Take-overs put car giants in pole position

Date: 20/07/2000

By Bruce Barnard

THE running battle between European Commission trustbusters and car manufacturers makes for colourful headlines, but it is a sideshow for an industry approaching the end-game in a massive global consolidation.

The Commission watchdogs are still on the warpath even though the European Court of Justice reduced a €90-million fine imposed on Volkswagen by regulators for allegedly restricting cross-border sales earlier this month. They are due to decide by the end of this year whether to fine DaimlerChrysler and Opel Nederland, and are continuing a second investigation into VW's activities alongside probes into Renault and Peugeot.

But the industry risks a much stiffer penalty, with Competition Commissioner Mario Monti warning that its behaviour will be taken into account when he reviews an exemption from the Union's anti-trust rules which allows car manufacturers to run tied-dealer networks. He has already said that he may radically change the 'block exemption' which expires in 2002 because there is not enough competition in the Union's car market.

Serious stuff - but not as serious as a whirlwind consolidation process which is shrinking the global industry to a half a dozen top players and threatening the independence of famous names, many of them European.

Even after spending a record €76 billion on mergers, acquisitions and alliances in 1999, the world's carmakers are still closing multi-billion-euro deals almost by the week. This global consolidation, which began in earnest after Daimler swooped on Chrysler in 1998, left six companies accounting for around 70% of the world's output of 45.4 million cars and light trucks in 1999. A few years ago, the same market share was split between a dozen firms. This year, the top six will probably account for 75% of global sales.

Even as they plot their next merger or acquisition, car manufacturers are pushing through massive cost-cutting programmes to cope with overcapacity and wafer-thin profit margins as well as responding to the arrival of the Internet which promises seismic changes in the way the industry does business, from ordering parts to selling cars.

Meanwhile, Europe's car manufacturers continue to confound the pundits who predicted that they would be sandwiched between the US' 'Big Three' - GM, Ford and Chrysler - and the super-efficient Japanese firms. In fact, they have clawed back market share in Europe from US and Japanese rivals and are competing head-to-head with the Americans in the Asia/Pacific markets.

Renault has survived scores of premature obituaries with a vengeance, with its trail-blazing €5.8-billion acquisition of a controlling 37% stake in Japan's troubled Nissan last year making it the second largest European player after Volkswagen and catapulting it into fifth place in the global rankings. A loss maker seven years ago, VW has (profitably) surged to third place in the global league and top spot in Europe with a strategy of making a large range of cars targeted at niche markets based on a few chassis and engine designs to reap massive economies of scale.

France's family-controlled PSA Peugeot Citroen has beaten the odds too, capturing 12% of the European market last year, second only to VW, after a 10% jump in sales. It was also the continent's most profitable manufacturer after a 50% leap in 1999 earnings boosted its return on capital employed to 14.2%, up from 2.6% in 1996. It is now expanding overseas to lessen its dependence on Europe: most recently, it announced a €429-million investment in its Argentinean subsidiary, Sevel Argentina, to double local production to 70,000 units annually for domestic and foreign sale.

Ford, by contrast, is on the rocks in Europe, where it can barely turn a profit following a 25% plunge in its market share to 9.1% in 1999 and on the way down to 8.7% this year. Ten years ago, Ford would have used a Japanese formula as a springboard for recovery: today, its marketing and design role model is Volkswagen.

To be sure, there are still question marks over the future of European manufacturers like Peugeot and Fiat, which are in the second tier of the global manufacturers with market shares of 3%-5%, and BMW, which spent €4 billion on the UK's Rover in an abortive attempt to guarantee its independence by becoming a volume car maker. The fate of Peugeot and BMW will be decided by the Peugeot and Quandt families, who are being discreetly courted by Volkswagen and cash-rich American suitors like GM and Ford which want to add to a quality European portfolio that includes Jaguar, Land Rover, Aston Martin, Saab and Volvo.

Fiat moved to secure its future with a €2.6-billion cross-shareholding alliance with GM which gave the world's largest car maker a 20% stake in Fiat in return for a 5.1% holding in GM. It has also reduced its dependence on Italy and Europe: ten years ago, Italy accounted for 56% of sales and only 9% of revenues were generated outside Europe. Last year, Italy notched up only 38% of sales and 26% of revenues came from outside Europe. The company also is diversifying, spending around €6 billion last year alone on non-car businesses such as insurance, leasing and production systems.

For the moment, the battle has switched to the Asia/Pacific region, where two thirds of growth in sales is expected over the next ten years. Renault moved into pole position in Japan with its Nissan deal, which dwarfed the presence of Ford and GM in Asia's top production and sales market, and was also first to move into South Korea with the purchase of a 70% stake in Samsung Motors in April. Both deals were gambles and both are potential winners: using the strategy which turned its operating loss of €914 million in 1996 into an operating profit of €1.48 billion in 1999, Renault is confident of turning round Nissan and expects its joint venture with Samsung to be in the black in 2004.

The Americans were already entrenched in Japan: GM owns 49% of Isuzu, 9.9% of Suzuki Motors and 20% of Fuji Heavy Industries, the owner of Subaru, while Ford controls 33.4% of Mazda. But they have been boxed in by Renault's 'take-over' of Nissan and DaimlerChrysler's recent €1.28-billion acquisition of a 33.4% stake in Mitsubishi.

DaimlerChrysler upped the stakes in June by paying €458 million for 10% of South Korea's Hyundai, another deal designed to move closer to chief executive Jurgen Schrempp's goal of generating 25% of sales in Asia within ten years compared with 3.2% at present. Ford hit back within days, edging out DaimlerChrylser and GM with a €7.38-billion bid for South Korea's Daewoo, one of the last available companies in the region.

This frenzied activity on the other side of the globe has distracted industry executives from the local difficulties in Brussels. But that could turn out to be an expensive mistake.

Major feature. The running battle between European Commission trustbusters and car manufacturers makes for colourful headlines, but it is a sideshow for an industry approaching the end-game in a massive global consolidation.