Carlos Ghosn: “This is a demanding task which requires a relentless effort. And trust has been reinforced by the fact that Renault has never interfered at Nissan, and Nissan has never interfered at Renault.”
Photo credit: AUTOMOTIVE NEWS ILLUSTRATION
Industry On Trial – Part 4
Rare alliance successes share key traits
By Neal E. Boudette 
Published August 24, 2015 – 12:01 am ET
In 2008, as Chrysler and General Motors were skidding toward bankruptcy, the companies began studying a possible merger, an idea that enthused top executives on both sides.
But tensions flared quickly when lower-level managers began examining the details of such a momentous deal — whose plants could be closed, which models eliminated, whose departments slashed.
Press: Turf wars hindered talks.
“Once they started talking product programs, everybody started protecting their own island and throwing sand at each other,” recalled Jim Press, the longtime Toyota executive who had jumped to Chrysler and was part of the discussions.
The accepted wisdom in the auto industry says mergers don’t work. Examples abound. DaimlerChrysler. Honda-Rover. BMW-Rover. GM’s investment in Fiat a decade ago. GM-Saab. Suzuki and first GM, then VW. Ford’s collection of luxury brands: Volvo, Jaguar, Land Rover and Aston Martin.
A sampling of automotive M&A
> Peugeot-Citroen
Acquisition: 1974
Peugeot acquired its domestic rival, left it as independent unit. Government concern about jobs limited downsizing. Finally integrated operations in ’90s. Continues to struggle.
> Ford-Mazda
Alliance: 1979
Ford bought stake in ailing Mazda, jointly developed and built cars for decades. They split in 2008 as Ford CEO Alan Mulally refocused on Ford brand.
> Chrysler-AMC
Acquisition: 1987
Chrysler phased out AMC, Eagle brands. Used Jeep to kick off ’90s SUV boom.
> BMW-Rover
Acquisition: 1994
BMW hoped to build economy of scale, enter volume segments, but “the English patient” continued losing millions. BMW exited in 2000.
> Daimler-Chrysler
Merger: 1998
“Merger of equals” was divided by culture, strategy. Daimler dumped Chrysler in 2007.
> Ford-PAG
Acquisitions: 1999
Ford formed Premier Automotive Group by buying Jaguar, Land Rover, Volvo, Aston Martin and adding Lincoln. Cooperative efforts such as Jaguar X-Type bombed. Sold off piecemeal under Mulally from 2007 to 2010.
> GM-Fiat
Alliance: 2000
GM bought stake in Fiat for $2.4 billion, but joint powertrain, purchasing yielded little. GM paid $2 billion to exit in 2005.
The auto industry is again considering the notion of major tie-ups. Fiat Chrysler Automobiles boss Sergio Marchionne, believing automakers are burning too much capital and earning too little in return, has called on the industry to consolidate to head off disaster, and has sought talks with GM.
The truth is some marriages do produce positive results. After a long engagement, Ford took control of Mazda for more than a decade, with both sides benefiting. Renault and Nissan have been working in tandem for nearly two decades now. At FCA, the two halves of the merged company are healthier, growing faster and more consistently profitable than they’ve been in decades. Mini under BMW’s stewardship has flourished.
Why? What makes some mergers or alliances work?
One overlooked and underestimated factor can be found in the turmoil Press glimpsed in those nascent GM-Chrysler discussions seven years ago: When merger partners have overlapping operations, the drive to wring out costs often results in a fight for survival among the troops.
In contrast, successful mergers typically involve very little overlap, so those internal battles are kept to a minimum.
Talk about counterintuitive. Vast overlaps in operations are often the reason mergers appear to make so much sense. That’s what has some, including former GM Vice Chairman Bob Lutz, cheering the prospect of a GM-FCA alliance — a combined company would be able to consolidate two vast headquarters, two technical centers, proving grounds, truck platforms, rear-wheel-drive architectures, small cars, midsize cars and more. Not to mention two sets of executives.
But what looks so good on paper is what makes them so difficult to pull off.
John Hoffecker, a managing director at AlixPartners, a consulting firm with a large automotive practice, notes the absence of overlapping operations is a hallmark of many mergers and acquisitions that pay off. The partners can come together to right themselves without fighting over who’s going to feel the pain.
