The new European order

Mergers and deals have left Europe's car industry in a surprisingly healthy state

THE car industry has been consolidating almost since it was born. In the late 1920s there were 270 car companies, mostly in America, before the Big Three gobbled them all up. Today, with the industry fully mature, there are only seven big groups and three smaller ones. Back in 1986, the late Gianni Agnelli, who spent over 30 years at the head of the Fiat Group, forecast that by the end of the 1990s there would be only half a dozen big carmakers left worldwide. He was not that far out. In volume terms, six groups, GM, Toyota, Ford, Renault/Nissan, Volkswagen and DaimlerChrysler account for some 70% of global sales, including their affiliates.

The three big consolidation deals of recent times have all involved European companies, and have produced mixed results. BMW bought Rover from British Aerospace in 1994, seeking to reap economies of scale by roughly doubling its output to 1m vehicles, and acquiring the strong Land Rover brand as part of the deal. But because it failed to appreciate how deep Rover's problems were, it did not put them right.

Six years later, when it gave the company away to a consortium of businessmen and employees from Britain's Midlands, it was left with the successful Mini brand, manufactured in the old Rover factory in Oxford. Even though the Mini is a runaway success, it is not much to show for the $5 billion that the German company poured into its “English patient”, as Munich wags used to call it. But at least the Mini brought BMW's sales up to the 1m mark and helped it overtake Mercedes (excluding Chrysler) in global sales in the first half of this year, for the first time ever.

One reason Mercedes has been overtaken is that top management at its parent DaimlerChrysler has been preoccupied with its own acquisition problems. When Daimler-Benz announced its merger with Chrysler in 1998, the bosses of Toyota's American subsidiary held an impromptu party at their head office in the suburbs of Los Angeles. They foresaw what the Germans did not: that the sheer difficulty of a transatlantic merger would distract Chrysler and boost its competitors.

They were to be proved right, but the damage went even deeper. Last year, the combined stockmarket value of the two companies had fallen to about half the sum of their separate valuations before they merged in 1998. The merger (which was really a takeover of Chrysler by Daimler-Benz) reduced the value of the two businesses by $28 billion. Like BMW with Rover, Daimler failed to look closely enough at Chrysler's business before tying the knot. The smallest of America's Big Three looked good at first sight, but its best-selling products were ageing, its quality was slipping and it had nothing much in the product pipeline.

Moreover, the Germans were slow to get a grip on Chrysler's management. It took them about two years to put in the engaging Dieter Zetsche, who had what it took to start turning Chrysler round. Unfortunately the company's revival coincided with the latest round of price-cutting, leading to last year's big write-off and the postponement of break-even hopes for 2003. But the latest Harbour report (a snapshot by a respected consultancy of the American car industry, both American- and foreign-owned) shows that Chrysler has made great strides, with efficiency rising by 16% in the past two years. Even so, Chrysler last year was losing a hefty $496 on every car it sold, compared with Ford's modest $48. GM was making a profit of $178 per vehicle, but was still completely outclassed by the Japanese: Honda made $1,488, Toyota $1,742 and Nissan $2,402 per car.

DaimlerChrysler's management thinks that in the longer term it will be able to reap huge benefits by transferring more Mercedes technology, parts and manufacturing know-how to revive Chrysler. But sceptics point out that the company has also been slow to turn round its Japanese affiliate, Mitsubishi Motors. Last spring DaimlerChrysler's chief executive, Jurgen Schrempp, proposed putting more money into the Japanese company to help it restructure, but DaimlerChrysler's board preferred to let Mitsubishi's Japanese keiretsu partners take the strain.

Fitch, one of the big credit-rating agencies, upgraded DaimlerChrysler in May, which should help the company's bonds. Analysts expect the group's pre-tax profits to recover from last year's depressed €596m ($673m) to over €5 billion this year and €7.3 billion in 2006. So after several wasted years it looks as though the benefits from the merger may soon start to flow.

The standard against which motor-industry get-togethers have been judged in the past five years has been the spectacular alliance of Renault and Nissan, which amounts to a virtual merger without the pain of fully fusing two companies. When the French group announced in early 1999 that it was taking a 37% stake in Japan's perennially loss-making second-biggest car company, virtually nobody in Japan thought it would work.

Renault renaissance

But within two years the man in charge of rescuing Nissan, the Brazilian-French Mr Ghosn, had turned it from loss into profit by closing factories in Japan and speeding up the development of more attractive cars by Nissan's impressive engineers. Once it was clear that Nissan was starting to reduce its huge debt burden, Renault increased its stake to 44%. But the two companies are keeping their separate identities in order to retain brand loyalty and employee motivation, “the fuel on which companies run”, as Mr Ghosn likes to say.

