INTERVIEW: Martin Leach, Magma CEO

By Dave Leggett | 16 July 2013

Martin Leach

Martin Leach

Martin Leach, the former head of Ford of Europe, Mazda and Maserati, now runs Magma - a multi-faceted automotive industry consultancy and service provider. Dave Leggett recently caught up with him in London to hear his views on the current state of the automotive business and the challenges ahead.

DL: What's your view on where the automotive industry is right now? Is this recession very different from what we have seen before?

ML: Yes, I think things are different. The industry has evolved into an entirely different space. There are a number of global players now who are extremely strong and extremely dominant and are profitable. They are using their strength and their profits to reinvest and become stronger and more profitable. That's a challenge for the bunch of players who are not strong. They are really struggling and I think they are going to continue to struggle.

It used to be sufficient in the past that you could have one knockout new model and that would be enough to change the dynamics of what is going on, but it looks like that is no longer enough. Product execution has become so much better across the board that it is hard to carve out a dominant position on product excellence alone.

That means you are back to looking at the business strategy side of things. There are people now saying things like 'Europe is going to be in this mess for twenty years' so nobody is thinking that Europe is going to come back anytime soon.

DL: Global market dynamics are continuing to shift? 

ML: Yes, I think so. 

I think most people expect China to continue to grow but there could be some bumps along the way, perhaps some bumps that are bigger than we have seen before. The Chinese market reacts very quickly. The companies doing very well there now could suddenly find that things have reversed very quickly. There could be some shocks along the way.

Changing market dynamics are a big issue for companies to grapple with. There used to be a polar axis between Europe and North America and now there is increasingly a polar axis between North America and Asia, and China in particular. Europe is looking increasingly like a sleepy backwater. 

Companies have to adapt their business strategies to these shifting market relativities and also be able to react quickly to changes.

DL: How do you feel about the impact of technologies – like smart connectivity - on the automotive business?

ML: Businesses are struggling to deal with the impact of some new technologies. Some of these impacts are going to be much greater than many people realise. There are a number of challenges for which the OEMs are not very well prepared. We're talking about challenges like redesigning how they do things. What we observe is that businesses do not have spare resources, neither do they necessarily possess the critical competencies to redesign how they do things for the twenty first century. Finding ways to achieve that – whether through outsourcing, bringing on new competencies, setting up whole different organisations – the OEMs are going to have to react and react quickly.

DL: In terms of the automotive value chain, where do you believe the pressures for change are strongest?

ML: The part of the value chain that matches a customer to a car is far too expensive for the value that it adds. Over time that part of the value chain is going to be squeezed, distribution models will evolve. At the moment we have a one-size-fits-all distribution model across the whole world. It won't change rapidly in North America because of the State franchising laws, but in other markets it could change very quickly. We may even see a market like China leading in terms of new styles of distribution, because they do not have the legacy of the 125-year-old model yet. People there are more likely to consider buying online and the primary source of reference for a new car purchase, in China, is another family member. So you have all the ingredients for a socially inspired distribution model. China is not just consuming ideas from the West, it's a place from where new ideas can be expected to emerge.

DL: Returning to Europe, the problems in the crowded marketplace look pretty acute. The traditional mid-market volume brands are being squeezed. Do you think we will see a big brand disappear?

ML: History tells us that it's unlikely that we will lose a big player. People tend to struggle on for a long time. Who's to say, for example, that there won't be a so-called French solution with Renault and PSA?

And it seems that [at Fiat] Marchionne's plan is working after a fashion, with the addition of Chrysler really strengthening the potential for Fiat, otherwise they would probably be worst placed of the major OEMs...

DL: But for all the tough talk, Marchionne has not cut much capacity in Italy has he?

ML: I think you will find that he has taken cost out, but the symbolism of shuttering whole plants is not there. Once a plant has been built, you don't necessarily save cost by blowing it up and tearing it down. You can save cost by stopping people walking in through the gates and I suspect quite a lot of that has happened. There's the old saying 'cost walks in in the morning on two legs'. 

DL: He also cut back on new product development. Was that wise?

ML: The strongest players are getting stronger because of outstanding product. Ultimately, if you are postponing and cancelling programmes, all the evidence I have seen over the years suggests that you are actually moving yourself into a worse place. The competencies of the key players are so strong now, that any reduction in your corporate competency reduces your corporate value. There have been huge reductions in the R&D workforce at Fiat and they may ultimately pay a high price for that.

DL: Do you think we will see the Chinese automakers moving more forcefully into Europe?

ML: I think the Chinese will come, but that will generally be via a circuitous route. The Chinese producers are exporting to some of the 'less demanding' – from a product acceptance or regulatory point of view – markets. They are clearly learning through that process but I think it will be a long time before we see any significant Chinese representation in major European markets. The important word there is 'significant'. As the Chinese five-year plans evolve, they have already indicated a desire for domestic brands to enter into export but the product currently is generally not at a competitive level for mature markets such as Europe. It would have to be heavily discounted and then you start to propagate an image that you do not necessarily want longer term. Chinese designed and branded products are not going to be coming as quickly to Europe as some had thought they would.