The late 1990s witnessed a major consolidation drive in the global ‘luxury car’ segment; Volkswagen was leading this consolidation drive. It acquired Porsche, Bentley and Bugatti in 1998. It also acquired Rolls Royce, but subsequently sold it to BMW. VW had earlier acquired Audi which in turn acquired Lamborghini in 1998. Ford, which owned Jaguar, acquired Land Rover from BMW in 2000. Ford sold both Jaguar and Land Rover to Tata Motors in 2008. Volvo, the Swedish luxury automaker was acquired by Ford and eventually sold to China’s Geely Corporation.
In effect, the number of standalone global ‘luxury’ automakers has fallen steeply in the last two decades. Volkswagen, BMW and Mercedes Benz (owned by Daimler AG) are the major German standalone players. Tesla in the US and Italy-based Ferrari are still standalone automakers, although the latter has a tie-up with Fiat-Chrysler.
Independent automakers
On similar lines, the ‘mass market’ segment has also witnessed large scale consolidation during the last five years. The number of independent Japanese automakers has steeply fallen to around three, because of this consolidation. In the late ’90s, Nissan and French car maker Renault came together which is strategically managed through a common alliance headed by Carlos Ghosn. The Renault-Nissan alliance recently acquired and brought into its fold another Japanese automaker, Mitsubishi. Renault-Nissan-Mitsubishi sold a combined 9.6 million vehicles worldwide in 2015, and now, will come under one strategic alliance. This acquisition moves this alliance close to the ‘Top Three’ auto makers in the world following Toyota, Volkswagen and General Motors, each of whom manufacture and sell close to 10 million vehicles per annum.
Toyota recently acquired the oldest of the Japanese auto majors, Daihatsu Motor Company. Ford had earlier ramped up equity stake in Mazda, acquiring close to 30 per cent. However, after running as an alliance for almost 10 years, Ford wound its shareholding down to around 2 per cent. Toyota and Mazda recently broadened their cooperation in sharing technologies to produce greener cars. A new alliance is brewing that could potentially culminate into equity consolidation. Toyota and Suzuki are also closely evaluating the possibility of working within an alliance; analysts believe that a major alliance between them could develop before the end of this decade.
Indian and global market
With Original Equipment Manufacturers (OEM) in a consolidation mode, consolidation among the global auto component vendors is also fast gaining momentum. Major players like Robert Bosch GHBH, Denso Corp., Continental AG, Magna and Hyundai Mobis have scaled to reach a top-line of around $20 to $40 billion.
Most Indian sub-component vendors are now graduating to ‘module’ suppliers, i.e., not making just one part, but a complete module; for example producing the entire ‘door latching module’ and integrating the same into the side-door system. Indian vendors such as Bharath Forge, Motherson Sumi, Sundaram Fastners, Spark Minda and Bosch India are taking the inorganic route to scale. Consolidation is also very much on the cards, with a number of smaller players with attractive valuations around. Medium-sized players such as Wabco, Sona, JMT, Gabriel, Amtek and numerous other smaller and fragmented players offer a good opportunity for acquisitions.
Why this consolidation?
The global auto industry is in a very unique situation today. It is extremely difficult to predict the short-term future; what would be the type of hybrid that would prevail, or will it be zero-emission electric vehicles (EV) that would become an industry standard? Such uncertainty stems from stringent regulations from local national governments, which also also depend on the global climate change protocols and the associated national commitments.
Further, fast-emerging technology casts uncertainty over the future. The industry is unable to predict the nature and type of technology that will become dominant over the next five to seven years.The secondary storage battery and the ‘battery charging’ eco-system especially, that could evolve over the next few years, are important enablers for EVs to gain market share and thrive; these are some of the key issues that carry major uncertainties. The evolution of autonomous driving technology and the ‘sharing economy’ is further upping the uncertainty as to how an automobile of the future will look like and the volumes it could sell.
In order to meet the current requirements of the customers, automakers are required to squeeze the available technologies and skill-sets to produce cars that are cleaner, safer and more connected.These entail enormous investments and require large volumes to breakeven. This, clubbed with slowing demand and excess capacity, is resulting in low ‘asset utilisation’ for automakers who end up with losses and acute strain on cash flows. In parallel, automakers need to invest in emerging technologies (such as hybrids, electric vehicles and battery technologies, autonomous technologies, and the like), under high levels of uncertainty, to produce the car of the future and position themselves ahead of the competition.
Each of these alternatives will entail a very different set of investments, and the manufacturers are struggling to decide which way to go; investments once made become ‘sunk costs’ and are irreversible.Smaller players are struggling to remain relevant in such a scenario.
Fragmented and small players
Fragmented and small players would not have the benefits of ‘economies of scale’, which the larger players enjoy, nor will they have pockets deep enough to support such large scale investments in emerging technologies to be able to build the car of the future. Hence consolidation is becoming inevitable.
With the auto industry reaching a phase of maturity, where global supply is exceeding demand, consolidations provide an advantage for automakers to become ‘big’ and thereby achieve cost competitiveness through ‘economies of scale’. Such ‘size advantage’ gained allows these large entities to control costs by sharing many of the ‘back end’ components in terms of ‘platform’, shop-line and administrative costs, and complementing geographical diversification, thereby gaining ‘cost advantage’ as compared to the competitors. Not only is this acost advantage, consolidated operations also provide an advantage of synergies in developing new models and investing large sums in disruptive technologies that will be the key for success in the future.
Emission manipulation tactics
One of the biggest challenges faced by the auto industry, of late, is the emission manipulation tactics that several automakers employ. With about 7 per cent of deaths globally reported to be caused by air pollution, regulators are tightening the noose on the automakers through stringent emission norms, which automakers are struggling to comply with. These norms involve huge investment and with the automakers already struggling to remain competitive in cut-throat competitive market conditions, they are unable to make investments and so attempt to manipulate their emission levels. It is widely reported that in Europe, for some models, emissions were more than ten times the legally allowed limit. Companies such as Volkswagen, Opel, General Motors, Mercedes Benz and Mitsubishi are all reported to be under the scanner of the regulators.
In essence, consolidation and strategic alliances help automakers address the demand-supply mismatch in matured industry settings. Consolidation not only helps in cost reduction achieved through economies of scale, but it also provides a deeper scope for enhanced research and development spend to be ahead of competitors in disrupting the industry.