Car industry and the future

From tutor2u website - an interesting analysis on the car industry. Advanced business English students can use this as background reading for a discussion related to the ML Advanced unit 7 case study.

Alliances - benefits of scale without the risks?

Tuesday, June 15, 2010

by Tom White

Is there the potential for some firms to enjoy economies of scale and the benefits of size, without risking a potentially disastrous merger?  The boss of Renault Nissan thinks so and is continuing to hype his alliance model as the way forward in the car industry.  We’ve heard about ‘co-opetition’ before: how would it work out this business?
As the Economist has recently explained, the Renault Nissan alliance “really is like a marriage”. Renault owns 44% of Nissan, which in turn holds 15% of Renault. They purchase most of their parts jointly, and have gradually learned to share engineering expertise, such as Renault’s strength in diesel engines and Nissan’s in petrol ones. The boss argues that it has also made Nissan more daring and Renault more cosmopolitan.
Then in 2002 Nissan launched what has proved to be a successful joint venture in China, now the world’s most important car market.  In late 2007 Nissan beat General Motors to become a strategic partner to a big Russian carmaker, taking a 25% stake. Next came Daimler.  The alliance will focus on sharing resources in four main areas: car ‘platforms’, small petrol and diesel engines; technology for fully electric and hybrid cars; and bigger diesel engines.
Why are economies of scale so important in car manufacturing?  The article highlights three main reasons:
-Under pressure to boost fuel efficiency and cut carbon emissions, carmakers are spending huge sums on R+D.
-There needs to be extra investment in substantial new manufacturing capacity and dealer networks in the emerging markets that are generating nearly all the industry’s growth.
-You can no longer survive as a niche player specialising in small cars or luxury vehicles. To cover overheads, big car manufacturers must cover every segment.
It’s not clear if a web of alliances can deliver all this. Even where full mergers have taken place (as with the disastrous union between Daimler and Chrysler) savings have proved difficult to find because engineers from one side are unwilling to share ideas and resources with the other. After 11 years and much effort, some argue, Renault and Nissan have yet to equal the efficiencies of the various arms of VW Group or Toyota, which are both tightly integrated and centrally managed.
Are other car firms following suit?  VW sees the 20% stake it took late last year in Suzuki, which is strong in India and in small cars, as a “critical” step towards surpassing Toyota as the world’s biggest car company. PSA Peugeot Citroën and Mitsubishi are keen to deepen their ties. And although Fiat has in effect taken control of Chrysler despite owning only 20% of the American firm, it is adopting a similar management structure to Renault and Nissan.