FEATURE: Paris 2006: the elephant in the room is industrial consolidation
It has been a problem for some carmakers for quite a while now. Just how do you make money in the automotive industry? And how do you catch Toyota? Amid the glitz of the Paris Motor Show, the talk and speculation centred on the next bout of industrial restructuring, writes Dave Leggett.
Motor shows tend to be upbeat, self-confident affairs. For those of us lucky enough to work in a part of the industry where presence on motor show press days, prior to the descent of the hordes, is considered a part of the job, they are - let's face it - fun events to go to. Much more fun than working down a coal mine or, come to think of it, toiling on the production line at one of the factories that actually makes cars or their constituent parts.
Don't get me wrong, there is plenty for a journalist or editor to do at these things, but let's not kid ourselves either: a motor show is undeniably a fun place to be - consumer culture, big business and industrial modernity come together in a funky celebration of the latest in automotive design.
There are new production cars, production concepts, technology showcases and wow concepts. Presentation is an important and fascinating part of the game (you can tell who has been spending lavishly, who has wheeled out the same old exhibition materials and who has gone for a no-frills showroom look). There's also the underlying technology to marvel at, new manufacturing processes to consider. And the designs are, let us not forget, works of art in their own right, too. They also communicate something about the age in which we live.
There are even non-automotive props that sometimes catch the eye (Volvo, for example, had a 12-metre long table football game in its exhibition area last week - don't ask me why). There is plenty to take in and never enough time to see everything.
Naturally, the cars are traditionally the stars. You've read about that wonderful new car that will turn around the fortunes of company X; maybe it starts a new design language, is the first of a hit line or is a last throw of the dice. Now you can get up nice and close - sit in the driving seat, feel the metal, stroke the interior, tap the dashboard plastic, caress the gear knob, hear the door clunk, ask a company representative some awkward questions.
There's an undoubted glamour factor as the auto industry collectively puts on its best frock and face paint to impress journalists, consumers, politicians and the world. Global brands strut their stuff.
You may even catch an F1 driver or a supermodel being wheeled out to support a brand. Politicians mingle with the glitterati, happy to bathe in the show glow (I even noticed a few Mullahs enthusiastically eyeing the cars at a motor show in Tehran a few years back). Crisis, what crisis? You can almost hear a Gordon Gecko-like mantra rising above the background noise of any busy automotive show hall: 'cars are good'.
But in Paris this year the cars weren't the stars. We departed from the usual script. All was not quite right. Attention was firmly focussed, not on the cars, but on a few key individuals and on the state of an industry that has a number of serious stress points.
If there was one man who stole the show it was probably Carlos Ghosn of Renault. This was his manor and he set out his stall for a mob-handed press contingent hanging on his every word. After turning Nissan around, he speaks from a position of some strength.
The message to General Motors was unequivocal: if GM joins the Renault-Nissan alliance, that creates an even more powerful industrial grouping that can exploit big synergistic benefits and save massive costs. But he made it clear that he was not going to force a reluctant partner to join.
If GM says no, he implied, the invitation would be extended to Ford. And there could be a PAG element to that negotiation that would add spice to premium brand challenged Renault. So, Mr Wagoner, reject this overture and then consider the consequences of your biggest domestic rival possibly picking up where you leave off. What would Mr Kerkorian make of that possibility and what would it do to the GM share price?
But for all Mr Ghosn's showmanship last week, there was a sense that things weren't quite going his way. The mere suggestion that he is ready to take what is on the table to Ford said it all. Clearly, the discussions with GM weren't going 100% smoothly.
Willing partners only, please
Mr Ghosn is apparently very keen on what economists call 'Pareto optimal' solutions in which no-one is made worse off by the new scenario. So, no, he doesn't like the idea of upfront cash compensation to GM for scale benefits that skew Renault's way.
To use an oft-quoted illustration, if GM gains $1 from the alliance and Renault-Nissan gains $3, GM is still better off than it would otherwise be. Why should it seek a share of the R-N $2 gain that is over and above GM's? That's the Ghosn view, anyway. Partners should get in deep, share as much as possible and have equity tie-ups so that they have a vested interest in each other's performance.
