Consolidate or be damned

Be prepared for a major realignment of the world automotive markets, warns Les Mara of Cap Gemini

Europe’s defence firms get March merger deadline,’ read the splash story. It referred to an unprecedented move by the British, French and German governments: Europe’s defence industry chiefs were given three months to come up with a plan to restructure the industry to meet the threat from consolidation of defence and aerospace giants in the US. ‘The message is rationalise or die,’ said defence secretary George Robertson.

Motor industry executives would do well to study this story with care: it has lessons which could affect the success and indeed the survival of their own companies. In automotive, as in pharmaceuticals, the overall industry structure and its underlying assumptions are simply no longer viable. It must change dramatically.

A combination of pressure factors are squeezing the industry into a significant realignment, and I believe this will happen within five years. Some of the most important of these are:

* Slow growth in demand. Despite potential new markets in the developing world and Eastern Europe, overall sales are not growing strongly. Analysts predict we are unlikely to see the big year-on-year increases of earlier decades.

* Rising consumer expectations. With relatively stagnant demand and a supply side characterised by over-capacity, it is now a buyers’ market. Customers demand more car for their money, more features, more discounts.

* Pressure from financial markets. Shareholders and the financial markets are continuing to exert pressure for higher earnings growth.

* The marketing arms race. In chasing a finite consumer spend, the industry is putting ever-increasing budgets into high-profile advertising and marketing, in a scramble that has often been likened to the arms race of the Cold War. A similar observation applies to expenditure on research and development. The investments needed to stay ahead continue to escalate.

There are of course many other pressures on today’s motor manufacturer: from new legislation, from safety bodies, from environmentalists.

How will the industry react? One thing that seems certain is that the structure we see today is no longer viable and cannot continue. The pressure on earnings generated by sluggish growth and ever-tougher competition means that a paradigm change is imminent. In its present form, the world’s motor industry does not compute.

In understanding what is happening to the motor industry, we should look at what has already happened in other industries. We find a simple, if hard lesson, that can be expressed in one word: consolidation. We can turn to industry after industry and find the same pressures and the same response: mergers, acquisitions, rationalisation, consolidation.

Who would have foreseen 10 years ago the coming together in aerospace of McDonnell Douglas and Boeing, or in my own industry, of Compaq and Digital? Mergers on this scale have an impact beyond the employees, customers and shareholders of the companies concerned. They have profound knock-on effects on all the other players in the marketplace. Faced with a new giant competitor, even large players can be marginalised: forced out of their own most lucrative markets because of simple lack of clout – insufficient resource to innovate rapidly enough, purchase cost-effectively enough, or market themselves aggressively enough.

In the US, in Japan, and in many European countries we see in the car industry what would, by the standards of other industries, be judged as too many competitors for even medium-term viability. We see duplication of costs in all areas, from design through to manufacturing, distribution and marketing. Above all, we see inability to cope with the pressure factors outlined.

The lesson of other industries is clear and the logic is compelling: consolidation is coming on a massive scale. As with all such realignments, there will be winners and losers, but this is by no means decided merely by the hand of fate. Companies that thrive in periods of major change recognise and understand the factors driving it. They plan and manage the change as opposed to being driven along by it.

Those with the foresight to grasp this essential truth will find that when it comes to taking action, they need not do so alone and unaided. Powerful techniques of computer-aided simulation are there for planning their overall business and competitive strategy. Questions of outsourcing versus insourcing, of product diversity versus rationalisation, are now amenable to answers that are more precise and more reliable than was possible only five years ago.

Some vehicle manufacturers are beginning to apply another powerful IT technique, knowledge management, to understanding and exploiting their consumer markets. Other new and rapidly developing technologies such as electronic commerce also hold the promise of a transformation in efficiency and cost-effectiveness.

Applying and exploiting new technologies on a piecemeal basis will not address the real issue of fundamental change. Only companies which recognise the scale of the challenge and harness technology from a strategic perspective, will win.

It is strategic decision time for the motor industry. As a recent issue of the American business magazine, Fortune, put it: ‘On the road to the future, will you be the windscreen or the bug?’