Car Industry.

It snowed for a while today. But, as usual, the snow was not that much. And the ground is not cold enough to stop it from melting. So, even after 1 hour of snowing, Wye did not turn white, unlike Manchester. Anyway, that is not really the point here. As I was reading my friends’ blogs, I began to realize that I have not updated my blog for almost a week. Yesterday, I had to give a presentation about global car industry and since I love cars so much, I was more than happy to be given this topic. So, here is goes.

For so many years, mergers and acquisitions have led to the birth of giant car manufacturers such as General Motors (GM) and Ford. However, now, these giant car manufacturers are not as successful as they were before. Therefore, one starts to think about how is it possible that mergers and acquisitions which have proven to be beneficial to these companies are now threatening them.

Looking back into history, players in car industry have been consolidating with each other since its earliest inception. Take America for example when we saw up to 200 garage-sized firms were taken over by bigger companies like the GM, Ford and Chrysler. Popular names such as Studebaker and American Motors disappeared from the market and leaving the industry in the hands of the “big three”. However, as we can see now, this strategy of consolidating behind brands has not been entirely successful. We also see that, there is an inverse relationship between the number of brands a firm possesses and profitability.

Now, let’s take a look at these companies one by one. Let me start with the GM, the company that is producing almost 14 million cars under 15 brands. Being the biggest car producer in the world, does not mean that GM is making the most profit. In fact, GM is very close to not making any profit at all. For the last 20 years, we saw that GM is not going anywhere with its mergers and acquisitions exercises. General Motors bought Saab and Daewoo; they also offered to buy some controlling stakes in Isuzu, Subaru and Suzuki in hoping to gain access into Asian market. Asian market is popular with small cars; something is which GM is lacking of in their offerings. However, it seems that no matter how much the company put to invest in other brands, they just cannot extract at least the same amount of profit from those brands. Apart from that, GM is facing a lot of internal problems such as increasing legacy costs. All these, are more damaging than helping General Motors.

Following close behind GM in terms of production is Ford. Although many people would think that Toyota should be the second biggest carmaker, Mazda and Volvo is the only thing that is keeping Ford above Toyota. Ford, like GM has been the biggest acquirer since 1989. Ford invested heavily in its brand but again, just like GM they just keep on spending away their money with no signs of getting it back. Take Jaguar for example; even after spending up to $5 billion, Jaguar is still not moving anywhere. However, their investments in Mazda and Volvo have finally paid off. Now, sales of Mazda and Volvo are increasing steadily in most market. But growing sales of Mazda and Volvo alone are not sustainable for the company in the longer term.

This is the end of the first part of the case study. I will continue on the second part later because my hands are getting tired right now. Ciao.

SOURCE: The Economist.