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Ben Oliver considers what the global car industry could look like in five years’ time

Even by the standards of these extraordinary times, it is an extraordinarily gloomy statement. Fiat Group CEO Sergio Marchionne predicts that by the time the global economy returns to growth, just six significant carmakers will remain. He recently told industry newspaper Automotive News Europe: “As far as mass producers are concerned, we’re going to end up with one American house; one German of size; one French-Japanese, maybe with an extension in the US; one in Japan; one in China; and one other potential European player.”

Marchionne’s prediction means a loss of two thirds of today’s 15 major carmakers, which each produce more than a million cars a year. More astonishingly, despite revitalising Fiat’s product range and returning it to profit after decades in the doldrums, Marchionne does not specifically include his own company in that tiny handful: “You need at least 5.5 million to six million cars [a year] to have a chance of making money. Fiat is not even halfway there. And we are not alone in this. So we need to aggregate, one way or another.”  

Stoically suggesting that he might have to cede his role as boss of Fiat Auto, Marchionne’s predictions suggest that a bloodbath is about to ensue in the global car industry. But will it, and just how deep is the hole the carmakers find themselves in? 

It’s telling that after financial services, the car industry was the first to ask for state aid. According to JD Power, a market research company, western European car sales fell 8.4% last year and will fall 16% this year to 11.4 million, a level not seen since 1993. However, the annual figures mask steep declines in the final quarter of 2008, leading to a sense of bewilderment even among veteran leaders such as Carlos Ghosn, Renault-Nissan’s usually cocksure CEO. He told CNBC European Business: “I have no clue about the market in Europe in 2009. I don’t know if it will be up, stable or down, and, if it’s down, by how much. I’m having a hard time projecting what the market is going to look like next month, so for me it is impossible to tell you how the whole of 2009 is going to be.” 

But is this slump enough to force closures and mergers on the scale that Marchionne predicts? He believes the car industry would function most efficiently with a handful of global carmakers reaping the sort of economies of scale only possible when output  totals more than five million cars a year. It was this calculation, combined with the recent implosion of US carmakers, that brought him to a total of six.  

The media-shy Marchionne is not given to sensationalist claims, but he may have an ulterior motive; namely, to help sell Fiat Auto to, or merge it with, another carmaker. Indeed, he made the first major move of the current crisis, taking a 35% stake in ailing Chrysler in return for giving the US firm access to Fiat’s small car platforms, efficient engines and global distribution network, which it so desperately needs. It’s a one-way bet; if Chrysler fails, it costs Fiat nothing. If it succeeds, that 35% stake could be of significant value, and the deal is likely to include an option to take a majority stake. And access to Chrysler’s US distribution network could allow Fiat and Alfa Romeo to return to the world’s biggest market. 

On the issue of Fiat’s future, Max Warburton, a leading industry analyst with investment research company Sanford Bernstein, believes Marchionne is still offering his firm for sale, and is skeptical about the Chrysler tie-up, describing it as a “far less useful but better-than-nothing option,” compared to Fiat merging or partnering with a European company. “I think Chrysler called Fiat rather than vice versa, and Marchionne thought, ‘Why not?’. Chrysler has been desperately looking for a small car and technology supplier, and some way of explaining to the US government how it was going to have a future, and Fiat proved willing to supply a story. The synergies for Fiat with a European car producer would be so much greater than with an American SUV producer.”  

Although Warburton says Marchionne has had some luck turning around Fiat, he praises his leadership: “Marchionne is the most rational of all the CEOs from an investor or equity market point of view. He has consistently said that this is an insane industry in which to deploy capital. He’s aware of his political and national responsibilities to keep Fiat Auto going, however; so dressing it up for sale would free good businesses like Iveco and CNH from the crappy business that is Fiat Auto. 

“Talking to investors, he’s made it clear he doesn’t think Fiat has had a sustainable future for quite a few years. There’s nothing new in what he’s said except the sense of urgency. The house has been for sale for some time, he’s just put up an estate agent’s board.” 

