Brand and Ownership Concentration in the European Automotive Industry - Possible Scenarios for 2025

KPMG Europe LLP

This is the second part of the report published in previous issue.

Number of Motor Vehicle Manufacturers around the globe?
 
Back in the 90s, the CEO of VW, Ferdinand Piech, forecast that "in the long term, only six motor vehicle manufacturers in the world will survive," a forecast that Fiat boss Sergio Marachionne has recently also repeated. But how many automakers are there actually today?

The question may seem somewhat mundane: the car manufacturing "gang" looks like it can be easily pinpointed and quickly quantified. The question is, however, far more complicated than it at first appears. This is because, in addition to the big and globally active manufacturers, there are also numerous small companies active only at the national level, whose number is difficult to estimate. In China alone (according to estimates), there are more than 100 legally and financially independent motor vehicle manufacturers.

The question as to the "actual" number of automakers in the world appears to be merely academic in nature. For many suppliers, however, it is extremely important: at the end of the day, it is a question of customer numbers and therefore, of the size of the relevant market for specific units and components as well as plants and tools.

The answer to the question depends, of course, on how many automakers there actually are that can be clearly and unambiguously defined as such. Can we include small-scale manufacturers like Pagani and Donkervoort, or companies like Caterham and Morgan in the group of automakers? And, if we only include "global" manufacturers how do we definitively distinguish a globally operating manufacturer from a national one? Or quite specifically: is Tata already a global manufacturer, or is it still just a national one?

Ultimately, these questions cannot be answered in precise scientific terms, as every selected criterion for delimiting the automotive industry group can be disputed. What remains is factual plausibility, which, however, always only results in orders of magnitude, and not in statistically precise figures.

If we leave size and global sales and distribution aside, there may well be more than 100 legally and financially independent companies producing automobiles around the world. If we leave the micro-scale manufacturers with production volumes of less than 1,000 units out of the equation, there are still 60 to 70 companies. How many of these can truly be called globally active manufacturers?

The statistics provided by the International Organization of Motor Vehicle Manufacturers (OICA) for 2008 specify 50 motor vehicle manufacturers, of which 42 are passenger car manufacturers (figure 4).

If we take the equitable interest complexities between these motor vehicle manufacturers into account, the number is reduced to 32. If we form a ranking from this, the biggest 13 manufacturers can certainly be identified as global without further discussion, as they unquestionably demonstrate a wide-ranging international distribution of production, and more importantly, of sales.

Eight companies can be identified as partially globalized manufacturers, as they demonstrate significant international activities, but they basically continue to be strongly dependent on their domestic markets. Nine remaining companies must then be considered as active only on a national level. The number of these companies is, of course, actually higher (as mentioned above), as not all manufacturers are included in the OICA statistics - only the 50 biggest in unit number terms.

This classification is not unimportant for this study, because, as already demonstrated, the market-level consolidation of the automotive industry is not a continuous process - it is actually repeatedly interrupted by deconsolidation phases. This deconsolidation is caused by nationally active manufacturers developing into international motor vehicle manufacturers, which significantly increases the number of competitors on the individual markets for short periods of time.

Consolidation of European Automobile Industry

2.4 Country-specific developments

The empirical evidence supporting consolidation process in the European automotive industry is high.

The model also has high explanatory power for country-specific purposes. Nevertheless, there are some national industry consolidation factors that cannot be considered in the general model, as they can be attributed to national characteristics. These are addressed in the following country specific considerations.

Specific national developments do not impair the structure and explanatory power of the illustrated model. More to the point, special factors can be integrated into the model as additional intensifiers, and therefore, increase its informative value on a national level. In chapter 3 the continued consolidation course in the automotive industry will therefore be illustrated from a prospective point of view on the basis of this model within the scope of two selected scenarios.

The following presentation of the country-specific consolidation process does not claim chronological completeness in terms of a historical overview. What it actually shows is that the driving forces and factors influencing the industry model developed above have had an effect in all industries. The following information is essentially restricted to a presentation of special features, while focusing on post-war developments.

