Business

Saturday April 11, 2009

Downturn may force global mergers


AS the world comes to grips with the toughest recession since World War II, the global car industry may experience a slew of consolidations in an effort to stabilise itself and avoid further slump.

In the US, where the economic crisis has brought “The Big Three,” namely General Motors Corp (GM), Ford and Chrysler Holding LLC to their knees, mergers and acquisitions may be imminent, say industry observers.

But so far, Italy-based Fiat SpA’s plan for a joint production with Chrysler is the closest that any of The Big Three has come to consolidation since the credit crunch and global recession began to wipe out sales last year.

In January, Fiat and Chrysler announced that they had agreed to form a strategic alliance that would give the Turin-based company a 35% stake in the troubled US carmaker in exchange for small-car technology, not cash, with an option to take its ownership stake as high as 55%.

The deal means Chrysler, which is struggling to fend off bankruptcy and having difficulty selling its vehicles, would have access to new, more competitive markets and cheaper, more environmentally friendly technologies.

It has been reported that the companies stand to save more than US$5bil over the next five years by combining vehicle platforms and parts procurement. The savings are expected to accrue significantly some time around 2012 or 2013.

The United Auto Workers (UAW) union offered its support for the alliance, saying the tie-up had the potential to preserve US manufacturing jobs.

UAW president Ron Gettelfinger was quoted in a statement issued by the union that the alliance would offer Chrysler new opportunities to compete in the US market and the global marketplace.

“As the US auto industry undergoes a restructuring process, this alliance has the potential to preserve a wide range of choices for US consumers as well as good-paying manufacturing jobs for our communities,” he said.

At the Detroit Auto Show earlier this year, GM Europe president Carl-Peter Foster said the European automotive industry could see “forced” consolidation should the current recession deepen and drag on.

“We could well see some surprises. It depends tremendously on how long this recession lasts because the longer it lasts the more companies will come into real distress and sooner or later there will be a forced consolidation.”

In February, China announced that it was pushing for consolidation within its car industry, where it hopes to cut the number of its major automakers from 14 to 10 and increase the market share of domestic-brand vehicles in an effort to enhance the competitiveness of its stalling industry.

The government intends to increase the market share of Chinese-brand passenger vehicles to 40% from the current 34%, officials from the China Association of Automobile Manufacturers was quoted.

Reports claim that the merger push will have the greatest impact on China’s top 10 carmakers, a group that accounted for 83% of total sales last year.

American Honda vice-president of automotive operations John Mendel thinks China could use this consolidation exercise as a platform to fast-track itself into the US.

“The Chinese would be well served to pick up a brand like a Chrysler or a Jeep that has an entry to a dealer network (in the US),” he says.

Historically, the global car industry has seen its fair share of mergers and acquisitions. Unfortunately, these efforts have been nothing more than over-optimistic business ventures that were doomed even before they began.

And with the current global crisis where companies are desperate to do anything just to stay afloat, business heads are more preoccupied with “striking a good deal” rather than managing the pre-deal or post-deal activity essential for a successful partnership.

Business ventures within the car industry that have gone awry include BMW with Rover, GM with Isuzu and Suzuki and DaimlerChrysler with Mitsubishi. – By Eugene Mahalingam

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