The history of the domestic automobile industry is a history of mergers and acquisitions. When times are good, the big fish eat the small fish. When times are tough, the big fish go to school. Witness Ford’s SUV-financed spending spree (Jaguar, Land Rover, Aston and Mazda) and the Daimler/Chrysler and Renault/Nissan mergers. At best, the long-term track record for acquisitions has been spotty, and alliances are equally likely to end in tears. So why do automakers persist?
Acquisitions possess a seductive logic: the “no fear” factors. Factor one: taxes. When a big automaker is doing well they have piles of money lying around. Buying up the competition keeps the taxable profit lower. Factor two: the art of the deal. Many auto industry executives hail from the world of finance. (GM CEO Rick Wagoner is a Harvard MBA.) Pulling off a big acquisition or orchestrating a huge merger is their “project car.” Factor three: capacity. Buying someone else’s production– and, hopefully, customer base– is cheaper and more efficient than building your own from scratch. Yes but…
Troubled automakers are almost always not what they seem. BMW bought Rover thinking it was securing an outlet to the UK’s mid-market. Unfortunately, by the time the Bavarians assumed control, Rover had lost most of its capacity and moved up-market to try to stay afloat. Instead of gaining entry into the middle of the market, the Germans bought the original “English Patient.” GM bought Saab in 1990 to grow a global luxury brand. After spending $1.5b and pouring a couple more billion down a Swedish sinkhole, The General discovered the brand’s glass ceiling: a limited appeal to a limited market willing to pay a limited price.
And speaking of cross-cultural coyote dates, voracious multinationals seem to forget that acquisitions come with their own traditions (i.e. entrenched bureaucracy and petty fiefdoms) and factories (usually old and in the wrong place). Isuzu, Suzuki or Mitsubishi are gold diggers on the prowl: top-heavy companies offering corporate suitors little more than engineering skills and expensive Japanese factories located in a mature market. For these reasons and more, most acquisitions fail miserably and hang around interminably– or at least until the execs responsible leave the company.
Mergers don’t fare much better. Chrysler accounts for the US auto industry’s two most recent mergers (absorbing AMC and being absorbed by Daimler). Fortunately, in both cases, one company was clearly stronger than the other, avoiding many of the problems inherent in any attempt to combine two corporate cultures. Even so, the first merger helped drag the company into bankruptcy, while the second only threatens to do the same.
History tells us Chrysler’s flirtation with oblivion is no exception. When Austin and Morris merged in 1952 to form BMC, the merged corporations maintained separate dealer networks, factories and management identities. As things went downhill, more companies were added to the mix. When Rover finally rolled over and died, it took with it the remains of over a half-dozen carmakers, all united by failure. The modern equivalent could yet be Hyundai merging with Kia: two rival companies with nearly identical product lines and deep-rooted management cultures.
Brand overlap is yet another merger-related nightmare. All car manufacturers’ line-ups span a number of price points and sizes. Adding in a former competitor necessitates realignment and pruning which, again, creates tremendous internal friction. And that’s on top of the fact that the whole point of buying a new brand is to grow sales, and those sales have to come from somewhere, and that somewhere is the industry equivalent of the horror movie's “he’s in the house!” Not to put too fine a point on it, the end result is often a major clusteryouknowwhat.
For example, while Ford has had success with keeping Mazda healthy (if static) and growing Volvo, you could easily argue that this progress has come at the cost of losing sales from (or simply neglecting) Mercury and Lincoln. Meantime Jaguar tried and failed to go down-market (more trouble for Lincoln). GM has had it even worse with Saab, especially since they started moving Caddy into the “sporty” side of luxury.
Common sense says it’s always best to stay focused, be your own man, hunker down and do a few things well– rather than gobble up a competitor and squander your resources on ill-advised brand extensions. Unfortunately, the auto industry tends to attracts egomaniacal leaders who see danger as an opportunity, rather than danger. When they're flush with cash, Empire building sings its siren song. As Ford eyes-up Renault, and other automakers eye Ford’s cast-offs, a word of unsolicited advise: look after your own house before coveting thy neighbor's.
The point made is quite good. Many mergers, and not only in the automotive industry, fail due to misconceptions about the future combined company. However, in the automotive industry, VW has shown that this can work differently as well: VW took over in the 90s Skoda from the Czech Republic and Seat from Spain. Audi is already a quite old acquisition from VW. VW has managed quite well to keep its brand in different segments, although due to extension of the lineups, some overlap has taken place. In any case, VW has shown that you can keep different brands alive, if you give them different lives – for Audi and Seat the sporty image, being in different price segments, for VW and Skoda the Family car image, again being in different price segments.
