Sin or synergy, that is the question

In a recent article in Automotive News, quote machine David Cole from the Center for Automotive Research explained that the Fiat-Chrysler merger is much more promising than the Daimler-Chrysler link-up was, because there is much more product overlap with the new alliance.

It struck me that this was the exact opposite rationale to the one that was touted about the DaimlerChrysler deal back in the day. From a 2001 article on the company:

At its start, the 1998 merger of Daimler-Benz AG and Chrysler Corp. appeared to unite exceedingly compatible partners. Chrysler would marry into a family of prestige, with Mercedes pledging its engineering and technological prowess. Street-smart Chrysler would show its partner how to fight for mass-market success in North America.

The article goes on to detail how this assumption was mistaken, but it really does beg the question of whether overlap is a good thing in a deal involving two car companies. You can argue it either way. You want to avoid overlap, since it doesn't make sense to put resources into two brands that compete with one another. Or, you want to make sure there's some overlap so that you can maximize the sharing of those resources, such as platforms and engines, between the brands.

Both sound kind of right, and saying either will make you sound smart. But at the end of the day, it's all just bullshit. There are too many other factors, like the economy, company talent both executive and otherwise, competitive forces, and pure luck, that influence the trajectory of a partnership like either of Chrysler's. To isolate a factor like overlap is exceedingly difficult, and probably misleading.

But I guess we industry analysts have to make our money somehow.

Bigger is Better?

I recently read a snippet about the CEO of Fiat, Sergio Marchionne, proclaiming that the number of global carmakers will eventually shrink to six behemoths. This, from the over 20 companies of significant size that Automotive News lists on its "Guide to global automaker partnerships". I searched further and found this article. Marchionne says that in order to survive, a company with need a sales volume of over 5.5 million cars each year, a number to which his own Fiat does not even come close.

I don't doubt that Fiat may need a merger to survive, as a recent news item claims it may be seeking. But the fact is, this very same statement was made roughly eight years ago. In a paper I wrote in college in 2000, I cited a claim by many industry bigwigs that by 2010, there would be a lot fewer car companies running the show. How many? The generally agreed-upon estimate was six. In fact, they used a very similar line of reasoning to Marchionne's, stating that there would be two for every major continental base, North America, Europe and Asia. Marchionne has also stated his theory in terms of geography: 'As far as mass-producers are concerned, we're going to end up with one American house, one German of size; one French-Japanese, maybe with an extension in the U.S.; one in Japan; one in China and one other potential European player.'

But the fact is, there hasn't been a huge amount of consolidation in the industry since that first round of predictions almost a decade ago. These predictions were likely precipitated by the "merger" of Daimler and Chrysler in 1998, and the alliance of Renault and Nissan, which had been inked the following year. We all know how the former turned out, creating not economies of scale, but rather one of the largest destructions of company value in automotive history. The latter tie-up is still going strong, and paying dividends, but aside from that, there has been little action that suggests a highly consolidated industry.

And why does Marchionne think that size is inherently good? While it's true that there are obvious advantages that stem from the basic principle of economies of scale, there are also downsides to this, most notably the loss of corporate agility. Corporations like GM have huge resources to offer its producers in each market, but if the act of marshaling those resources becomes cumbersome, decisions cannot be made in a timely manner, and competitiveness suffers.

While GM is a great example of how size does not necessarily equal strength (as is Ford, one of the other four companies cited as above Marchionne's magic 5.5m number), there are some equally good examples of smaller companies that have so far proven resilient in this tough economic climate. Honda is thriving, as Japan's number-two producer, because the company has refused to compromise its ideals. Its growth has been organic, driven by demand rather than production.

An even better example of the principle is Porsche, a company which sold less than 100,000 units last year. Despite its volumes, Porsche has managed its business so well that it is now financially powerful enough to have gobbled up a controlling interest in the only German company that is "large enough", Volkswagen. Porsche has achieved this clout with strict discipline, and tough decisions made based on the existing business and market climate (including the oft-derided decision to market an SUV). 

Size may be what's important to Fiat at this moment, but that doesn't necessarily mean that it is the major determinant to survival throughout the industry. It's true that for any company to survive, it needs to achieve a decent level of scale. But at a certain point, scale can become counterproductive if not managed the right way, and the right product decisions will, in my opinion, always trump size in importance. 

Maserati's Self Deprecation

I just read one of the most interesting car tidbits in AutoWeek. For the first time that I've ever seen, a car brand is trying to knock its own reputation down a few notches.

“We’ve got a situation where prospective customers immediately associate the Maserati name with the likes of Aston Martin, Ferrari and even Lamborghini. That is simply not the case,” [former Maserati boss Karl-Heinz] Kalbfell said in an interview with AutoWeek before his departure from Maserati. “The real rivals are upper-end Audi, BMW and Mercedes-Benz models from quattro, M division and AMG.”

It seems Maser's scaring away prospective customers with images of lofty stickers. Now the the Fiat division is trying to find a comfy nook between the Alfa Romeo and Ferrari brands. They plan to do that with the $130K GranTurismo (above). Let's hope that humility pays off in this situation.