Saturday, May 30, 2015

Questioning Fiat's Push for Auto Industry Consolidation

The Wall Street Journal reports today that Fiat CEO Sergio Marchionne has been pushing hard for auto industry consolidation.  He's approached several other large automakers, and they have rebuffed his inquiries.  Why is Marchionne intent on pursuing mergers in the industry? 

He argues that it will help eliminate excess capacity and raise returns on investment.  According to the Wall Street Journal, Marchionne cited the superior return on capital earned by industries such as aerospace and pharmaceuticals in 2014.  Here we have mistake number one.  Mergers will not eliminate the gap in profitability between automobiles and pharmaceuticals.  Here you have to think about the structure of the two industries.  The pharmaceutical industry simply has a much more attractive industry structure (run through the five forces for the two industries, and you will see the advantages for pharma).  Mergers will not suddenly alter the fundamental attractiveness of autos relative to pharma. 

One also has to question Marchionne's belief that consolidation is inevitable.  NYU Professor Pankaj Ghemawat has argued persuasively that many CEOs mistakenly cling to a belief that industries must consolidate as they globalize, and that eventually a "Rule of Three" will prevail - i.e. three big players will dominate.   He's gathered data showing that many industries have become less consolidated as they have globalized.  That includes the automobile industry.  The Wall Street Journal article actually makes this point.  It quotes Bill Ford, who recalls the pushes for consolidation in the 1980s that did not work out (think Ford acquiring Volvo, Land Rover, and Jaquar, Daimler acquiring Chrysler, etc.).  Ford also notes that the industry has actually become less consolidated since that time.  Ford says, "Everyone thought that's where this industry was clearly headed,.  Of course, then the Koreans came in and now the Chinese are in.  The numbers have proliferated rather than shrunk." 

No comments: