6. Marriages made in hell

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The troubled history of carmakers' mergers

Mr Marchionne, the corporate troubleshooter, who, since 2004, has been responsible for a highly successful turnaround at Fiat, has reached the conclusion that volume carmakers will in future need to sell at least 5.5m vehicles a year to be viable. He reckons that only those firms, such as Volkswagen and Toyota, which can extract sales of around a million a year from each of a handful of expensively-developed platforms (these are a car’s architectural underpinnings, on which a variety of models can be based) can hope to be consistently profitable.

Adam Jonas of Morgan Stanley questions Mr Marchionne’s faith in scale, suggesting it is a function of success rather than prerequisite for it and gives warning that even successful mergers bring with them “many hidden cost burdens (financial and non-financial)” and that these can spiral if things do not go well.

Sceptics say cross-border mergers in the car industry have a poor record. Their doubts are rooted in experience. With the partial exception of the alliance formed between Renault and Nissan a decade ago, auto-industry mergers usually go wrong and destroy rather than create value. Two of the most notorious were the unhappy marriages between BMW and the ailing British car firm, Rover, and Chrysler’s own supposed “merger of equals” with Daimler-Benz. In both cases, the German premium-car maker believed that it needed increased scale and that taking over a volume maker would make this possible without a potentially risky brand extension.

In particular, BMW wanted a presence in the markets for small cars and for SUVs, while Daimler thought that Chrysler’s brands were below Mercedes’s, “but not too far below” and that it could learn from Chrysler’s skills as a low-cost producer—especially the way it handled supplier relationships and the speed with which it brought new products to market.

Not only was the premise behind both mergers mistaken—BMW and Mercedes have subsequently discovered that their brands can be safely extended much further than they had once believed—but the implementation was flawed from the outset for not dissimilar reasons. Although Chrysler had given every appearance of being in much better health than Rover (at the time of the merger with Daimler in 1998 it was one of the most profitable car companies in the world), both firms suffered from fundamental weaknesses that their German owners, partly out of mistaken tact and concern about provoking political hostility, acted only very belatedly to correct. Instead of doing the difficult things immediately, they let things drift.

In BMW’s case, it should have concentrated all its resources on reviving Land Rover and reinventing the Mini instead of lavishing resources on the dying Rover brand. BMW’s boss at the time, Bernd Pischetsrieder, believed that with BMW’s help Rovers could be exported as the “slightly premium” option in every segment, while BMWs would be the sportier, more expensive choice of keen drivers. It was a fantasy that masked the degree of Rover’s weakness and diverted BMW from doing more sensible things, such as consolidating purchasing and closing down the hopelessly outdated Longbridge factory in Birmingham.

A further problem was a growing rift within BMW as to whether the “English Patient” was worth the time and money it was absorbing. Far from ensuring BMW’s independence, Rover was imperilling it. In 2000 BMW finally extricated itself, paying some former Rover managers to take the thing away, selling Land Rover to Ford and keeping Mini. All told, the cost to BMW was about $7 billion and six years of heartache and distraction.

Something similar happened to the ill-fated DaimlerChrysler. Because it was meant to be “a merger of equals” and Chrysler was superficially in good shape when they bought it, the Germans waited far too long before dealing with some fairly obvious problems. Having allowed a leadership vacuum to develop at Auburn Hills (Chrysler’s HQ) as senior American managers who had been enriched by the deal drifted away, Daimler only acted to cut costs and capacity in late 2000 when the market had turned down and Chrysler was burning cash at a rate of $5 billion a year. But despite the best efforts of Dieter Zetsche, the Daimler manager sent out to get a grip on things, the cultural chasm between the two partners became wider.

In a bid to centralise purchasing, Daimler undermined one of the best things about Chrysler, its collaborative relationship with suppliers. Nor was there any synergy between the departments developing new models. Daimler's engineers thought Chrysler’s slapdash, while their American opposite numbers found them arrogant and ignorant about the needs of volume manufacture. The hope that platforms and powertrains would be shared was only implemented half-heartedly — the Germans in Stuttgart were reluctant to allow Chrysler technology they thought should be reserved for premium Mercedes cars.

Worse still, during the nine years of the marriage with Chrysler, Mercedes’s reputation for gold-standard quality took a battering. When in 2007 Daimler, now being run by the same Mr Zetsche who had tried to save Chrysler six years earlier, finally decided to bail out, its share price shot up. As a measure of the pitiful state in which the Germans had left Chrysler, its new model pipeline was almost empty and with only one or two exceptions the cars it was selling were old and uncompetitive.

The alliance between Renault and Nissan has, on the whole, been a much happier affair, although it is no longer regarded within the industry as quite such a shining exception as it was a few years ago when Carlos Ghosn, its architect, was the most feted car boss in the world. The secret, according to Mr Ghosn, has been in allowing the two companies to work as two distinct, but co-operating entities. He says: “You must be ambitious for the relationship, but not try to dominate or you will pay for it afterwards.” The alliance had taught Renault to become a global company and taught Nissan to be much bolder. Its guiding principle is that each can benefit from the other’s strengths.

For example, the alliance can boast class-leading powertrain technology thanks to Renault’s knowledge of diesel and Nissan’s highly-rated petrol engines and gearboxes. The key from the outset has been the cross-functional and cross-company teams, mainly of middle managers, set up by Mr Ghosn to engage in a permanent quest for new synergies. There must be, he says, complete transparency and a shared sense of purpose.

What Mr Ghosn could have added is that his own background (a Brazilian of Lebanese descent who was educated in France and speaks five languages) may have brought with it a cultural sensitivity that at times proved crucial. It is also almost certainly the case that both Renault and Nissan really could see strengths in each other they could learn from, whereas too many senior people at BMW and Daimler quickly grew contemptuous of the companies they had bought and were bad at hiding it.

From The Economist