Embracing the New Era of Automobile Giants: Only the Major Players Will Persist
Embracing the New Era of Automobile Giants: Only the Major Players Will Persist
Last week, two prominent Japanese automakers declared their intentions to unite, aiming to become the globe's third largest automaker. Although the specifics are still unclear, they anticipate disclosing their union within the next half year.
Mergers in the automotive sector are not a new phenomenon. Since the early 20th century, when various brands merged to form General Motors (GM), such alliances have occurred frequently. However, analysts suggest that the potential merger between Honda and Nissan could spark a wave of similar agreements that might restructure the industry.
As Jeff Schuster, GlobalData's global vice president of automotive research, puts it, "The environment appears to be conducive to additional mergers." Although he believes the Honda-Nissan deal will not necessarily trigger additional agreements, it could speed up the process.
Several factors contribute to the potential for mergers, including technological advancements, the automotive industry's substantial appetite for research and development, and capital spending, as well as tight profit margins. The trend towards consolidation is expected to intensify in the coming decade. It may be that only the largest companies will remain viable.
"It becomes increasingly challenging to survive without economies of scale if everyone else has them, particularly as we move into new technology," said Schuster. "In a highly competitive market, it encourages partnerships that may not have happened otherwise."
Technological advances and significant expenses
The shift from gasoline-powered vehicles to electric vehicles (EVs) and self-driving technology has already cost the automotive industry tens of billions of dollars in research and development costs. This transition will likely require tens of billions, if not hundreds of billions of dollars more across the industry.
The push towards electric vehicles is driven partly by environmental regulations that could make profits from internal combustion engines less secure in the future, and partly by investor demand for stock valuations akin to Tesla. However, so far, the majority of automakers have not been able to turn a profit from EVs, with Tesla and some Chinese manufacturers being the exceptions.
"The unfortunate truth is that the investments are not yet paying off, and it will take longer than anticipated," said Schuster.
Though consumers have demonstrated interest in advanced driver assistance features, such as automated braking and human-supervised highway driving, the reality of developing true self-driving cars has proven to be elusive. GM recently scrapped its robotaxi plans due to the costs, while Ford discontinued most of its self-driving development efforts in 2022. Nevertheless, Tesla and others continue to push forward with their self-driving plans, increasing pressure to innovate – even if at a more modest scale than initially anticipated.
The expense of developing these new technologies is expected to drive more mergers and transformations in the automotive sector, said K. Venkatesh Prasad, senior vice president of research for the Center for Automotive Research, a Michigan think tank.
Beyond technological change, increased competition from Chinese automakers is another concern. Once barely noticeable on the global market, Chinese automakers have now positioned themselves to become significant players internationally. BYD, one of the largest Chinese manufacturers, sold more than 4 million cars in 2024, a leap of 41% compared to the previous year, while Western automakers saw more modest growth. Surprisingly, over a third of BYD's sales are electric vehicles.
Chinese automakers are already making a mark on the European market and are anticipated to eventually capture a substantial portion of the North American market.
"I believe this is only the beginning," Prasad said of the Honda-Nissan announcement. "These forces of powerful economic and technological change are accelerating the push to merge."
Prasad is unsure which companies will combine, but he is confident that there will be significantly fewer major automakers operating independently in the next five to ten years.
"There isn't room for as many players in this market," he said. "Perhaps two in Japan, two in Europe, two in the U.S., and perhaps two in China. Going from twenty to eight – that's a substantial decrease."
Auto mergers aren't without challenges
However, experts caution that mergers won't always be straightforward. Previous automotive mergers haven't always been successful. For example, Daimler-Benz, a German automaker, agreed to purchase Chrysler Corp. in 1998, only for the combined group to disintegrate a decade later. Eventually, Chrysler went bankrupt and required a government bailout within two years.
Chrysler's most recent merger, with Europe's PSA Group in 2021 to form Stellantis, also faced challenges pervasive in the last year, with falling sales and profits. Additionally, Nissan's alliance with Renault, while not a formal merger, ultimately disintegrated following the arrest of Nissan's CEO Carlos Ghosn in Japan on charges of significant financial misconduct. He managed to escape the country before trial.
Political concerns also prevent some mergers from occurring, noted Peter Wells, professor at the Cardiff Business School in Wales and director of the Centre for Automotive Industry Research. Some countries may be reluctant to allow their national automakers to unionize with a foreign company.
Furthermore, new entrants can disrupt the automotive market on their own, as evidenced by Tesla's growth and the increasing impact of Chinese manufacturers like BYD, pointed out Wells. Even new entrants such as Hyundai and Kia, while still relatively new to the market compared to legacy automakers, have become significant global players.
It appears there's often talk about consolidating into a handful of significant entities, stated Wells. The issue, however, is a couple of factors, such as political influences in certain regions and the appearance of newcomers who usually disrupt the consolidation process.
Certain prominent players, like Volkswagen or Ford, have organizational structures that might hinder, if not obstruct, merging with other automakers altogether.
Ford, for instance, has two varieties of shares that grant the Ford dynasty, led by Henry Ford's great-grandson, Bill Ford Jr., significant control over the vehicle manufacturer. Unwilling to relinquish their power, the Ford family has maintained their grip on the company's helm.
As for Volkswagen, approximately 20% of its shares are owned by the Lower Saxony German state, where the company is headquartered. This ownership structure presents another obstacle to a full merger. Despite announcing an alliance in 2018, Volkswagen and Ford have yet to pursue a comprehensive unification.
Therefore, some consolidations might materialize as alliances instead of traditional mergers.
In September, GM and Hyundai revealed plans to collaborate on future vehicle development, including both conventional gas-powered vehicles and electric vehicles (EVs). Further, they've agreed on jointly sourcing raw materials for batteries, steel, and other essential components for vehicle production.
Wells believes that further consolidation is possible, particularly within the Chinese automotive sector. Legacy automakers may shrink in size as the portion of the global market interested in traditional gasoline-powered vehicles continues to diminish.
"We'll witness a gradual contraction of the existing players," he said, referencing the brands and markets that automakers like Ford and GM have abandoned over the past 15 years.
"We are currently witnessing this happen, with an increasing number of plant closures, and a loss of market share," he added.
The potential merger between Honda and Nissan could incentivize other automakers to explore similar alliances, according to Jeff Schuster. This trend towards consolidation is driven by significant expenses in technological advancements and the shift towards electric vehicles.
Furthermore, the push towards electric vehicles and self-driving technology is expected to drive more mergers in the automotive sector, as indicated by K. Venkatesh Prasad.
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