Here is one of the great mysteries of commerce. Car companies around the world recruit only the brightest and the best. They hire brilliant engineers and designers, creative product planners and marketing people, solidly reliable financial and legal experts. Each company is supposedly led by a visionary with a full complement of MBAs and industry accolades.
All these talented people work hard and are handsomely rewarded. Their task is to create products that consumers already want, and in many cases cannot live without. To do so, they are provided with budgets that are exceeded only by national defence depart-ments and aerospace companies. How hard can that be?
And yet, the parts are often greater than the sum. Time after time, these ever-so-clever people collectively screw up.
Whole communities suffer when they do. The results go way beyond the thousands of employees, shareholders, suppliers and distributors directly involved. The ripple effect reaches into regional shopping centres and as far as pumped up politicians in the nation’s capital.
Today’s casualties are all around us. All that remains of MG Rover are excitable newspaper headlines about the possibility of a manufacturing revival at Longbridge, or Coventry, or anywhere. In the United States, General Motors and Ford are desperately liquidating factories and jobs as they fight to stay in business. The shuttered car factories at Dagenham (Ford) and Luton (Vauxhall) are testament to the fact that they have already been through similar processes in Europe. Renault was forced to do the same a decade ago.
Volkswagen and Mercedes-Benz in Germany are now cutting thousands of jobs because they are inefficient. Fiat Auto remains among the walking wounded after four years of heavy losses, during which time a third of its market share in Europe vanished.
These developments did not happen by chance. They occurred because a few years ago the decision-makers at the companies concerned over-estimated their own abilities and under-estimated those of their competitors. They simply got it wrong.
The motor industry being the long-lead business it is, the effects of those bad calls take time to filter through. But when consumers start to reject a company’s products – because they’re too bland, unreliable, expensive or whatever the reason – there is an inevitable impact on the bottom line. Heads roll, jobs are reassigned and fresh strategies are dreamt up. Focused on the future, the gung-ho new leadership teams do not want to dwell on the mistakes of their predecessors, at least not in public. But it will take years for the new strategies to show results. What guarantee is there that those suppliers, dealers and so on who got burned before will not be again? Trust us, is the only refrain from the latest managements.
It’s a cop-out with the potential to perpetuate problems. The famous health care and pension legacy costs that GM and Ford maintain are the crux of their current troubles are not new. They were known about 20 or more years ago, but nothing was done to address them. Is that because the corporate cultures that created those messes also shaped the philosophies of the people now running the shows?
Carlos Ghosn demonstrated how an outsider can act decisively, first at Renault and then at Nissan. The Japanese car maker stumbled from one ineffectual set of managers to another until it almost went bankrupt. It took Brazilian-born Ghosn, a tyre industry man far removed from the cosy keiretsu culture of Nissan and Japan, to identify the problems. The outsider’s vision for Nissan was far greater than anything Nissan had for itself. Ghosn saw that Nissan was beyond tinkering. He gave it the type of radical shake-up that GM and Ford now need. Ghosn, though, is an exception in an industry that is “myopic”, according to John Wormald, a founding partner at the Autopolis automotive consultancy. “The industry is so caught up in its own rhetoric that it somehow doesn’t see the reality,” says Wormald, co-author of “Time for a Model Change” (Cambridge University Press), a book that identifies the need for the international motor industry to reform itself.
Whether it will change is another matter. Professor Karel Williams of Manchester University, a business strategy academic with a special interest in the motor industry, maintains: “If the industry could change, it would have done so years ago.”
Today’s runners and riders
Big car groups fall into one of three categories – the good, the bad and the indifferent. Some characterisations are arguable, but they broadly reflect respective performances in terms of sales, profits, technology and growth.
In alphabetical order, the pace-setters are BMW, Honda, Hyundai-Kia, Porsche, Nissan and Porsche. Ford’s Volvo and VW’s Audi probably fall into this category as well.
The mid-fielders are the Chrysler bit of DaimlerChrysler, PSA/Peugeot-Citroen, Renault and Suzuki, plus Ford’s Land Rover and Mazda and VW’s Skoda.
