The latest view from the EIU on this week’s accelerating restructuring of the global automotive industry

The former British Prime Minister Harold Wilson once said that a week was a long time in politics. The phrase resonates strongly at the moment for automotive industry observers feeling somewhat dazed by the accelerating pace of restructuring taking place in the automotive industry. Just as news emerged of advanced discussions on co-operation involving DaimlerChrysler and Mitsubishi, Fiat and General Motors announced a strategic tie-up and cross-shareholding. This week has also seen a rapid unfolding of events at BMW, with the strong possibility that BMW will be selling off a sizeable chunk of its Rover subsidiary. What are the key questions and issues regarding the industrial make-up of the global automotive industry right now?

Firstly, some thoughts on what has just happened. It has been an open secret for some time now that Fiat was on the lookout for a strategic partner, in spite of public pronouncements that ‘go-it-alone’ was still a viable option. DaimlerChrysler was looking like a probable suitor, but it seems that being swallowed whole by D/C was fundamentally unappealing to Fiat and its shareholders. GM may look a poorer fit in terms of market geography and product, but the company has a record of letting its partners stay independent and the cross-shareholding deal does that, at least for now. However, that distance between the two partners could leave the synergies from their co-operation on the low side. Cost savings on parts procurement, for example, will be severely limited if the two makers fail to get together in a big way on platform sharing. The pressures to do just that are bound to grow over time.

BMW’s planned divestment of Rover’s mainstream car operation (excluding Land Rover) may please shareholders in the short term, but it leaves BMW itself looking a little vulnerable. The company is left looking uncomfortably small and concentrated in executive and luxury cars. BMW’s strategic policy of the 1990s, which relied heavily on the acquisition of Rover and its constituent parts, is now in tatters. The company’s shareholders may be well known for ‘keeping their cards superglued to their chests’, but they have clearly lost patience with the scale of the losses racked up by the Rover subsidiary. Their displeasure will certainly be noted by VW‘s Ferdinand Piech and can only add to the prevailing sense of nervousness in Munich. The next few months will be telling. A plausible business strategy for BMW is urgently needed.

For the Rover car operation, a leap into the dark with a venture capitalist (‘Alchemy‘) does not augur well for long term security, even if such an owner could reverse losses in the short term. The scale of the task is huge. The fundamental problems facing Rover cars – appalling production economics, a weak brand and a major need for investment in new models – certainly require some very creative thinking. Could a venture capitalist succeed where BMW failed? Could there be any interest in the operation from car-making groups, given the fundamental problems outlined above? It’s hard to be positive.

More broadly, it seems that the process of restructuring in the automotive industry has much further to run. While the number of mergers and tie-ups is increasing with a diminishing pool of independents left, there can be little doubt that the need for further rationalisation is there. Overcapacity is a persistent problem, with some makers still needing to get to grips with more efficient plant-product mixes. The larger groups that have been formed will, over time, exact an efficiency gain borne of global reach and scale economies. Smaller makers can expect to lose share and become marginalised with progressively weakening financial performance. Downward pressures on prices can be expected to continue. The rise of e-commerce will hasten things further: some European makers are already talking about an on-line components sourcing network along the lines of that announced by Ford and GM (which will embrace Fiat and Toyota too). Cost pressures on component suppliers will certainly not go away in these circumstances.

The outlook for the global automotive industry then, is for more consolidation. At the vehicle maker level, keep an eye on Mitsubishi (possible tie-up with Daimler/Chrysler), Daewoo (up for sale), and a clutch of independents hoping to remain that way, but likely to come under pressure, including PSA (Peugeot Citroen), Honda and BMW. DaimlerChrysler, VW and Ford in particular, are on the look-out for more acquisitions.