Auto industry: Hybrid carmakers
We’ll send you a myFT Daily Digest email rounding up the latest European companies news every morning.
The power couple of the car industry, Carlos Ghosn and Dieter Zetsche, make for an odd pair. Mr Ghosn, an effervescent French Lebanese-Brazilian, is outspoken and animated. Mr Zetsche, a tall, slim, German with an immaculate but fulsome moustache, prefers to let his cars do the talking.
One sells millions of low-cost, entry-level hatchbacks every year. The other builds Mercedes-Benz saloons. But the blossoming relationship between the Renault-Nissan chief executive and Daimler’s chairman, they stress, is a meeting of equals.
“I do not know if this is a marriage, two fiancées or a casual encounter,” says Mr Ghosn, his eyes twinkling, as Mr Zetsche laughs. “[But] there is no limit. There is no taboo.”
“This is not just about drinking Bordeaux together, it is about eating together as well.” says Mr Zetsche, as they swivel on matching white chairs at a press conference.
Amid falling western demand, rising competition and pressure to spend big on costly new technologies, carmakers are turning to an increasing array of alliances, from full mergers to informally pooling of resources – pulling former rivals closer in order to save themselves.
Mr Zetsche, with research laboratories full of gas-guzzling V8 engines, needs expertise in small cars and low-emission, compact engines. Mr Ghosn, who has run Renault-Nissan as one company for more than a decade, could do with some secrets from Stuttgart for his luxury products.
The result is an alliance in which the two build sedans, trucks, engines and compact cars together.
Every one of the world’s 24 biggest carmakers by sales operates some form of alliance or joint venture with another large carmaker. Some work with as many as 10 of their rivals, while many own chunks of each other’s shares.
The approach is not without risk. After all the handshakes and champagne, the car industry has a patchy record for making these marriages work.
Failed romances litter the industry but the remnants of shared models, engines and research linger. The scrappy divorces leave a tangled web of co-operation that continues to benefit the separated parties.
For car buyers, the badges on the dealership forecourts look as distinct as ever. But under the bonnet, it is a different story, with engines shared between manufacturers. A diminishing number of platforms, the skeletons on which cars are built, means more and more models are made from the same DNA. Pooled design teams mean the difference between once starkly different brands is becoming harder to discern.
The logic for carmakers is simple. The cost of developing a new platform, a new engine family or building a factory can run to several billion dollars. Sharing that with another carmaker halves the investment while maintaining the benefits.
“No car company in the world right now is rich enough to go forward in every area and every market on its own,” says one senior executive at a carmaker. “Before, there was a fear that it would make brands seem weak. Now alliances are seen as a necessary evil.”
“It will not go away. It is only going to intensify. The investments to work on new projects are crazy,” says the executive, whose company works with several other carmakers. “It is not done because we love each other so much, it is done because it makes sense.”
Renault engines are used by Mercedes. Peugeot and Citroën’s electric-powered car is built by Mitsubishi. Fiat builds engines for Suzuki. Ford engines power Jaguars and Aston Martins. Dacia cars sell around the world with Renault or Nissan badges on them. General Motors and Peugeot’s forthcoming MPV will be the same car under the skin.
Volkswagen’s success at sharing its components across its brands and markets means the same engine can power a £20,000 Seat León and a £28,000 Audi TT. The average car buyer is none the wiser.
“To expand into new products and markets is expensive and time-consuming. Alliances are a way to accelerate the expansion strategy with affordable investments,” says Stefano Aversa, managing director at AlixPartners, a consultancy.
Sergio Marchionne, chief executive of Fiat and Chrysler, has said that to survive, a mainstream carmaker needs to build and sell about 6m cars a year. By that yardstick, accepted begrudgingly by the industry, only Toyota, General Motors, Volkswagen, Renault-Nissan and Hyundai are comfortable.
Toyota, the biggest of the national champions that dominate the industry, got there alone.
GM and Volkswagen bought their way to scale. GM snapped up companies in Europe, Britain, Australia and South Korea. VW swallowed Audi, Seat, Skoda, Lamborghini, Bentley and Porsche to build the most complete portfolio.
And Hyundai, through its shareholding and alliance with fellow South Korean carmaker Kia, and Mr Ghosn’s Renault-Nissan, found that by working together they were stronger than the sum of their parts.
Building a car factory can cost a billion dollars. Developing a new engine can cost three times as much. Building up a reliable supply chain network and a footprint of dealerships can take the best part of a decade.
“If you are big enough, you can afford it,” says Xavier Mosquet, partner at Boston Consulting Group. “But for everyone there are areas where you would like to reduce the risk.”
In 1999, Nissan was bankrupt and needed $5bn. Renault had cash but with a limited portfolio and very little market penetration outside Europe it was on shaky ground. A deal was struck in which the French carmaker sent a cheque and a team of executives to Yokohama for a slice of the Japanese company. One of those who made the journey was Mr Ghosn, who was to take charge of Nissan within two years.