Sorry, Andrew, but I’m not buying your business logic. You site 3 factors driving auto industry M&A, as follows:
1. tax advantages. Apparently car manufacturers have a lower tax bill from earnings of a competitor they buy, rather than from income from their financial holdings? Well then, why not simply buy stock in another firm and avoid the hassles of a merger? You clearly aren’t an international corporate tax expert and your argument reflects that fact.
2. they like to deal. You site as evidence that Wagoner is from the “world of finance†because he has a Harvard MBA. No, having an MBA means you are educated in business, not necessarily that you are an expert in finance, let alone M&A economics. Also, given that GM has largely been on the merger sidelines under Wagoner, your evidence doesn’t line up with your argument. You’re saying that the Renault/Nissan and Daimler-Benz/Chrysler and Ford/Volvo hookups were caused by a competing executive going to Harvard?
3. manufacturing capacity. For this to be the case, you would need to show evidence of Mercedes production at Chrysler facilities or Renault production at Nissan facilities, or BMW production at Rover facilities. But none of these happened, at least not to any extent that would justify a merger.
In actuality, a merger is caused by one of the following rationales:
A. Expense synergies due to redundancy. You can take out a lot of cost by eliminating headcount that performs the same function at your merger partner. You only need one accounting system, one corporate affairs department, etc. Examples of this include the Nissan Versa and Ford 500, both built off a partner’s platform, saving hundreds of millions of dollars in engineering expense.
B. Improvements from shared expertise. Essentially, taking the know-how of one firm (in quality control, engine design, marketing, etc.) and sharing it with the other. An example of this is the quality improvements at Jaguar under Ford’s ownership, wherein Ford instituted Quality Control processes and Supplier standards that essentially saved Jaguar. (Yes, I know, saved is a strong word, but without the quality improvements, I don’t believe there’d be anything left)
C. Revenue synergies. These arise typically when a small firm is taken over by a large one, and can then leverage the larger firm’s capabilities. You see this in the way that Mini leverages BMW’s engineering resources, engine developments (in the new model) and dealer network.
Finally, I take issue with the idea that mergers don’t work because the end product is not successful. First of all, consider that most mergers in the auto industry in the last two decades have been caused by the near bankruptcy of one of the partners. AMC, Chrysler, SAAB and even Nissan were all on the ropes when they merged. If they aren’t as successful today as BMW or Porsche, it is because they weren’t that strong to begin with, not because the merger failed.
If anything, I see evidence to the contrary. Nissan is doing fantastically well compared to before Ghosn stepped in; look at the stock price if you don’t believe me. Chrysler’s record has been spotty (hasn’t it always?), but it appears to be the least sick of the Big 2.5. What is remarkable isn’t SAAB’s difficulties – how can a small manufacturer of sport sedans compete effectively with BMW, M-B and Lexus? — but rather that Volvo has done quite handsomely since merging with Ford.
I don’t mean to rough you up, Andrew, but I don’t consider this analysis to be worthy of the label “The Truth About Cars.â€
Mazda I think is a huge exception:
a: Mazda has remained a strong, and profitable, company. A huge share of ford’s profits come from tiny Mazda.
b: Mazda has added engineering know-how that ford’s beurocracy would never have gotten internally. 6 speed transmissions on the bread-and-butter cars, the euro focus, good 4-bangers, VVT on the budget V6, crossovers, fusion/milan, etc.
But Mazda is the exception.
Mergers don’t fare much better. Chrysler accounts for the US auto industry’s two most recent mergers (absorbing AMC and being absorbed by Daimler). Fortunately, in both cases, one company was clearly stronger than the other, avoiding many of the problems inherent in any attempt to combine two corporate cultures. Even so, the first merger helped drag the company into bankruptcy, while the second only threatens to do the same.
I’m having some trouble with this paragraph. For one thing, the AMC merger occurred long after the Chrysler bankruptcy crisis was over, and Chrysler never actually did go bankrupt. Care to explain further?
Well then, why not simply buy stock in another firm and avoid the hassles of a merger? You clearly aren’t an international corporate tax expert and your argument reflects that fact.
Wow you’re pretty harsh. Perhaps you’ve never head of goodwill, y’know, the excess of the purchase price beyond the target’s book value? That’s a non-cash expense that might indeed reduce taxable profits. In a good merger the buyer might increase its market share and cash flow, while reducing its profits.
