Are mergers the next step to ensuring the survival of OEMs?
Towards the end of May, the trade press announced that FCA would enter merger talks with Renault — a merger that, if pursued, would create the third largest automaker in the world.
The question looming over all of this is: what happened to Nissan along the way?
As readers will know, Nissan and Renault have been in a partnership/alliance with one another for the last 20 years. Last year Japanese rival Mitsubishi also joined that alliance, but at this point it is unclear where things stand for Nissan, which owns less of Renault than Renault owns of it despite being the larger company.
An interesting piece of Canadian automotive history would occur if the merger were to be formalized. Renault will have come full circle in the Canadian market, securing an interest of some sort in the FCA Bramalea, Ontario plant that Renault built in the late 1980s to produce a new mid-size sedan called the Premier in another merger with American Motors at the time.
In 1987, Chrysler subsequently purchased American Motors — mostly for the coveted JEEP brand, but they also received quite a new, state-of-the-art manufacturing facility at the time in Bramalea. Renault quietly retreated from the North American market with the Chrysler acquisition of AMC.
An interesting piece of personal automotive history, at least for me, is that my father was involved in the negotiations with Ed Lumley who was the Minister of Industry Trade and Commerce at the time, to get the plant built in Bramalea.
Reminiscing aside, it is evident that we’re probably going to see a lot more of these types of mergers or outright acquisitions as time moves forward, over and above all of the technological joint ventures that we have seen in the past few years alone.
Attracting and retaining customers is about three things, as Canadian automotive analyst Dennis DesRosiers is fond of saying: “product, product and product.”
Consider the sports car market. How many two-door sports cars is a manufacturer really going to sell? It is a pretty niche market, so at a time when automakers are spending hundreds of billions of dollars on research and development — with a lot of that being spent on propulsion technology — it is not surprising that you see Mazda and Alfa Romeo linking up for two somewhat different variants of the same vehicle. Or how about BMW and Toyota? If there was to be a new Supra, it would be co-developed because increasingly developmental resources are constrained, especially for niche vehicles.
And the research and development costs don’t stop there. In addition to very expensive research and development on various propulsion technologies, OEMs are also investing inordinate amounts of money in automated and connected vehicle technologies. This, with the ultimate goal of minimizing the risk of injury or death in a motor vehicle, while also giving drivers back at least some of the time behind the wheel for other things that are more important to them.
In an industry that is also moving (at a pace yet to be determined) from personal vehicle ownership to shared vehicle modalities, manufacturers can ill-afford to be absent from having a stake in that emerging field as well. Once again, capital is required for investment into this area, leading to investment or ownership stakes being taken by OEMs into these platforms.
At some point this notion of having an investment or an interest in every possible potentiality for the future of the automotive industry may no longer be sustainable for more than one automaker — hence making the FCA/Renault merger perhaps the first of others to occur in the not too distant future.
The late Sergio Marchionne, former CEO of FCA, prophesied a year and a half ago that at least part of the automotive industry would become commoditized, like a generic cell phone, with fewer brands having the brand staying power.
Staying with the late industry icon, some may remember his famous slide deck from 2015 entitled “Confessions of a Capital Junkie,” in which he enumerated many of the challenges I have outlined that have only become exacerbated in the intervening years and are particularly challenging as the industry enters into a slower demand cycle.
Attracting and retaining customers is about three things, as Canadian automotive analyst Dennis DesRosiers is fond of saying: “product, product and product.”
This focus on the new and the relevant has squeezed product development cycles to around four years compared to something that was closer to twice that not that long ago. The quicker your product development cadence, the more capital is required to sustain that product cadence.
So it would seem that at every turn most OEMs are in a situation of rapid and significant capital investments in many areas that are essential to keep the OEM relevant, up-to-date, and compliant as the industry continues to move forward at a rapid pace.
At this point it remains to be seen how the FCA-Renault merger will pan out, but one thing is clear: it won’t be the last of these types of mergers in the automotive sector.
