“The merger is wonderful news. It will be the saving . . . of the industry. One has the know-how on the heavy vehicle side and one on the car side. Between them they should be able to build up the sector and make it safe for all time.”
Those were the somewhat less-than-perspicacious thoughts of Leslie Kealey, the chief negotiator for the TGWU union. He was speaking about the merger of British Motor Corporation and the Leyland company that created British Leyland.
A merger of two motoring giants, among the most successful in the world, it was a marriage made in the depths of automotive hell. Two decades later, all that was left were the smoking ruins of the once-mighty British car industry, and a couple of survivor brands (Jaguar, Land Rover and Mini) that would eventually go on to flourish again under other ownership.
Perhaps those words, and the awful events which followed them, should give some pause to those currently pencilling in long board-room sessions to decide on future automotive industry mergers. And believe me, those sessions are being planned. Many may already be well advanced and a new round of mergers is looking ever more likely.
Shopping spree
We've been here before. The vast shopping spree that built up the now titanic Volkswagen Group for instance. Ford's buying up of Jaguar, Land Rover, Aston Martin, Mazda and Volvo. GM and Fiat getting together, before a spectacular falling out. Mercedes buying Chrysler.
It can’t have escaped your attention that only one of those mega-groups has stood the test of time – Volkswagen. All the others have fallen into divestment, and it is their swirling remains which may now be looking to accrete into new corporate wholes.
VW is, in some ways, kicking all this off. It is actually separating out its various marques, at least according to reports from Reuters this week. With former overlord Ferdinand Piech defeated and departed, current VW CEO Martin Winterkorn is setting out his stall for the future.
Piech's system was to keep close central control over all of the various VW brands and let them fight it out between themselves for influence and success. Winterkorn is being more conciliatory – the brands will group together into various sub-units, which will have some autonomy on decision-making and model plans. Audi will manage Lamborghini and Ducati. VW Commercial Vehicles will work more closely with Scania and MAN trucks, Porsche will watch over Bentley and Bugatti, and Volkswagen itself will tie more closely to Seat and Skoda.
Financial clout
There’s no doubting the massive success and financial clout of VW as it stands, but Winterkorn’s plans are meant to plug the gaping holes in the edifice. Far too much of VW’s cash-flow comes from Audi and Porsche, far too little from the mass-market brands. VW itself only makes 2.7 per cent profit on its model range, and while Skoda burgeons, Seat is still a drag on resources.
VW's move is not a de-merger by any means, but a loosening of the corporate reins seems counter-intuitive at a time when most are speaking of ever larger conglomerates. Renault-Nissan boss Carlos Ghosn has long spoken of a future where there are just five car-making mega-groups, and Fiat's mercurial CEO Sergio Marchionne thinks along similar lines.
It's Marchionne that probably holds the trigger for setting off the next round of mergers. He is desperately trying to find a partner to merge with his Fiat Chrysler Automobiles – which is odd, because the merger of Fiat and Chrysler was supposed to create a group big enough to stand on its own two feet. It hasn't though – Chrysler and Jeep have prospered but Fiat, Alfa Romeo and Maserati (in spite of recent expansion) continue to struggle.
Marchionne needs a mega-merger to stop Fiat's finances following their traditional feast-to-famine lurching (a point which the shareholding Agnelli family have allegedly made very clear to Sergio) but no one's biting. General Motors has publicly rebuffed an approach, and Marchionne has said that "if you go back and look at the graveyard of failed deals, there's enough to create concern. But the problem I'm having with all those concerns is the benefits associated with this are really too large".
They are large. Marchionne has spoken of $6 billion in annual savings from a big merger, but investors are spooked by the amount of money needed to get Alfa Romeo's ambitious plan to become a big premium brand player off the ground, to say nothing of the fact that Fiat is in the process of selling off its jewel in the crown – Ferrari. It was once thought that Volkswagen might buy Alfa Romeo from Fiat, taking away a major headache but that seems unlikely now that Alfa-loving Piech has departed.
Could Marchionne and Ghosn combine forces and groups to create an automotive monster? Between them, Fiat-Chrysler and Renault-Nissan would make about 15 million vehicles a year, instantly dwarfing the likes of Volkswagen and Toyota, and their various brands (Renault, Fiat, Infiniti, Nissan, Jeep, Dacia, Maserati, Alfa Romeo, Lada) would seem to have enough space around them to be complimentary rather than competitive.
Share agreement
Ah but Ghosn is more likely to look across the Rhine than the Alps for a merger partner. There is already a technology, platform and share agreement between Renault-Nissan and Daimler-Benz. Engines, chassis and electronics are already being swapped between the two groups and it seems likely that, at some point, greater shareholdings will be exchanged, with a combined Renault-Nissan-Mercedes making around 10 million cars a year – easily competitive with Toyota or VW.
Who else could team up? Mazda and Fiat already have a tech-sharing agreement, but then Mazda has also recently cosied up to Toyota, and a Japanese conglomeration would me more appealing to the accountants. Honda is unlikely to try to merge with anyone, in spite of its European woes, but what of Chinese-owned Volvo? It has ambitions to make 800,000 cars a year, but that's chump change compared to the big groups. Does Volvo (and its owner Geely) need a bigger partner to make it viable?
Ford has had its fingers burned in the merger market in the past (and still has troublesome Lincoln to sort out) so we can probably rule out any moves there. General Motors too has its own merger regrets, but is potentially more likely to seek expansion through acquisition. With PSA Peugeot-Citroen perhaps? The two did have a platform-sharing agreement until a buy-in by Chinese Dongfeng spoiled the mix. Perhaps a Franco-American rapprochement is in the offing?
And what of Hyundai-Kia? The conjoined automotive powerhouses have this far resisted the chances to snap up any rivals, but that could change. Rumours have long circulated that the group desires a ready-made premium brand, probably a European one, and Tata-owned Jaguar Land Rover was equally rumoured to be top of that list. Hyundai’s sales have been in the doldrums lately but the group as a whole has inordinately deep pockets if it wants to go shopping.
The trick though is in combining two companies’ finances without diluting their brand appeal. As Ghosn has previously put it “a couple does not assume a converged, single identity when they get married. Instead, they retain their own individuality and join to build a life together”.
That’s a tough task to achieve in a heartlessly corporate automotive world. Can Ghosn manage it? Can Marchionne? Or will Winterkorn’s teasing apart of VW’s brands set the stage for more a independent existence ahead for car makers?