The architect of the Nissan deal was Louis Schweitzer, the chairman and chief executive of Renault. Mr Schweitzer had been running the rule over Nissan since the mid-1990s when he became concerned, after Renault's part-privatisation, that it was too dependent on France and western Europe. Part of the attraction of Nissan, he says, is that “it gave us entry into Japan and the United States”: Renault had twice before had to beat a retreat from America. Mr Schweitzer had always thought there was a 90% chance that the deal would work, otherwise he would not have risked investing $5 billion (half Renault's equity) in ailing Nissan. But many thought him crazy.

After the stockmarket crash in Asia, Renault felt that it could at last afford to acquire control of Nissan without bankrupting itself: Renault's market capitalisation on its way up overtook Nissan's on its way down. A letter to Nissan's boss in January 1998 was well received. What Mr Schweitzer did not know at the time was that Nissan had approached both Daimler-Benz and Ford for a rescue, but both of them had shied away.

Now Renault and Nissan are pushing ahead with their plans to share car platforms, reducing the number across the two companies from 40 in 2000 to ten in 2010. This will open the way to common purchasing which Commerzbank analysts reckon will save them more than €500m a year. On top of such operational savings, Renault will this year derive about a fifth of its profits from Nissan dividends.

For much of the past decade, the two surprising stars of the European volume car market have been Peugeot and Volkswagen. Peugeot delivered outstanding shareholder returns by keeping a tightly focused range of products, refreshing them often and refusing to spend too heavily on new capacity. Instead, in keeping with its stern Protestant roots in south-eastern France, it sweated its assets and ruthlessly pushed through changes in working practices to achieve more flexibility. It also benefits from using the same components to produce two complementary brands with very different customer appeal. Other assets include its excellence in diesel engines for small cars and its joint ventures for engines, small vans and small cars with partners that include Ford, Fiat and Toyota, with which it shares a factory making a cheap car in the Czech Republic.

Volkswagen's profits are falling fast, but it is tackling its high costs. Its big challenge is to show that it can manage its sprawling stable of brands, ranging from Bentley and Lamborghini to Audi, SEAT, Skoda and VW itself. To introduce more coherence, its boss, Bernd Pischetsrieder, appointed Stefan Jacobi as director of marketing for the whole VW group to ensure that none of the brands got in each other's way.

Europe's three weak brethren are Fiat, Ford Europe and GM Europe. Fiat seems to many observers to be in terminal decline, not least because of the frequent changes in its top management and the refusal so far of GM, which bought a 20% share in the Italian company four years ago, to take up its share of a recapitalisation last year. Its stake in Fiat Auto is now down to 10%. But the present head of Fiat Auto, Herbert Demel, is pressing ahead with a rescue plan drawn up with the banks, and the company has had a hit with its new Panda small car. Fiat was nearly sold to DaimlerChrysler in 1999, but Gianni Agnelli, the patriarch of the controlling family, could not bear to lose it. An earlier attempt to hook up with BMW had fallen at the same hurdle.

Ford and GM used to mint money in Europe when local companies such as Renault, Peugeot and Volkswagen were not doing very well and imports from Japan were restricted. But since 1984 Nissan, Toyota and Honda have been opening their own European factories and the competition has grown tougher. Toyota alone now has 5% of the European market. In the past decade Ford and GM have lost billions in Europe. Last spring GM's boss, Rick Wagoner, asked his number two, Bob Lutz, to sort out the company's European operations. Within three months Mr Lutz, a Swiss-born American who once ran Ford Europe, had created an integrated structure to bring together GM's three previously disparate European businesses, Adam Opel in Germany, Vauxhall in Britain and Saab in Sweden. Fritz Henderson, a former boss of GM Latin America and GM Asia Pacific and, at 45, a rising star in the company, has been charged with putting Mr Lutz's plan into effect. In June he became head of GM Europe in Zurich.

What a difference a decade makes

Ten years ago Europe's car industry was struggling. Its premium marques, Mercedes and BMW, had yet to emerge as strong global brands. Volkswagen was dragged down by the acquisition of a Spanish firm, Seat, and by its high production costs in Germany. Renault's attempted merger with Volvo had fallen apart after the Swedes resisted French government dominance. Little PSA Peugeot Citron seemed too small and too restricted to Europe to survive.

Now BMW and Mercedes have broken through in global markets, and Volkswagen has grappled with many of its problems and made progress in America and in China. Peugeot has done rather well and is no longer so heavily dependent on France. Renault has changed the industry's entire landscape with the Nissan deal. With the exception of Fiat, the European industry is in surprisingly good fettle. Even Daimler-Benz's ambitious transatlantic leap to join with Chrysler is at last beginning to show signs of working. That leaves only Fiat still stuck with losses.

Mergers and deals have left Europe's car industry in a surprisingly healthy state. Article forms part of a survey on the world car industry.

• Primary Source