Global Reorganization: The Alliances of Giants

In the final decade of the twentieth century, the auto industry entered a great age of reorganization that might be called a tectonic shift. Until then, automakers of each country had competed by drawing on their home markets, each bearing its own character and history. America’s Big Three, Germany’s luxury makers, Japan’s mass-production companies that had perfected efficiency. Each had its own pride and culture.

But at the turn of the century, those self-reliant giants began to join hands across borders, or to try to swallow one another. Why did companies that had kept their independence seek to become one? The answer lay in a certain heavy fate the automobile industry carries.

Why did the giants join hands?

To put the reason in a word, it was ‘scale’.

To build a single automobile requires enormous development costs. A new engine, a new body, and the safety devices and exhaust countermeasure technology we saw in the previous episode. Developing these came to demand vast funds with each passing year. Moreover, to make cars that sell around the world, a maker needs to line up a diverse range of models suited to each country’s regulations and tastes.

Here is where ‘economies of scale’ come into play. The more you make, the lower the development cost and parts procurement cost per car. Conversely, makers of small scale grew less and less able to bear, on their own, the year-by-year heavier burden of development. To fight on a global scale takes global-scale stamina. This simple but inescapable logic drove the giants toward alliance.

The ‘merger of the century’ and its difficulty

Spoken of as a symbol of the reorganization is the merger formed in 1998 between a German luxury maker and a major American maker. Said to bring the two together on equal footing, this integration was called ‘the merger of the century’ at the time and is reported to have astonished the world. Combine German engineering with the American market, the strengths of both, and a colossal company without rival in the world would be born. Such were the hopes placed upon it.

This large-scale integration is said to have given a sense of crisis to other automakers as well, spreading a mood of ‘pursue scale’ across the whole industry. If the giants had joined hands, we too must find some partner or be left behind. The chain of reorganization accelerated in this way.

But running a merger said to be of equals proved far harder than imagined, it is reported. The initiative in decision-making, the approach to development and management, and above all corporate culture. Even between makers of the same automobiles, bringing together organizations of different countries and histories was no easy thing. The hoped-for synergy is said not to have been sufficiently realized, and this integration was dissolved in 2007, with the American division reported to have been sold to an investment firm. ‘The merger of the century’ closed its curtain in less than ten years.

From the brink of bankruptcy: another form of reorganization

While the merger exposed its difficulty, a union of a different form drew attention. The partnership, that is, the alliance.

In 1999, Japan’s Nissan Motor had fallen into a serious management crisis. Burdened with interest-bearing debt said to exceed two trillion yen, with bankruptcy whispered, the company formed a capital partnership with France’s Renault. It was a framework in which Renault invested in Nissan and supported its management revival. Under a manager sent in from Renault, Nissan carried out a bold restructuring plan, turned profitable within a few years, and was announced to have fully repaid its debt.

The path this Japanese-French union chose was not to melt the two into one, but for each to remain an independent company while cooperating. They held each other’s shares and joined hands in development and production. Keeping their respective brands and cultures, they sought to draw out the merits of scale. Not a merger but a partnership. This form came to present one model to the industry as another option for reorganization.

That said, the partnership form too had its own difficulties, as later history shows. An imbalance in investment ratios, a subtle tension over the initiative. For independent firms to keep in step over the long term carried challenges different again from those of a merger. Both forms had their light and their shadow.

Sharing and emerging markets: the new stage of competition

As reorganization advanced, what the giants commonly took up was ‘platform sharing’.

A platform is the skeleton that forms the foundation of a car, and the basic parts such as the engine and chassis. If this foundation can be shared across several models that differ in appearance and brand, development costs can be greatly held down. Because the same parts can be made in large quantities, procurement costs fall as well. Sharing the foundation by making use of group or partnership frameworks became the central method of the reorganization era, tying economies of scale to actual profit.

And another thing: the stage of competition itself widened. As the markets of developed countries matured, makers turned their eyes toward the emerging nations where automobiles were yet to spread. Countries with large populations and continuing economic growth were vast future markets. Companies built local factories in such regions and brought in affordable cars suited to the land. Global-scale competition was no longer a matter confined to the developed world.

From the end of the twentieth century into the start of the twenty-first, the auto industry waged cross-border alliances, and many a giant union was born and changed shape. The reorganization of giants in pursuit of scale, including both success and setback, tells of how vast and how fund-hungry this industry had become. And yet, behind it, a new challenger was quietly about to appear, one who would deny the very premise of a century’s standing, the internal combustion engine itself.