Tata’s acquisition of Jaguar and Land Rover and Geely’s takeover of Volvo are two examples. Volkswagen has become one of the largest and most profitable companies in the industry in part through acquisitions — of Bentley, Lamborghini, Skoda and Porsche.
Most of these involved little integration. Bentley and Lamborghini extend Volkswagen’s reach into rarified segments of the industry. Tata has provided financial support for JLR; it hasn’t merged the brands with its emerging market operations.
These deals work in part, Hoffecker said, because they “amount to filling holes in someone’s strategy.”
Neither the Renault-Nissan Alliance nor FCA has involved consolidating overlapping operations. Both sets of partners are separated by geography. Renault’s main operations are in Europe; Nissan’s turf is Japan and North America. Fiat and Chrysler also play in different segments: Fiat in small cars, Chrysler in trucks and SUVs.
When Nissan partnered with Renault, the Japanese company had to be downsized and restructured, but the alliance didn’t make Nissan plants, products or technical centers redundant. Chrysler hasn’t closed plants since Fiat took management control. In fact, it’s done the opposite: added shifts, hired more workers and rebuilt its engineering corps.
No doubt both partnerships experience friction. Renault and Nissan, for example, spent more than a year trying to agree on a common design for a mere turn-signal stalk. FCA was going to build a Maserati SUV in Detroit, but eventually moved that high-profile assignment to an Italian plant.
One reason major spats have been few at Renault-Nissan and FCA is the presence of another ingredient industry executives say is indispensable for success: a strong leader.
Not simply a shrewd and savvy executive. There are many of those in the industry. But in the case of big, broad mergers or sprawling alliances, a key difference-maker seems to be an executive who wins the allegiance of both sides, and who stakes his personal reputation on the success of the venture.
Automotive Coupling
Success-O-Meter
In a merger, acquisition or alliance, these factors affect its odds of success.
> Raise the odds
Less overlap. Minimal product and geographical overlap allow for cost-cutting opportunities in joint purchasing, parts sharing, r&d.
Strong, highly involved leader. A good listener who hears all sides then lays down the law helps ensure effective, engaged direction.
1 partner at death’s door. Employees are more open to change if they’re thrilled to still have jobs.
> Lower the odds
More overlap. Sorting out which side’s plants, products and tech centers gets the ax guarantees turf wars.
Deal-making leader. The top dog wanting to move on to his next deal, leaving partnership details to others, can create a leadership vacuum.
Partial government ownership. European and Asian governments have shown they want job, factory or supplier cuts to come elsewhere.
Merger of equals. Need we say more?
At Volkswagen, in its acquisition of Bentley, Lamborghini and the other brands, failure was not an option under Ferdinand Piech. Marchionne moved to Auburn Hills and personally took charge at Chrysler.
Few take charge of an alliance as Carlos Ghosn did. He came from Renault, saved Nissan and has demanded cooperation — but never subservience — from both sides ever since.
Speaking to Nissan shareholders in June, Ghosn described the alliance as a win-win partnership intended to strengthen both sides.
“This is a demanding task which requires a relentless effort,” he said. “And trust has been reinforced by the fact that Renault has never interfered at Nissan, and Nissan has never interfered at Renault.”
Another common hallmark of successful mergers: one company enters the partnership near death’s door. That was the case for both Nissan and Chrysler, GM’s takeover of Daewoo and Ford’s long alliance with Mazda.
Or consider Chrysler’s 1987 acquisition of a sinking American Motors. Chrysler took control of AMC, phased out the Eagle brand and AMC models, selected a new, combined management and invested in Jeep — all with less infighting than was seen at DaimlerChrysler.
“It makes it a lot easier if one of the companies knows it’s either accept dramatic change, or go out of business,” said Tom Stallkamp, Chrysler’s purchasing chief in the 1990s who was put in charge of “integration” in DaimlerChrysler’s early years.
Cooperating seems to be easier in the many one-off projects the industry does to share costs. GM and Ford develop transmissions together. BMW produces engines for a variety of automakers. Toyota works with Subaru on sporty cars and with Mazda on subcompacts for its Scion brand.
But Marchionne, in his assessment of the industry, says that’s not enough. Automakers must consolidate on a much larger scale, he says, and strive for big, historic mergers that will yield enormous savings.
A word of advice for Marchionne as he pursues his vision: Be careful what you wish for.
You can reach Neal E. Boudette at NBoudette@crain.com.
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