2.4.1 The consolidation of the German automotive industry

The consolidation of the German automotive industry is characterised by the following three features:

▪	The number of new motor vehicle manufacturers entering the market after the Second World War, was particularly high in Germany. These were primarily small and microcar manufacturers. This development must be considered the context of the almost complete destruction of the German economy and transport infrastructure. Furthermore, many people thought Germany would need several decades to heal the scars of the War, and there were also political arguments against the reindustrialization of the German economy ("Morgenthau Plan"). Against this backdrop, it appeared quite probable that purchasing power in Germany would only increase slowly, and small cars and micro-cars would be the only option for those buying their first car. This expectation was not fulfilled, and as a result, post-war consolidation in Germany was significantly stronger than in other European countries.
▪	The strong orientation of the German automotive industry towards the premium segment meant that economies of scale did not have, as much of an effect on the consolidation process in Germany as they did in other countries. Motor vehicle manufacturers in Germany were also able to survive with relatively small unit numbers, whereby in Daimler's case, the commercial vehicle segment must be seen as an important support base of the overall business segment.
▪	German economic policy has traditionally been relatively liberal and market-oriented, meaning that until, recently, there was hardly any state support for struggling motor vehicle manufacturers. Despite the major insolvencies and threatening corporate collapses of the 60s, the state did not intervene in the shakeout process. This was the case with Borgward, for example, which had as many as 20,000 employees in Germany prior to shake-out. The consolidation of the German automotive industry was practically complete by the end of the 70s.

 

Case Study Consolidation in the 60s: Borgward, Auto Union, NSU, and Hans Glas GmbH When the "economic miracle" ended, the German automotive industry experienced a far-reaching consolidation wave in the 60s, which, in contrast to other European countries, was not stemmed or delayed by state rescue plans. ▪  At the beginning of the 60s, the automobile manufacturer Borgward filed for bankruptcy of its brands. This was caused by an insufficient brand and model policy, rapid model changes, and technical modifications to the vehicles. The result was that Borgward did not achieve the desired long-term profit effect, despite innovative technology and comparably high unit numbers.   ▪  In the 50s, Auto Union was extremely successful on the German market with its DKW brand. With their three-cylinder engines, its vehicles were cost-effective and had relatively good mileage. Fear of the European automotive market developing more and more in the small car direction led to Auto Union's acquisition by Daimler- Benz in 1958. When it became clear that the feared market segment shift would not materialize, Daimler-Benz sold its partnership interests to VW. In 1965, and now underlie Audi brand name, VW brought the first four-stroke engine from this alliance to the market (Audi F103).   ▪  NSU was another motor vehicle manufacturer that disappeared from the market at the end of the 60s. The company had initially been very successful with small cars (NSU Prinz); the revolutionary and trend-setting NSU Ro 80 was developed in 1967, but did not achieve the required financial success. NSU was acquired in 1969 by Auto Union, which was rebranded in the VW Group in 1985 as Audi AG.   ▪  Hans Glas's history also began with production of a small car - the Goggomobil. When it became clear that the trend was towards higher-value vehicles, engineer Hans Glas decided to follow the trend by producing sports cars. BMW acquired Glas in 1968 and production of Glas's last car, the Goggomobil, finished in 1969.   With the consolidation wave of the 60s, the concentration process in the German automotive industry was essentially complete - earlier than in most other European countries manufacturing motor vehicles.

 
On the basis of its strong international orientation and intense competition for several decades (which was also a consequence of a liberal economic policy), German motor vehicle manufacturers were not negatively affected by the globalization phase. On the contrary, German motor vehicle manufacturers pursued an active consolidation strategy in this phase, which, however, was only partially successful. Volkswagen, consequently, managed to incorporate two other European automakers with Seat and Skoda; BMW acquired Rover; and Daimler completed a "merger of equals" with Chrysler. Both mergers proved to be unsuccessful, and ended up in the respective de-mergers.

Porsche lost the takeover battle with Volkswagen in 2009. The company' take-over attempt began as a brilliant coup, but was thwarted by the financial crisis and Volkswagen's strategic strength. The result: Porsche is becoming a future VW brand.

