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Car makers banking on partnerships to ride out downturn
Car makers banking on partnerships to ride out downturn Stamp
October 19, 2012
A Postcard from Europe
Car makers banking on partnerships to ride out downturn

Cars in Europe

Pinched by a recession and austerity measures, consumers across Europe are unwilling to buy new cars. That has hit the sales and profits of carmakers in the region.

 

If you are a tourist soaking in the quaint charm of Southern Europe, don’t be surprised if the cars there seem as old as the cobblestone streets!

Forgive the hyperbole, but the truth is consumers in countries like Spain and Italy have simply stopped buying new cars lately. Even the high-on-life French and the design-obsessed Germans are making do with their older vehicles. Apparently, the dire state of some of the Euro-zone’s largest economies is keeping people clinging to clunkers.

The cold reality of Europe’s economic problems is playing out in the auto industry. Car sales across the continent have tumbled consistently for the past five years. This year, the plunge has only accelerated. September marked the twelfth consecutive monthly decline in car sales. Spain actually posted a 37% fall in car sales last month. Even previously unaffected markets like Germany have been caught in the downturn.

Unfortunately, analysts have all but written off the prospect of a quick rebound in the European auto market. Some say Western Europe’s auto sales may not reach their pre-crisis level before the early 2020s. Almost all mass-market car manufacturers in the region are suffering. Fiat has been weighed down by the recession in Italy. Peugeot-Citroen of France is burning precious cash at the rate of €200 million a month. Opel in Germany is projected to lose $1 billion in 2012.

Governments have not been able to help these car companies due to their own constraints. In most European countries, the unemployment rate has risen. So governments are reluctant to let car makers shut down unproductive factories or downsize workforces. For instance, when Peugeot wanted to close a factory in France, the government, with an eye on the country’s powerful labor unions, showed its displeasure. No wonder, despite the collapse in demand, very few factory closures have been reported on the continent so far.

The good news though is car companies are increasingly turning to each other for help in this situation. The result: an unprecedented rise in the number of partnerships involving European car makers.

France-based Renault, which is already in a broad alliance with Japan-based Nissan, has also solidified its partnership with the German luxury automaker Daimler. Peugeot formed a partnership with General Motors (GM) in early 2012 mainly to work in conjunction with the American carmaker’s troubled European unit Opel. Sergio Marchionne, the boss of Fiat, which has bought a majority holding in the U.S.-based Chrysler Group, has been quoted as saying that without the partnership “we (Fiat) would have gone through hell.”

The importance of these partnerships can hardly be understated. A partnership arrangement helps two firms pool precious resources, such as cash, factories, and talent. Peugeot’s partnership with GM is a case in point. Peugeot and GM together buy a whopping $125 billion worth of parts and materials from suppliers. By choosing to produce cars together, the buying power of the duo simply doubles vis-à-vis their raw-material suppliers. Unsurprisingly, the two firms expect to save $2 billion in raw-material costs alone over the next five years. But make no mistake, Peugeot and GM, despite the partnership, will still be rivals marketing and selling cars independently.

In the case of the Nissan-Daimler partnership, the principal aim of the partners is to share production assemblies and engine designs, as well as to shift operations to low-cost factories. Nissan owns a huge industrial complex in Mexico where wages are a fraction of those in Europe. By shifting its flagship Mercedes-Benz assembly to Nissan’s Mexican factory, Daimler will save labor costs. For Nissan, assembling Daimler’s cars in its Mexican facility will keep the factory floor humming and help improve capacity utilization. Forthcoming regulations that mandate more fuel-efficient cars in the U.S. and Europe have also made the case for partnerships. By pooling capital to produce fuel-efficient powertrains, Nissan and Daimler are looking to share R&D costs as well.

It is noteworthy that partnership arrangements have their advantages over outright mergers. For one, they help car companies avoid the culture clashes that are typically part and parcel of a merger. For instance, owing to its failed merger with Chrysler a few years ago, Daimler prefers partnerships. But partnerships have their disadvantages as well. They rarely provide partners the same sense of trust a merger gives. One only needs to look at the partnership between Germany’s Volkswagen and Japan’s Suzuki, which ended in bitter litigations mainly due to the lack of trust between the two. Nonetheless, analysts opine that the recent wave of partnerships forged amid the gloom of the European crisis should work better than those formed in good times.

Indeed, for car makers in Europe, it is a bumpy drive ahead. But they have willing partners on the passenger seat to help them navigate through the bumps.

 

Image Credit: Bogdan Migulski on Flickr under a Creative Commons License

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