A difficult industry
The automotive industry is the world’s largest manufacturing sector. It is complex in its structures and often financially opaque. It attracts much emotional and political attention. It can be a dangerous jungle for investors and regulators. Do not enter unadvised !
The industry develops, produces and supports complex assembled products, which have considerable social and environmental impacts. It works through long development, production, distribution and service chains, which bind together specialised partners, ranging from providers of advanced technologies to sources of finance and to local service and repair outlets. These chains are in the main closed, in that the interfaces between the levels do not function like the open markets of classical economics in which standard commodities are traded between multiple partners. The sector is characterised by product- and brand-specific links between oligarchies of technical and commercial specialists. Today, the vehicle manufacturers contribute only a minority of value-added in the chains and to the final products. They remain, however, the leaders and architects of them. Their behaviour is often predatory and domineering towards business partners, regulators and providers of funds.
The industry grew mightily through the 20th century, predominantly in the established industrial countries, only interrupted by the two world wars. It has undergone and continues to undergo long-term structural change: the globalisation of products; and the delegation by manufacturers to tiers of increasingly powerful systems, components and materials suppliers. Relationships between them, however, continue to be characterised by power-based dominance, despite professions of partnership. There is a element of compulsive and bullying behaviour in this industry, particularly over-competition in new vehicles through product proliferation and premature replacement, which inflates costs, depresses price realisation and raises the industry’s break-even point unnecessarily; brutal price pressures applied to suppliers of sub-systems, components and materials, which endangers the sources of much-needed technical innovation; and abuse of positions in the downstream sales and service/repair sectors, in order to extract monopoly rents from it, to make up for the inadequate profitability of the new vehicles business. The industry, while a model of operational efficiency along complex chains, lacks the strategic flexibility and reserves of strength to deal with the challenges of the 21st century.
The industry enjoyed a benign climate for most of the 20th century: a generally high level of social for individual motorised mobility; growing markets in open economies; plentiful and cheap petroleum-derived motor fuels; relatively few environmental or safety constraints; fairly light regulatory regimes; and generous support from national and local governments. These conditions have now changed substantially: most of the growth are in the less accessible emerging markets, whose nascent automotive industries are protected by national governments; a growing imbalance between demand and supply of crude oil, leading to considerable price increases and fluctuations; growing pressure for major cuts in greenhouse gas emissions from the transport sector; a lack of easily deployable technological solutions to these problems; and, ultimately, the demise of the automobile in its present form, to be replaced with other forms of motorised mobility. Social attitudes are gradually starting to turn against the automobile in developed markets and this will likely happen more abruptly in the emerging ones, as they run into their own energy and environmental constraints and realise that they cannot afford Western-style mass motorisation.
The upstream supply sector has accomplished much of its transition from multiple national players to global oligarchies of technological and functional specialists. While the balance of power has in theory shifted strongly in their favour, this is in practice not fully honoured. The downstream sector remains frozen in underdevelopment, through the manufacturers’ insistence on retaining control over brand-specific proprietary distribution, retailing and service networks of tied franchised dealerships, anti-competitively enshrined in US state dealer laws and protected by the European Union’s regulatory regime on vertical agreements. Control over these networks by incumbent manufacturers is a major obstacle to the entry of new competitors and inhibits the overdue shake-out of excessive products and producers.
Despite its remarkable technical and operational achievements and the huge contributions it has made to 20th century society, this is not a sector at ease with itself or with its outside partners. Self-obsession and lack of objectivity have led to some major strategic errors, for example ...
