There are abundant cases in business history about successful and unsuccessful M&A deals, and the automotive industry is no exception. The potential synergies of sharing resources, platforms, processes and parts are just too large to ignore. As illustrated in the famous presentation by Sergio Marchionne, the FCA Chief, in his “Confessions of A Capital Junkie”, the automotive industry is earning a ROIC far lower than WACC, the required return by both bondholders and equity holders. In other words, the automotive industry has been destroying stakeholder value for quite a long time. The remedy to this problem, according to Sergio, is large scale of industry consolidation through M&A.
The idea is fairly straightforward:
Take perhaps the most famous case study, Daimler Chrysler, as an example. Before the 1990s, Chrysler had been a huge turnaround story. The margins had been improving year over year, higher than other major OEMs; Chrysler had been cutting its vehicle development cycle so drastically that it only took half the time for Chrysler to develop a new vehicle, which contributed to its efficiency and cost reduction. Daimler came along, and promised great benefits for a combined vision: product lineup complementarity, cost reduction in vehicle development, and combined market share and power. The most valued promise in Chrysler’s eyes, is that Daimler would not make Chrysler a mere part of Daimler. However, it proved otherwise. The Germans were eager to fold Chrysler in and consolidate the resources for the benefit of Daimler. In a manner of fast integration, Daimler basically scrapped the processes and best practices accumulated by Chrysler, and imposed the “Daimler Way” on it. This “Shotgun Marriage” created a genuine disaster: the promised synergies were never realized, which left a broken and battered Chrysler. After 9 years, Daimler sold Chrysler at a price that was far from its acquisition cost.
The major reason for failure in this case was that Daimler sought fast integration in ignorance of what it really wanted from Chrysler. What was good about this marriage was that Chrysler had a lot of best practices, processes and experiences, not merely resources that could be easily duplicated. These were the distinct of ways of doing things that cannot be wiped out. In short, what Daimler really needed to do was to find out the cultures and the processes that should be sustained while slowly folding in the duplicable resources. It was not easy. It needed both parties to sit down and talk through all the major details and work out a long-term strategic plan on how to successfully integrate.
One might ask, have there been any successful mergers in the auto industry?
So far, the only case that might be positive is Renault and Nissan.
There are many distinct features in this deal. The most obvious one is that it is not a straight M&A at all. It is a cross-holding partnership, as boasted by both companies, without full integration. The merit is obvious: while preserving each other’s distinctness, they can share lots of indiscernible resources to lower cost. Indeed, both companies have been slowly integrating with each other:
The result is stunning: both companies emerged from near bankruptcy, and the combined alliance today enjoy a market share and profitability that is enviable to other OEMs.
Going forward, the auto industry is trying to embrace the digital era by partnering or acquiring tech startups, in order to acquire critical capabilities that they don’t have. In light of the cases in industry history, OEMs must be careful of the fashion they conduct post-merger integration. It could be either a glorious victory or a disastrous failure that smothered both companies.
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Qian Yang serves as VP of Finance of Spartan Consulting. He has experience in automobile joint venture management, analytics, negotiation, supplier relationship management and executive communications.