2.4.2 The consolidation of the French automotive industry

The consolidation process in France was characterised by the following two special features:

▪	Even before the Second World War, two major corporations had established strong market dominance: Citroen and Renault. After the war this made it difficult for other companies to enter the market, with the result that the consolidation process in the 50s and 60s, featured hardly any small car and microcar manufacturers - it was essentially dominated by luxury car manufacturers.
▪	The traditional interventionist economic policy in France resulted in massive interventions into the consolidation process in the automotive industry. The industry consolidation in France was consequently, delayed and diluted in its effects. French manufacturers also tried to utilise the globalization phase to strengthen their position on the market.

 

Case Study From Peugeot to PSA In the 70s and early 80s, Peugeot became one of the most important drivers behind the consolidation process in the French automotive industry. The company first took over Citroen in 1975, and then in 1978 acquired Chrysler's European operations with the Simca and Matra brands. For marketing reasons Simca was rebranded in 1979 as Talbot, a manufacturer that Simca had actually bought in 1959. This brand proved, however, incapable of competing in the long-term, and production was stopped in 1986. As already pointed out, PSA tries to compensate for its relatively small size with an active co-operation policy.

 

▪	PSA pursued a very active cooperation strategy based on finished vehicles (Toyota) and engines (BMW).
▪	In recent years, Renault has been operating an active consolidation strategy, which has led to its interlocking participation with Nissan, its acquisition of Dacia and SsangYong, and a minority holding in AvtoVAZ.

 
2.4.3 The consolidation of the British automotive industry

The consolidation process in the British automotive industry must be seen and understood in terms of its overall correlation with the general economic development in the UK. This development was characterised by continual de-industrialization, which in turn was rooted in an extremely high trade union influence on both individual companies and the private sector. The decline of the British automotive industry in the 60s and 70s, therefore, cannot be explained without including the dominant role of the trade unions, it is not claimed here that this was the only factor contributing to this decline. The "shop steward" system resulted in the repeated postponement of painful but necessary structural adjustments in the respective companies, which led to a rapid decline in international competitiveness. Only in the mid-80s was the UK's de-industrialization stopped and partially reversed through a change in economic policies and extensive structural reforms. These, however, came too late to permanently rescue the remaining automotive industry activities.

The history of the British automotive industry effectively ended with Jaguar's acquisition by Ford, and Rover's insolvency in 2005. All that was left were a few famous small-series manufacturers, such as, Aston Martin and Morgan in particular. Jaguar was taken over in 2009 by the IndianTata Group.

2.4.4 The consolidation of the Italian automotive industry

The structure of the Italian automotive industry was characterised immediately after the Second World War, by the sheer dominance of the Fiat Group, which controlled the Italian market in the 50s, to such a degree that market entry was almost impossible. Other manufacturers were really "niche" providers in character, primarily of sports cars and vehicles in the high price range.

Case Study British Leyland and the decline of the British automotive industry The British automotive industry consolidation process was completed in two waves: ▪  The first wave came in the early 50s, with the founding of the British Motor Corporation (BMC), a merger of Austin and Nuffield, which united brands including Austin, Mini, Morris, MG, Vanden Plas, Riley, Wolseley, and Austin- Healey. Over the years there was a gradual shake-out of the brand and product portfolio, but it was not enough to make BMC profitable for the long term.   ▪  The second consolidation wave appeared in the mid-60s. Firstly, BMC and Jaguar merged to become British Motor Holding (BMH) in 1966. Soon thereafter in 1968, BMH fused with the Leyland Motor Corporation to become the British Leyland Motor Corporation (BLMC).   British Leyland became the symbol not only of the decline of the automotive industry, but of industry in the UK as a whole. The company did actually have a wide-ranging brand and product portfolio, so it really should have been in a position to meet the requirements of an increasingly differentiated automotive market. The fact is, however, that it never succeeded in strategically positioning the multi-brand corporation, which also would have meant eliminating individual brands from the portfolio. This was also complicated by considerable quality problems and low productivity in more than 40 production sites. The shop steward system prevented production activity restructuring. British Leyland was nationalized when it filed for insolvency in 1975, which did nothing to stop falling sales and production. During the course of Margaret Thatcher's political reforms in the 80s, British Leyland was reprivatised as the Austin Rover Group and sold to Jaguar in 1984. From 1988, the company traded under the Rover name after Honda had secured a 20 percent holding. Rover's fate was sealed when BMW took over the company in 1994, and then sold it because of increasing losses to the Phoenix-Venture Group in 2000. Low unit numbers meant Rover's continuation was a hopeless undertaking from day one. Rover filed for insolvency in 2005.