The companies approached the developing alliance cautiously, swapping best practices and pooling some purchasing. But 10 years in, the financial crisis forced the long engagement into a shotgun wedding.
As GM and Chrysler went bankrupt, profits at Renault and Nissan collapsed and the car industry faced a bleak future. For the integration ideologues at the alliance, there was no better opportunity to make their case.
“There was a sudden wake-up due to the crisis. We had to jump to full sharing …Survival mode and a sense of emergency hit us both,” says Christian Vandenhende, Renault-Nissan’s director overseeing all purchasing.
In 2001, Renault and Nissan conducted 30 per cent of their purchases together. Now they share everything, from exhaust pipe suppliers to joint factories in new markets such as India.
Cost savings from the alliance tripled to €1.5bn in that year and reached €2.7bn in 2012. That is more than Nissan’s profit last year and more than 20 times Renault’s.
“The first rule was that every decision taken for the alliance must be beneficial to both. It is not always 50-50 but always win-win,” says Christian Mardrus, managing director at the alliance. “It is easy to say but not easy to do.”
Many in the industry watch with envy. Much of the alliance’s success is attributed to Mr Ghosn, who maintains a gruelling schedule between Yokohama and Paris. The head of another global carmaker quips that Renault and Nissan are held together with “Ghosn tape”.
“Breaking up the alliance is a virtual impossibility,” says Harald Hendrikse, head automotive analyst at Nomura in London. “There are just too many shared products, plants and technologies.”
But Mr Zetsche has seen the other side of mergers. He was chairman of DaimlerChrysler when their $38bn, nine-year deal fell apart, rupturing what was at the time the world’s biggest cross-border accord.
VW and Suzuki are still fighting legal battles over their partnership that went sour more than two years ago. GM took a stake in Fiat in 2000 as part of a planned partnership, but that turned bad five years later and the US carmaker was forced to pay $2bn to sell options that could have seen it buy out the entire Italian company.
Most alliances fail, industry executives say, because of a lack of patience. Product cycles are typically more than five years long, meaning that companies can take the best part of a decade to align their model strategies in order to share designs, factories and parts.
But in spite of a history of failures in the industry, the rewards of getting it right are too great to ignore. And with new technologies such as electric and hybrid cars and self-driving vehicles needing huge, long-term investments, many see no alternative.
“That will be the main driver of future alliances; to share the huge costs of developing these megaplatforms that will be dominating the auto industry in the next decade,” says Mr Aversa. “If you go outside your core product area, you are almost obliged to find alliances.”
Mr Marchionne is determined to ram together a deal that would fully unite Chrysler and Fiat. Mitsubishi recently joined Renault-Nissan to share small car expertise.
Analysts expect more tie-ups, especially between mainstream carmakers and smaller, more nimble companies. “We have always seen focused alliances on a platform or a technology. But what we are seeing now is alliances that are broader, because if you want the full benefit of integrating engines and platforms, for instance, then you are making decisions for companies that are long-term decisions you cannot get out of two years later,” says Mr Mosquet of Boston Consulting.
“We’re going to see more integrated alliances like Chrysler-Fiat and Renault-Nissan,” he says. “Once you start sharing platforms …you have tied the two companies very closely. And it is better to do that in a Renault-Nissan environment than a totally separate environment.”
Aston Martin Cygnet
The world’s biggest carmaker teamed up with one of the industry’s most prestigious brands to build a luxury supermini. The Aston Martin Cygnet cost £32,000 but was little more than a dolled-up Toyota iQ, which cost two-thirds less. It sold abysmally and was killed off this year after just two years of production.
In 2000, the two national champions thought they had a winning formula. GM swapped 6 per cent of itself for 20 per cent of Fiat and the two agreed to work together. But things quickly went awry. Complicating the issue was an option for Fiat to sell out to GM completely. As the Italian company continued to lose money, the Americans balked at the possibility of having to rescue it and ended up paying $2bn to wash their hands of the deal.
The supreme car alliance disaster. It was supposed to be a “merger of equals” between Stuttgart and Detroit, but ended up as a bonfire of investment. Executives sparred and cultures clashed. People used to designing Mercedes sports cars struggled to get to grips with a Chrysler pick-up truck. Promised cost savings spluttered. In 2007 the companies separated. Chrysler was bankrupt within two years.
The X-Type is a textbook case in how not to share car designs and platforms. Under Ford’s ownership, Jaguar wanted to return to the compact car market. The result was a souped up Ford Mondeo with a Jaguar snout, designed in Detroit. Reviews were poor and sales flopped. The car was killed off soon after Ford sold the marque to Tata Motors in 2008.