"No, I don't think you can sustain an alliance if at any point in time we say the one will win and the other will lose," he stressed to an industry audience last week. "We have to make sure that every decision is win-win."
Le Cost-Killer didn't acquire that nickname for fun. He cuts costs and he does it well. Suppliers tend to be big losers.
Cross-functional teams with clout sliced through the keiretsu political flab at the 'burning platform' that was declining, loss-making Nissan in 1999. Purchasing costs were slashed. Platform consolidation across Renault and Nissan is bringing further savings.
Could the same sort of methods work at GM or Ford? Do these companies have low-hanging fruit also? Ghosn's eagerness to add GM or Ford to the R-N alliance suggests that he believes there are significant savings to be made - and quickly.
Ghosn is eyeing synergistic benefits too. He wants 'active' synergies, rather than just 'passive ones'. In Ghosn's ideal scenario, two OEM partners don't just negotiate a volume purchasing reduction on buying, say, standard specification batteries from a supplier. The two partners should be dynamically sharing their experiences and engineering know-how in that area and working with their supplier partner to get a better specified product as well as simply lower unit costs in purchasing. Managers need to have the will to engage and if they do, the more valuable active synergies come into play. That's the theory.
Wagoner plays it cool and ultimately backs out of alliance
Asked in Paris whether GM needs an alliance, GM CEO Rick Wagoner said: "We really don't." Emboldened by a shored up position following improved GM financial results, Wagoner and GM's management has recently been able to credibly counter criticisms from GM's largest shareholder Kirk Kerkorian that GM's North American restructuring needs to be speeded up. That emboldened stance appears to have extended to the alliance discussions taking place over the last two months (which, remember, GM's management was bounced into publicly by Kerkorian).
GM wanted compensation for the skewing of the alliance benefits towards Renault and, especially, Nissan. Ghosn was apparently unwilling to provide that. GM today is in trouble, but it is not quite the desperate 'burning platform' that Nissan was in 1999.
Having announced in Paris that the study into proposed three-way alliance benefits would continue until the agreed completion date of mid-October, the study and discussions involving all three carmakers were abruptly curtailed on October 4th when GM's board unanimously voted (that, curiously, would include Kerkorian's board rep, Jerry York) to end GM's participation.
Upfront compensation for GM (several billion dollars) was opposed by Renault and Nissan and that appears to have been the major fly in the ointment.
GM, then, is sticking with its existing turnaround plan. Is it a victory for Wagoner? You bet. Kerkorian has been faced down, for now. But the pressure is still very much on in terms of continued improvement with respect to North American performance.
Ford now in the alliance frame?
With GM out of the Renault-Nissan frame, speculation turns to its archrival Ford. Would Ford pick up where GM left off? Does the idea of joining up with Carlos Ghosn and Renault-Nissan play better at Ford than it did with GM's management and board?
There is sure to be some lively discussion at Ford's World HQ. The immediate political backdrop is certainly different to GM's. Ford chairman Bill Ford is clearly an admirer of Ghosn, having had many discussions with him in the past (including sounding him out about the Ford CEO role). Joining the R-N alliance might seem like an opportunity to gain some headway in its turnaround plan, which is behind GM's. A creative deal that incorporates some or all of the PAG brands in an equity tie-up of some sort might be attractive to the Renault side, possibly overcoming some of the shares tie-up hurdles in the GM talks. It could be attractive to Ford too.
But would Ford CEO Mulally, still finding his feet, go along with jumping straight in? That's doubtful. He - and others - will likely take the view that more time is needed to assess Ford's operations and determine the best strategy going forward. Ex-Goldman Sachs' Leet still has an input into how Ford needs to 'rightsize'.
Ghosn the showman may have come across as overly opportunistic in recent weeks and GM's reservations on the alliance benefits will have been well and truly noted in Dearborn. Does Ford want Ghosn in the driving seat? How would the Ford family take to ceding a stake in Ford to Renault?
Like GM, many at Ford will take the view that Ford needs to focus on its existing plans to turn round its North American operations.
