Car mergers set to shift into top gear

Date: 10/12/1998

By Peter Chapman

HENRY Ford once said of his famous old Model T car: "You can have any colour you like as long as it's black."

To Ford - a pioneer of efficient production lines - too much choice meant higher factory costs and, ultimately, a higher price for the customer.

More than half a century later, motorists can order their own customised version of Ford's latest mass-market model, the Focus, in virtually any colour they want.

While Henry Ford would have been astonished by this, his successors kn ow full well that they, too, are at the mercy of economics. Production costs, efficiency, currency deviations and, most importantly, consumer demand are the things which really matter.

Jim Donaldson, president of Ford Europe, is in no doubt as to the biggest challenge facing car manufacturers competing for business in today's crowded EU market.

"Overcapacity is one of this industry's most pressing problems. Europe's overcapacity is conventionally put at 25-30%. I think it's more like 40% when you take into account running plants on three or four shifts," says the Scottish-born Donaldson.

This situation creates a bonanza for buyers, who are able to snap up cars which would otherwise languish in the dealers' showrooms at lower than budgeted for prices. But it also means margins are paper thin for manufacturers making the medium to low-range products which are in most plentiful supply.

"In the long run if you don't have supply and demand balanced, either you need to get demand up or you have to take capacity down," says Donaldson.

"I don't see the market growing annually by anything like 40% by 2010, so somewhere along the line we have to become more realistic about our plans as manufacturers. If you add up the planned shares of the European market announced by the industry, it amounts to about 150% of the reality. It has got to be 100%. People have got to be more realistic with their advance planning."

Many see consolidation as one of the key answers to falling profits and scattered over-production.

Donaldson's boss in the US, Ford chairman Alex Trotman, predicts a world in which there will be just half a dozen big firms - two each from the US, EU and Japan - capable of the economies of scale which are necessary to remain competitive.

That consolidation has already begun. Deals such as Chrysler's merger with Daimler Benz are only the beginning, according to Donaldson, although he declines to reveal where Ford's affections might lie if it decided to forge ties with a Union rival.

"There will absolutely definitely be consolidation," he says. "Everyone wants to know who is dating whom. I have no comment at present [about Ford], but in reality, at the moment, the number of big firms is not that large.

The big guys all tend to know each other already."

Donaldson believes that much of the merger mania will take place behind the scenes among the suppliers of parts and components to the car industry.

"The rate of consolidation is quite staggering among what we call, in the industry, the 'original equipment manufacturers'. An interesting question is not 'will it continue?' but 'when will it end?' I don't know the answer to that question," he says.

The bottom line, according to most industry watchers, is that companies will have to improve their efficiency, whether via mergers or plant closures.

At the same time, they will have to focus their efforts on producing more of the cars that people actually want to buy. This is a lesson which some firms appear to have learned already. German manufacturer Volkswagen, for example, has customers queuing up to buy its middle-market Golfs and Polos.

Ford hopes that its massive investment in the Focus will have the same effect, even though it has dropped one European model entirely and has allowed its market share to fall below 11% by concentrating, as Donaldson puts it, on the "quality" of that share. This means selling cars which people are willing to pay top prices for, rather than discounting mediocre models.

"Matching supply and demand is going to take time and it is not going to be easy or painless. Compounding that, not everyone has the productivity," he says. "Like most manufacturers in Europe, we have examples of high productivity and others that are not so productive."

Although modern, efficient plants which are not operating at full speed are not 'productive' because they do not benefit from economies of scale, most manufacturers also have some out-of-date factories which are no longer up there with the best.

"The spread is uneven. There are some jewels and quite a few museum pieces. You can't afford museum pieces," warns Donaldson, in a comment which is likely to send a chill down the spine of carworkers across the EU.

The US industry's experience is there for all to see, he claims. It saved itself from the onslaught by Japanese competitors, which set up shop in the US, by making savage but focused job cuts while at the same time boosting capacity and quality at the remaining factories. Donaldson believes that Europe, with its infamous labour laws, social chapter and militant unions, will accept similar changes if they are explained.

"I do not see too many barriers, conceptually. We need to get acceptance of the need for change. This broad agreement covers everything from the work philosophy to standards and productivity. You also need acceptance of bench-marking. That means seeing if people with the same tools are doing a better job," he says.

"If you get management and labour behind you, then things can happen very quickly."

Many within the industry agree with Donaldson's analysis and point to the deal struck last week between car manufacturer BMW and trade unions representing workers at the Longbridge plant near Birmingham, which the German car company acquired as part of its take-over of the UK's last volume car firm, Rover.

BMW had to decide whether to retool one of its loss-making Rover plants in the UK or close it and put 16,000 workers on the dole.

It opted for the former, unveiling plans designed to transform Longbridge from one of the EU's least productive plants, with a large slice of a 3.4-billion-ecu investment package. But this only took place after the trade unions agreed to cuts in overtime pay and a reduction in the benefits enjoyed by their members.

Under the plan, Rover will be geared up to develop a new range of models, such as a replacement for old Mini, to help it turn around the massive losses which it has been clocking up for its German masters.

However, no sooner had BMW unveiled its plans than press speculation began to mount that its rival, Volkswagen, was set to offer the company 1.4 billion ecu to be involved in design and production at the Rover plant.

Experts predict this could eventually see VWs being churned out of factories in the UK. It would also be, they say, the first step towards a Volkswagen-owned BMW, creating the world's biggest carmaker.

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