· DaimlerChrysler. This now celebrated failed merger (or takeover, as it was seen from the US side) illustrates the danger of optimistic and unverified assumptions. Daimler, a German but global-selling up-line car manufacturer, had really rather little in common with Chrysler, a US domestic volume producer of light trucks and some cars. So there were few synergies to exploit but much friction resulting from the takeover. Daimler suffered a similar frustration with Mitsubishi Motors. Both could have been foreseen but that was not politically correct at the time
· Ford. The company correctly observed that much of the money in the wider industry is made downstream, in service, repair and parts. It set out to move its centre of gravity in this direction, with the help of a $15 billion war chest. While this sounded huge, it was in fact not that big in comparison to the sheer size of the company. 10% of it was spent on one transaction alone, the acquisition of KwikFitEuro, the leading UK tyre and exhaust chain, with subsidiaries in France, Germany and the the Netherlands. This $1.5 billion acquisition was sold again some years later for $0.5 billion. Virtually no synergies with Ford’s mainstream business in the UK or elsewhere were ever achieved. Essentially because they never existed. It was a gratuitous waste of shareholders’ funds, based on a whim devoid of understanding. Parallel attempts were made to take over dealerships in areas of the US. These founded on bitter opposition, enshrined in state dealer laws
· eVs. There has been much ballyhoo around their prospects. Of course, we shall ultimately have to drive them but it only makes sense in energy and environmental terms once electricity generation is decarbonised. This is only true to any extent in very few countries and will take much time and expense to achieve elsewhere. We shall also need to get used to driving smaller and lighter vehicles, more slowly and less. To claim that we can simply electrify the current types of vehicles and thereby have and eat our greenhouse gas and energy security cakes is a gross dishonesty. As usual, governments are being asked massively to subsidise the substitution. Few seem to want to look critically at the economics of the proposition, how they might evolve and by when, and whether there really is any siginificant willing market for eVs. In the immediate future, there clearly is not. There will be tears, which could have been foreseen.
Government support has often been uncritically granted, perpetuating uneconomic activities. Or it has distorted competition. Thus the US government’s imposition of the CAFE regulations opened the door to the Japanese invasion of the American market, to which Detroit had difficulty in responding. The light truck loophole in them encouraged the US industry up a track that ultimately proved to be a dead end, resulting in very few US designed and built vehicles being sold abroad. Inability to manage the demand side through appropriate fuel taxation has left the US industry isolated for 3 decades. The French government has shown an obstinate commitment to arbitrary design-based constraints on competition in visible crash repair parts, to the detriment of French consumers and ultimately to that of its own automotive industry, become too dependent on monopoly rents from these. The Australian government persists in paying enormous subsidies in proportion to the size of the national automotive industry it is trying to keep afloat – with no identifiable route out of the bind. Malaysia continues to protect and subsidise its hopelessly uncompetitive national champion. No-one seems to dare ask about the opportunity cost of this “investment”.
There are positive counter-examples but they have often happened in defiance of the industry’s usual rules of behaviour: the sustained success of Bosch as a creator and deployer of advanced vehicle technologies, helped by its protected status of being owned by a foundation; the emergence of independent, all-makes focused service chains in tyre, exhaust and glass replacement, defying the conventional economics and controls of the downstream sector; the European system of safety and environmental homologation of vehicles, systems and parts, a fine example of inter-governmental and government-industry cooperation, together with European-national subsidiarity.
The moral for those already in the sector, contemplating entry, or needing otherwise to be involved with it (as financiers of regulators, for example) is clear: look before you leap. Look, interpret and understand. Don’t let yourself be carried away by optimism – yours or those who self-interestedly want to sell you a transaction or persuade you to make a contribution in the name of a supposed public interest. Look widely enough to see the context and deeply enough to see where the Devil is in the detail. Take the time to understand the structures, workings and dynamics of the industry, including the curious ways in which it competes. We Begin With An Understanding is not an idle phrase or empty slogan. We have invested 20 years and more in understanding this industry and many – not all – of its many facets. We have used that knowledge to advise actors and would-be actors, both within the industry and around it, at all its levels and across regions. Vehicle manufacturers; systems, components and materials suppliers; the various actors in the downstream sector; public authorities; and financial institutions. We are strictly independent and objective.