Kevin: point taken. That said, when was the last time you saw 2 auto CEOs on the podium announcing a merger to reduce tax levels? Besides, tax avoidance assumes profitability, a big assumption in this industry.
At the end of the day, there are midsized non-luxury auto manufacturers who are not going to be able to compete with the Toyota. For them, merger may be the only long term alternative to bankrupcy. We may want to see Ford, Peugot and Fiat survive independently, but I think they face long odds.
Great post, Andrew.
IMO, we wouldn’t have such severe cases of badge-engineering if these M&A’s hadn’t taken place (Saaburu, SaabBlazer, Escape/Tribute, Quest/Villager). In few cases, the “lending” of technologies and platforms can have positive results (Mazda6/Fusion), but the temptation to slap a new badge on an existing product is very strong, as we’ve seen.
A guaranteed result seems to be the slower inertia of a larger beast – the reduced ability to make good decisions when a company is larger and more centralized. It leaves me wondering if larger companies mistakenly believe they have the luxury of time, since they can afford to lose money and market share on one model or line (like small cars) for a time while they make it up on other lines (like SUV’s). But, that has placed too many eggs in one basket.
A parallel occurred in the broadcasting industry: When ownership was regulated, companies could only own a pair of radio stations and one TV station in any one market. Listenership was highly competitive, and creativity was strong. Now, a few companies own thousands of stations (I think up to 8 radio stations each in any one market), so on-air mediocrity and simulcasting is more prevalent, satellite radio found a means of gaining popularity, and digital music players and CD’s are more heavily used. It became acceptable for a station to bottom-feed while a co-owned station is making the group money in a combined market share.
Radio gave away their market the same way the 2.5 gave away theirs to Toyota, Honda, etc.
The flip side: Would AMC have otherwise survived as a stand-alone if Chrysler hadn’t acquired them? Jaguar? How long can Mistu stay afloat without a Sugar Daddy?
Sure Mazda and Volvo seem to be doing well despite the merger, but look at Mercury, Lincoln and even Ford. Who only knows how these brands could have faired without attention and cash being pulled away from them to these newer and thus sexier divisions in the Ford empire.
I am curious how many Mazda sales can be considered stolen from Ford.
Did you read the Wall Street Journal editorial yesterday written by the former CEO of Land Rover and Mazda and the former editor of Car and Driver? They basically said “Kill Mercury and Lincoln, sell Land Rover, Mazda, and Aston Martin. Only keep Ford, Volvo, and Jaguar, three global brands that have no overlap. And for heaven’s sake, let these units operate independently so that they can each become strong brands in their own right!” I just about fell out of my chair when I read that.
Then too, when companies don’t understand the importance of a name, you run into problems with acquistions. It goes back to the fact that the automobile industry, most especially the luxury portion of it, is decidedly different from say, soft drinks. The introduction of that (by most enthusiasts I know) term “brand” shows that many of these so-called captains of industry, don’t grasp this.
Going way back in time for an example, consider when Studebaker “merged” with Packard. For a brief time, they kept Packard’s product line separate; and that was a good idea, since looking backwards (and given what I see at auctions) Packard was doing some things to re-build its reputation. But in 1958, when Studebaker decided that the costs of maintaining a separate factory up in Detroit – Studebakers were built in South Bend, Indiana until December 1963 – they took the Hawk, changed the nose a bit with a fiberglass hood and front end – bolted on a supercharger to the Studebaker V8 and sold the last Packard; what most collectors now call a “Packard-baker.” A proud marque thus went into history.
More recently, when the former Chrysler Corporation took over what was left of American Motors in 1987, they kept building the Eagle automobiles (which were, as I recall, essentially Renault for the American market), up in Canada. The Mitisubishi Ecclipse – first generation – was rebadged as an Eagle (again, as I recall). Finally, the Eagle went to that Sargasso Sea of automotive oprhans in the early 1990s.
When Ford acquired Jaguar, they seemed to feel that they could keep the “brand’s” aura going, despite putting Ford engines and suspension pieces underneath the bodies fitted with the famous Leaping Cat. It worked for a short time, in the late ’90s, as peopled looked only at the exterior of the XK8 – most especially the convertible – and felt Jaguar was back.
But when Ford decided to kill the two-seat sports car Jaguar was to make, while persisting to go downscale, with the X-Type (which no less an authority than Larry Edsall of AutoWeek called “the best Mondeo made” at a ride-and-drive I attended in October 2003 for the Prius). Now, perhaps the best thing Ford could do for itself and Jaguar, would be to sell Jaguar off.