The back-markers comprise DC’s Mercedes-Benz, Fiat Auto’s various brands, Ford (including Jaguar), GM (including Saab), Mitsubishi Motors and VW’s Seat and Volkswagen businesses.
The standings of these groups were determined years ago, in many cases by managers who were subsequently directed towards the exit door. Whether their strategies were successful or not, though, certain themes emerge.
The groups that are struggling are largely those that pursued mergers and takeovers. The amount of money Ford threw at Jaguar over the years, or GM at Saab, will probably never be recovered. Worse, the purchases bogged down scores of Ford and GM personnel who might have been more fruitfully employed in other areas. This level of executive turnover has an unwanted side effect. “Some people get promoted outside their realms of knowledge,” suggests Philip Wylie, automotive team leader at consultants PwC in London
By contrast, Toyota stuck to what it does so well, which is to create top quality vehicles that consumers want to buy. It grew organically by building greenfield factories and by creating a luxury brand of its own, Lexus. Says Wylie: “It’s taken a long time, but I would suggest the Lexus brand is as strong in Europe today as Jaguar is.” In the United States, of course, Lexus, launched in 1989, has long been a major player.
Toyota’s results speak for themselves. It is only a matter of time before it overtakes GM to become the world’s leading vehicle maker. Unlike GM, though, Toyota has the type of financial foundations that leave its competitors in awe.
That commercial success allows Toyota, and other successful firms, to generate the cash to throw plenty of new models into the market. This continuous supply of new models is critical, as Prof Karel Williams of Manchester University, points out: “If you look at the companies struggling, they’re the ones who are running out of cash.” The temptation, then, is to cut R&D spending on new models. “In the long term, that just creates bigger problems down the road,” says Mike Steventon, head of automotive at KPMG in the UK.
But gaining additional scale through mergers is not necessarily the solution. “The track record of mergers and acquisitions, way beyond the motor industry, is deplorable,” says John Wormald of Autopolis. “Ninety per cent of them don’t do what they say on the tin.”
The disparity between the experience of M&As and going it alone will not be lost on the industry. “It’s inconceivable that Toyota would buy anything big,” says Steventon, who adds, “I’m not sure we’ll ever see another big merger like DaimlerChrysler.” He says rival car makers will opt instead for specific joint ventures that do not involve capital ties.
The pursuit of takeovers was not just for scale reasons, though. Much of it was driven by egos. “These mergers have been dominated by mad egos and petrol-heads,” ventures Williams. He likens Ford’s purchase of Jaguar to the ageing, wealthy businessman with the pretty young mistress on his arm. “It’s one way of wasting an awful lot of money,” he says.
The cult of the personality proved counter-productive in many parts of the motor industry: Juergen Schrempp at DaimlerChrysler, Ferdinand Piech at VW, Paolo Cantarella at Fiat and Jacques Nasser at Ford. It’s not a career-enhancing move to oppose a strong boss. But that can create commercial flops like Smart, the VW Phaeton and Fiat Stilo – and for Ford’s neglect of the medium saloon car sector in the US.
Culture is the root cause of the failure of so many mergers and takeovers. It is also the reason for the success of companies that have remained independent like Toyota and Honda. “For an acquisition to work, there has to be a real joining of cultures, a merger of souls,” says Steventon. Adds Wormald: “Because of the depth of these cultures, they are not always compatible.”
Neither is it possible simply to copy a successful culture like Toyota’s. “Attempts to reinvent car companies are a waste of time,” says Williams. “They’re invariably half-baked and unsuccessful.”
Conservative, considered and diligent, Toyota’s business model is, however grudgingly, probably the most admired in the motor industry. Quality is not just a boardroom buzzword. It is part of its DNA. Unlike so many of its rivals, which are weighed down by more immediate concerns about survival and quarterly results, Toyota is able to embark on serious long term planning – which doesn’t include diverting takeovers.
A perspective of just how far out Toyota is focused was provided by Jim Press, the head of its US operations, in a recent radio interview in Chicago. He was quoted as saying: “In our company, there are two planning processes, short-term and long-term. Short term means in our lifetime.”