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Friday, September 09, 2005

Automobiles : Disastrous Merger Mania

Automobile – mother of all industries is always a keen industry to watch – the industry besides being the most impactful in business has contributed immensely to the development of several management frameworks and has always been a trendsetter. The Economist writes about the challenges before the global automobile industry include Chinese cars, rising fuel prices etc. Excerpts with edits & comments about the article:

In mature markets, over-capacity continues to sap profitability. China and India shall power the growth of the industry .In the next 20 years more cars will be made than in the entire 110-year history of the industry. Experts say this growth will create the need for 180 new factories, each producing 300,000 cars (and light trucks) a year - in effect, almost doubling the production capacity of the global industry to over 110m units annually. Today's car plants will need to be "renewed, retooled, refurbished and replaced to remain competitive. There is nowhere for the inefficient to hide". Not a good message for today's established big producers, facing difficulties to compete. Some observers predict just that: famous carmakers will own the technology and brands, while manufacture and distribution will be contracted out to parts-makers or general engineering manufacturers. Today the top five company alliances account for 75% of the global market, while adding the next five takes this to 90%, with producers in China, India and Malaysia making up the rest. The strategy of consolidating behind the brands has not been entirely successful: indeed there is an inverse correlation between the number of brands a firm possesses and profitability. The most sensible of the carmakers has spurned the consolidation game. Toyota is growing fast and the speed at which GM is shrinking, the day when Toyota becomes the biggest is probably no more than five years away. Its market capitalisation, at $150 billion, is greater than that of GM, Ford and DaimlerChrysler combined ($90 billion). This superiority has been achieved by concentrating on organic growth.
The trend has shifted from making large numbers of a few models to making a few copies of a lot of derivatives. Creating niches from common platforms is the new way to compete. The greater the specification by consumers, the higher the premium price the carmaker can command. John Murray, chair in Business Studies at Trinity College Dublin, points to a worrying loss of power by the carmakers, rather than the expected gain. The makers have pushed much of their intellectual property away to the first tier of component suppliers, which have taken physical assets along with the necessary skills. And downstream, the new multi-brand retailers and the internet-savvy consumers are together gaining power and a bigger chunk of the value chain. The so-called car manufacturers are going to be left to take care of just design, marketing and brands - a long way from the traditional skill of managing big manufacturing businesses. The car industry could probably now cope with an implosion of the assemblers, thinks Mr Murray. β€œAn alliance of Tier One component integrators and the new major retailers could happily fill the vacuum.” Clearly interesting possibilities lay ahead. Yesterday's predators, obsessed by their takeovers and mergers, will give way to nimbler, smarter carmakers that will reshape the global industry.

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