Of course, Jaguar may – sadly for those of us who remember what it was and dream of what it could be – also go away. Many people think that Packard started to go downhill when it offered the series 120, the X-type of its time, if you will. The marketplace is a cruel mistress.
“Common sense says it’s always best to stay focused, be your own man, hunker down and do a few things well– rather than gobble up a competitor and squander your resources on ill-advised brand extensions.”
OK I hate to sound like a broken record (I’m NOT a Toyota groupie, only a Toyota owner) – look at the fact that Toyota and Honda pretty much are the only two companies which adhere to the above wise, logical and common sensical advice from your well-written article.
And look what good it has done them, long-term.
Joe C., Mitsubishi HAS a “sugar daddy” – (and “mummy” too) they are called Mitsubishi Bank and Mitsubishi Heavy Industries, Mitsubishi Motors’ original, literal, parents. So, maybe just maybe, Mitsu should stay partnerless and emulate Toyota and Honda on a smaller but hopefully growing, scale.
Why can’t a medium sized car company survive solo? Porsche and BMW can (though paradoxically, Porsche is now less independent having bought into Volkswagen not long ago – a parallel of small Chrysler buying Dodge Brothers in the 1920’s?). The more things change, the more they stay the same.
American Motors probably could not have survived solo, because their management was entrenched in “Detroit think” and because their customer base was no more than 2% of the USmarket when they needed 3-5% in order to spread costs effectively, OR they needed to be able to sell cars elsewhere in the world (as the car companies in the rest of the world do) to spread costs over higher production for a lower market share at home. But this could not happen because few buyers in the rest of the world wanted “American” sized so-called compact cars. (For example, the 1970 AMC Gremlin “subcompact” had a 3.3 liter or 3.8 liter inline six, wheras in most of the world, anything over 1.6 to 2.0 litres is considered a luxury car engine and taxed thusly). Plus due to the huge inline six, the proportions of the car were such that there was virtually no rear seat room and no four door variant.
Now, had AMC executives actually listened to little-ole’ me in 1977 when I was stationed in the UK in the Air Force, they may have survived. I suggested that AMC buy up the entire Volkswagen K70 production line and design, and transplant it to Kenosha, federalizing the car and adding an optional automatic transmission.
The K70 was actually developed by NSU Werk before VW bought it, then brought out as VW’s first front wheel drive car in 1970, built through 1976. It was about the size of a Volvo 140, had front wheel drive and a lengthways engine somewhat like Saab 99’s (only the other way round; Saab insisted on putting the flywheel end of the engine toward the radiator), and was actually one of the most advanced automobiles built until the mid 1980’s – way ahead of it’s time. It seated 5 in comfort, had 22 cubic feet of trunk (about what a full-sized Detroit barge had), 3 brake circuits not just 2, front inboard disc brakes, crush zones for safety, etc. The engine was a unique 1.6 or 1.8 liter inline four with overhead camshaft and hemispherical combustion chambers.
Ironically, AMC DID buy the design to an Audi four cylinder engine right about in that time and introduced it in 1979, and I’ve always wondered if my letter germinated that thought in their corporate minds. They ended up putting the Audi 2.0 litre OHC four into the Gremlin replacement called the Spirit, and the Hornet replacement called the Concord, offering the engine along with their big heavy sixes. The K70 would have done them proud, had they gone with it, IMHO. They could have reskinned it in the early 1980’s and it’d have continued to sell, just as Toyota continues to sell Camrys.
Here are some links to K70 information if anyone cares to see this technically interesting car in further detail online.
http://www.motorbase.com/vehicle/by-id/-651035946/
Here is the best site I’ve found.
http://web.telia.com/~u31614134/eK70.html
Glenn, Thanks for the lesson and the link. You can really see where the look of the ’85 Audi 5000 came from!
Very interesting post and discussion. I also like that photo of the Mercedes, uh, Chrys… I mean Rambler.
Does anyone have a complete (or mostly complete) list of all car makers and who they’re owned by? Maybe even a history lesson? Thanks!
JohnB-
Automobile Magazine had a chart in an issue earlier this year, listing which companies owned what percentage of each other.
Last month’s issue had a chart where many of the major car designers have been the past 2 decades, lots of arrows all over the place.
Hmm i was expecting a more exciting reading with the Sexy Eagle Wagon picture. oh well i guess looks can be decieving.