 
They all came under growing consolidation pressure over the years, mostly because of internal problems. Lancia was consequently, acquired back in 1969, and Alfa Romeo followed in 1986. Fiat also secured a holding in Ferrari in 1969, and after an extremely chequered history, Maserati was then also added to the portfolio.

The Fiat Group was therefore, a driving force in the industry's consolidation, into which the other Italian motor vehicle manufacturers were gradually absorbed. Fiat was supported in this endeavour, both directly and indirectly, by the Italian government. Direct support came through state subsidies, which were quite high in some cases - for example, to locate new automobile plants in structurally weak regions. Indirect support came through state import restrictions, which were in place until the early 90s and which were used in particular to combat Japanese manufacturers.

Fiat was also strengthened by the sale of a put option in 2005, which would have obliged General Motors to take over Fiat completely. General Motors has had a ten percent holding in Fiat since 2000.

Fiat was threatened for a long time in the 90s, with becoming a victim of globalization. The increasing import competition, in particular, eroded Fiat's traditionally strong position on its domestic market. With Chrysler's entry, Fiat attempted to strengthen its international market position and become a global consolidation winner.

Will China follow the European Consolidation Process?

Will the consolidation process in the Chinese automotive industry follow the European model, or will it take a different path from the one predicted by the industry model proposed here?

First of all it must be stated that the current overcrowding of the Chinese automotive market has different causes to those experienced by the European markets in the 20s and 50s. While in Europe it was inventive engineers and courageous entrepreneurs that wanted to participate in the anticipated market growth, the numerous Chinese motor vehicle manufacturers that exist today emerged during the Communist regime of Mao Zedong. Unlike the controlled economy in the Soviet Union, which, shaped by Stalin, was based on strong heavy and processing industry with massive state holding companies, the Chinese Communist Party has pursued a more decentralized economic policy, which granted the individual provinces a relatively high level of freedom.

The result was the emergence of numerous small and micro companies, which did not originate with the innovation of new technical solutions, but rather are rooted in a mechanical/technical tradition. Most Chinese motor vehicle manufacturers from the country's Communist period were, and still are, manufacturers that produce automobiles using mostly out-dated technology with a low level of automation, and which - compared with international standards - can scarcely be described as competitive.

This period is defined by the events ranging from the foundation of the People's Republic of China in 1949 to the country's economic opening up around 1978. The cooperation with the Soviet Union and the intervention of the Chinese Government resulted in a decentrally developed industrial structure in the automotive sector, which still today is characterized by China's low automation manufacturing processes.

A look at the industry's structure in China today essentially reveals four different types of automotive companies:

▪	Independent national private sector organized companies (for example, Brilliance).
▪	Independent state-owned companies (for example, Chery).
▪	Joint ventures with western manufacturers, who, however, also develop their own models (for example, SAIC).
▪	Joint ventures as purely manufacturing companies (for example, Changan).

 
The industry model proposed here, can only be applied to the first group of motor vehicle manufacturers: with the other corporate forms, state or international influences control the consolidation process.

As far as the purely national private sector of the Chinese auto industry is concerned, we can see that it tends to correspond with the European automotive industry of the 50s.

The key driver behind this sector's future industry consolidation is, therefore, the need to implement economies of scale. This driver is boosted by rising customer requirements, which are increasingly oriented towards western quality and technology standards.

The market exit barriers are low, as the central Chinese Government sees no reason to rescue individual small-scale manufacturers because of the numerous joint venture companies. A significant and sustained shake-out of the national-private sector of the Chinese automotive industry must therefore, be expected in the coming years.

(To be concluded)