But analysts and industry leaders believe that fear, pride, political interference and the difficulty of achieving those economies mean that even a long, deep recession won’t be enough to force the kind of super-rationalisation that Marchionne predicts. 

“Everything Sergio says makes perfect sense in terms of what needs to happen, but history tells us that politics will get in the way,” says Warburton.  

In the short term, far from embracing change the industry is paralysed. 

Ghosn says: “Initiatives in terms of alliances are frozen, and for a very simple reason: everybody is scared about the credit crunch and cash problems. The financial meltdown is leading to even healthy companies being scared to take any initiatives until the re-establishment of the normal flow of credit… Until the financial crisis ends we won’t see many initiatives.” 

Professor Garel Rhys of the UK’s Cardiff Business School has been analysing the car industry since the oil crisis of the 1970s. He says just six survivors is “a bit of an exaggeration”, but believes there will be mergers and acquisitions as the industry emerges from “a depression” lasting until at least 2011. 

So which carmakers might be targeted? “The best evidence is to look at the state of companies as they enter the recession. The biggest reduction in sales year-on-year was GM in Europe, and the North American arm is in no state to bail them out. The three French brands have also done badly. PSA (Peugeot-Citroen) has lost over 100,000 sales and Renault about 50,000—60,000,” says Rhys. 

The other outcome for struggling firms is closure. Korea’s SsangYong has entered bankruptcy protection and ceased production. At around 100,000 cars a year it’s a relative minnow, but some famous European brands with similar volumes look dangerously exposed. GM has put loss-making Saab up for sale but has had no interest, and the Swedish government has ruled out nationalisation.  

“The importance of the industry politically and economically is not what it was 10 years ago, let alone 30,” says Warburton, “but it is so important symbolically that I think governments would step in to prevent closures. 

Something small might go to the wall. I could envisage Saab being let go by the Swedish government but couldn’t see it letting Volvo close. Would the British government let Jaguar go? I think they’ve basically said they’re not going to.” 

The French government has already signalled its determination to save its car industry, with Luc Chatel, industry minister, announcing at an industry summit in January that Paris had a €10bn plan to save the French car industry, the money being given to ailing companies in exchange for equity and a promise not to close any factories. It already owns 15% of Renault.  

If closures, mergers and takeovers are more limited than Marchionne predicts, what other changes might we see? The car industry’s supply chain is already being ruthlessly consolidated, a process set to continue as car makers collaborate behind the scenes to reduce the number of unique components in circulation. Toyota and PSA share a small car platform, as do Fiat and Ford; the new Ford Fiesta is produced in the same factory that pumps out the Fiat Panda in Tychy, Poland. 

Meanwhile last year saw sworn rivals BMW and Mercedes collaborating on hybrid technology. The other major trend underway is a societal downsizing in the wake of soaring fuel costs last year. SUVs are out while even exotic sport cars such as VW’s recently unveiled BlueSport roadster rely on economical diesel engines. In the same vein, carmakers have cancelled plans for larger vehicles ranging from BMW’s Concept CS large four-door coupe, and Mercedes’ replacement for its R-class luxury people carrier. The beneficiaries of downsizing will not just be value brands including Fiat, but secondary brands previously intended for emerging markets. Fiat is planning to bring low-cost cars previously intended only for the BRIC nations to western Europe in 2010, while Renault’s second brand, Dacia, originally Romanian, has seen unexpected success in western Europe with its no-frills Logan model. 

Larry Burns, GM’s vice-president for R&D and Strategic Planning, was closely involved in the US car industry’s appeal to Congress for funding. As a 40-year veteran of GM, and now a key figure in the fight to save it, what does he make of Marchionne’s prediction of his firm’s impending implosion, and the fundamental realignment of the car industry? 

“It’s an extraordinarily critical time for this industry. Change is going to happen. But part of my job is to look back over the last 20 years, study history and see how many players have come and gone. Although it feels like it’s terribly dynamic, it’s not that radically different. Nations place a high importance on having auto industries. I think you have to look at a longer-term timeframe before you embrace a forecast like [Marchionne’s].”

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March 2009

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