Anyone who suggests that mergers are not at least partly a matter of managerial hubris is simply not paying attention. Flush with cash a firm can do a number of things, buy back its’ own stock, raise stock dividents, invest in capital projects, or buy another firm. Most managements are allergic to the second, which leaves the other three. That is when the MBAs go to work, and like GM in the ’80s with its’ Hughes and EDS purchases, or Ford with its’ lux badge purchases, decide that there are better uses of their money than investing within the firm. It doesn’t mean that they have invested nothing in improving/creating domestic plants, it is just that some things look more interesting, compelling, ptentially more profitable. The problem with all of those snazzy scenarios and equations justifying those purchases, eveything always hinges on a set number of guesses, and if those guesses are wrong, the whole equation becomes non-sensical. Given that boards and top executives are usually there because they agree on most things, the dire problems of a Jaguar or Rover may not be brought up. Oops.
For instance the justification for buying Jaguar was logical when you thought about leveraging the brand downstream, combining platforms with Lincoln, and assuming that as an old line British firm there could by substantial savings to be made in the bureacracy. Alas the production facilities demanded far more investment than presumed, leveraging downstream was a debacle, the Lincoln/Jag sharing buggered up both brands, and you ended up with a storied brand wandering around looking for a purpose. And if you wanted to keep your job, mentioning these caveats to Jaques Nasser before the fact was not a good idea.
The reason Iacocca wanted AMC was Jeep, not the AMC passenger cars. The unibody ’84 Cherokee singlehandedly put the SUV on American families’ shopping lists.
and it was Jeep that Daimler Benz wanted Chrysler for.
And it was Land Rover that BMW wanted when they aquired Rover, and what Ford wanted and bought after BMW:s fiasco with the english patient. Was it $1 billion?
Nobody has mentioned GM, the original merger monster. Eighty years later, Olds is gone, and the differences between Chevy and Pontiac, Buick and Cadillac, Chevy trucks and GMC, are as difficult as ever to discern.
How much money does GM waste in developing four different versions of each platform? If they invested all that money in developing one outstanding model instead of four at best mediocre versions of the same car, they might be able to compete.
fishiftstick:
Having all those brands used to make sense. There was a clear ladder of prestige from Chevy to Pontiac to Olds to Buick to Caddy. Heaven forbid if the prices overlapped too much. But that was also a world in which each brand had maybe 1 or 2 models. Now an “entry level” brand with 10+ models spans a much bigger price range, and prestige brands have introduced lower-priced models. This has effectively removed some rungs for the ladder, where you only need two rungs, entry and prestige. (i.e., Toyota/Lexus, Honda/Accura). In this world GM would only need Chevy/Caddy and make Chevy’s the best they can be instead of trying to make them look inexpensive next to a Pontiac.
Ingvar: Ford paid almost 3 Billion $ for Land Rover.
But something tells me that big doesn’t always equal beautyful. I mean if a small niche company like Porsche – that has only three model lines (911, Boxter/Cayman, Cayenne) and doesn’t even sell 100,000 cars per annum – is able to buy enough shares of a huge company like Volkswagen to basically take over control, you have to wonder about which strategy is the right one.
Kia is already owned by Hyundai
Back before the 70’s, the GM model worked because of an iron line drawn between each marque. For example, at my father’s dealership a (say) 59 Impala (top of the line) hardtop sold for about $3300.00. If you went to the Pontiac dealership, that same amount of money bough you a Catalina 9bottom of the line) hardtop, which had an interior equal to a Chevy BelAir (one model down from the Impala). Therefore you bought a more prestigeous nameplate, but got a bit less car for the same money.
This system started to go wrong in 1961 when Pontiac, Oldsmobile and Buick started demanding their own version of the Ford Falcon (1960’s big seller). So Pontiac got half a conventional car/half a Corvair, the other marques got small conventional cars. This situation was exaserbated (sp?) by Chevy getting the Caprice in 1965, putting it squarely in Pontiac territory. By the way, this supposedly happened because of an internal memo that division heads had to drive the marque they managed – no automatic Cadillac’s anymore – and the Chevy brass wanted something more in line with their supposed stature.
By the 70’s marque identity was forever gone except in a negative fashion (Oldsmobile’s are for senior citizens only, etc.).
Syke
Deranged Few M/C
—The reason Iacocca wanted AMC was Jeep, not the AMC passenger cars. The unibody ‘84 Cherokee singlehandedly put the SUV on American families’ shopping lists. —
Don’t forget the the brand spanking new manufacturing plant that Renault built in Bramlea, Ontario.
What Chrysler paid for the whole of AMC (including the “Jeep” name) cost less than half what Renault paid to build the plant a few years before.