As a result, Toyota has a solid position in every market segment in Japan. The only weakness during the 1990s was its Daihatsu minicar affiliate, which was losing market share to Suzuki. Finally, Toyota bought full control of the company, deciding that the affiliate's problems could be solved only if Toyota ran every aspect of the company. Suzuki's stock price has suffered since Toyota took action.
Toyota's position in the North American market continues to grow. Last year, Toyota's North American profits were estimated to rank third - behind Ford and General Motors. But Europe continues to be a weak market for Toyota, where it is breaking even at best. Toyota's sales trail behind Nissan in western Europe, the only region where that is the case. To catch up, Toyota is building an assembly plant in France.
Joachim Milberg can finally smile again. Less than a year after BMW AG's chief executive unloaded the Rover Group, the German automaker's profits and sales are rising. And with each new product BMW brings to market, the original justification for the Rover purchase makes less sense.
It seemed to be a good idea at the time. When it completed the acquisition in 1994, BMW believed it could survive only if it expanded into new markets and product segments. The Rover Group looked like a nice fit for BMW. It produced sport-utilities for the luxury market, a segment BMW had not yet entered. And it produced cars for the mass market. In that segment, the Rover brand could prove useful for BMW, which did not want to dilute its own brand image.
It proved to be a grievous miscalculation. BMW overestimated Rover's ability to design new products. Quality problems forced repeated delays in the introduction of new Rover models. Worst of all, BMW had wrongly assumed that English consumers would remain loyal to the Rover brand.
As Rover sales sagged, infighting broke out within BMW's managerial ranks. On 'Black Friday' - February 5, 1999 - Chairman Bernd Pischetsrieder and President Wolfgang Reitzle both resigned. Milberg was named chairman, but the shakeup continued. On March 16, 2000, Milberg finally sold Land Rover to Ford and unloaded the Rover car subsidiary to a group of British investors. That same day, three senior BMW executives left the company, victims of the internal power struggle.
At the time, BMW's disarray seemed complete. The original purchase of Rover, plus subsequent losses, had cost at least $4 billion and decimated its management. Journalists speculated that the secretive Quandt family would try to sell their controlling share of the company.
Now, less than a year later, BMW has rebounded. The company is demonstrating that it does not have to buy another automaker to expand into new market segments. Its subcompact Mini will spawn a family of models, allowing BMW to preserve the exclusivity of its own brand. At the other end of the spectrum, the company is preparing a new model for its Rolls Royce brand. The disarray is a distant memory. Journalists - and competitors - are not laughing at BMW anymore.
In January, DaimlerChrysler Chairman Jurgen Schrempp warned that he would need another two to four years to fix Chrysler's problems. Shareholders were not pleased. The company's stock price has tumbled steadily since November 1998, when Daimler-Benz completed its acquisition of Chrysler Corp. In December, DaimlerChrysler stock traded at just $40, down from a high of $90-plus.
In the United States, industry sales began to soften just as Chrysler introduced its newly redesigned minivan. To make matters worse, Chrysler botched the rollout by producing too many old models, which it had to sell at steep discounts. Chrysler also allowed manufacturing costs to creep up. On a per-unit basis, Chrysler's vehicles are no longer competitive with Ford, the most efficient manufacturer among the Big 3 automakers. To cut costs, Schrempp sent two executives from Mercedes-Benz to oversee the process.
But the problems at DaimlerChrysler run well beyond cost-cutting and product introductions. The company's management is suffering a crisis of confidence, and much of the fault is Schrempp's. Last year, he told investors that the purchase of Chrysler was never viewed as a 'merger of equals.' At Chrysler headquarters in Auburn Hills, Michigan, employee morale plunged. Meanwhile, investors quickly concluded that Mercedes-Benz was not serious about studying Chrysler's practices or keeping its top managers.
As if that were not enough, DaimlerChrysler's partnership with Mitsubishi seems certain to become troublesome. Last year, the company acquired a one-third share of the troubled Japanese automaker. Within a few weeks, Mitsubishi disclosed that it had systematically hidden tens of thousands of warranty claims from the Japanese government over a period of decades.
As the crisis deepened at its Japanese partner, DaimlerChrysler had to boost its equity stake in Mitsubishi to 38 percent and take over operating responsibility of the Japanese firm. Mitsubishi also removed the 10-year standstill agreement, which - incredibly - had not been made public in the initial transaction. If DaimlerChrysler chooses, it can buy a still-larger share of the Japanese company. Mitsubishi's shaky cash flow almost dictates that DaimlerChrysler will commit more cash.
DaimlerChrysler has not determined what to do with Mitsubishi or Hyundai Motor Co., the company's Korean partner. DaimlerChrysler announced plans last year to build a world car, the leadership of which was given to Mitsubishi. Some months later, the leadership was shifted to Hyundai - or so it is believed at Hyundai. It is not clear what the partners' responsibilities will be.
Worse, Mitsubishi has yet to undertake a transformation of its complacent corporate culture. The company's managers appear resistant to DaimlerChrysler's efforts to emulate Renault's turnaround of Nissan. Mitsubishi's potential is much harder to find than Nissan's.
When Renault announced its alliance with Nissan, most industry analysts focused on the risk. Nissan had huge debts, stodgy products and a frozen corporate bureaucracy. Now analysts are focusing on the rewards - Nissan's soaring stock price.
Renault's success was no accident. First, it purchased Nissan at the right time, spending $5.5 billion to gain a controlling 38 percent share of the troubled Japanese automaker. Second, Renault insisted from the outset that it must have operating control of Nissan.
Third, Carlos Ghosn - the Renault executive dispatched to fix Nissan - launched a public relations campaign to convince Nissan's militant labor unions that there was no way to avoid painful cost-cutting. He extracted major concessions from suppliers, while working to retain their allegiance. Ghosn eliminated Nissan's slow-selling models, reduced the number of vehicle platforms and gave more freedom to profitable overseas operations.
Fourth, Renault moved quickly to integrate the two companies' purchasing, technology and products development.
Two years after their merger, the early successes of Renault and Nissan stand in contrast to the lackluster financial results of other mergers. Mercedes-Benz and Chrysler are attempting only a small number of common initiatives. General Motors has accomplished little to date with its investments in Suzuki, Subaru and Fiat. Meanwhile, Ford has moved rapidly to absorb Volvo and Land Rover, but at an enormous cost.
E-mail writer Jay N. Woodworth at [email protected]