For both GM and Ford, it may be a case of focussing on existing turnaround strategies for now. If someone has something you want and they cannot get it elsewhere, keeping them on hold may be a viable strategy.
If it emerges - next year perhaps - that either Ford or GM's financial performance is heading south at an unsustainable rate, then other options come into play. A burning platform (like Nissan in 1999) would surely get a better reception from Mr Ghosn. But there again, there are other scenarios, also.
A stressed industry, in places
Taking a step back, how does the auto industry look globally? Ghosn's interest in North America reflects the simple fact that he sees big opportunities there. A flabby Ford and GM, encumbered by high costs locally, are losing out heavily at home while leaner competitors who have set up shop in North America are gaining share.
But their decline at home is not all about cost. The product proposition is recognised as a problem and both Ford and GM have been slow to truly globalise their operations. For too long they relied on North America for sales of big trucks with big margins and, to some extent, it's payback time now.
By contrast, Toyota goes from strength to strength (record sales, record profits, blah, blah, blah) with an increasingly global footprint, state of the art manufacturing processes and products highly attuned to local market needs. It keeps things simple on the brand numbers front. Honda is a success story too, the brand built on similarly positive values ('glocalisation').
In Europe, like North America, cost is the big issue. But the big European companies are not quite in intensive care the way the American Two are (and let's face it, DC is German). Market leading Volkswagen knows that it needs to cut costs in Germany, especially, but Volkswagen AG does at least make a profit. As expected, Volkswagen has convinced labour union IG Metall that VW needs to do a deal to maintain competitiveness.
Renault has the boost from its tie-up with Nissan (which has given it a big shot in the arm on net income in recent years), though Ghosn must surely want to cut costs in France further (something that domestic politics makes difficult). In a move that will not have gone unnoticed at Renault, PSA has announced a series of measures designed to cut cost in Europe, in the face of lower profits and market share.
The jury is out on Fiat. It is feeling the benefit of fresh product, but much depends on whether it can really crack the quality issues that still dog its brands. Crunch time is next year when the glow from recently introduced - and initially well-received products, like the Grande Punto - dims.
Ford and GM can take some comfort from their already heavily restructured European operations, though Ford's loss-making PAG unit provides ample cause for concern.
As Western volume car makers vie for space in emerging markets (especially Asia, but also central and eastern Europe for low-cost manufacturing) to take the heat off problems in developed, mature markets, they must look enviously at premium and niche players. BMW has successfully developed the Mini brand (proving that making cars in Britain can work and creating a small premium hatch sub-segment of the market in the process) and added niche models to its line-up (more pressure for volume makers is coming from executive/luxury specialists adding niches) and Porsche has the biggest profit margins in the industry.
The pressures are overwhelmingly on volume carmakers, but the auto industry is at the forefront of economic pressures globally that are causing a shakeout in manufacturing generally. To compete in world markets, automakers in mass-market segments know that they need to address areas of high-cost and that is the issue driving the industry at the moment.
That is at the heart of proposals for bigger alliances as well as ongoing restructuring efforts in Europe and North America. Asian OEMs are taking their time in planning an assault on world markets. But there is no comfort in that; they are taking their time to get it right. They have sizeable markets, scale economies and low-costs to exploit locally, anyway. No hurry. Western brands may believe that they can command a brand premium on them, but how big will it be?
Asymmetrical company performances have long been a characteristic of this industry. Companies cling on and sometimes survive deep crises (eg Fiat just a few years ago). We all know who the current winners and losers are, that markets and margins are tight, that there is overcapacity. Rough seas are ahead. Some are playing catch-up, but the current winners are not standing still either. Automotive industry history is littered with companies and brands that eventually failed or were swallowed up during periods of industrial consolidation.
If someone had said five years ago that GM and Ford would be so sick in five years' time that there would be a serious possibility that one of them would join a Renault-led corporate alliance, they would have been laughed at. That's a measure of how quickly things have changed and the scale of the challenge faced by the American Two.
Will there be fewer automakers in ten years' time? As Carlos Ghosn put it in Paris last week: "If you say that there are three possibilities - more manufacturers, the same number as today, or fewer - I think that the first two possibilities are not going to happen."
Who would argue with him on that?