Consolidation is key to survival

Oddly enough for a US and German combine, Daimler-Chrysler AG’s launch last week took place just a few hundred metres from The Engineer’s editorial offices in London’s Docklands. If that decision surprised us, then the implications of this mega-merger and others like it across the globe could also be surprisingly close to home for industry […]

Oddly enough for a US and German combine, Daimler-Chrysler AG’s launch last week took place just a few hundred metres from The Engineer’s editorial offices in London’s Docklands. If that decision surprised us, then the implications of this mega-merger and others like it across the globe could also be surprisingly close to home for industry throughout the UK.

Both parties to the merger have talked about the savings that can be expected in joint component buying, as Daimler-Chrysler emerges to become the fifth biggest car maker in the world.

That ranking may not last long, as other car makers are expected to forge alliances that could see a reformulated top 10 accounting for almost the entire global car production. Who will buy whom to get to this position is a matter for speculation. But most analysts agree that all future mergers will be citing cost reductions as a powerful incentive, pointing to the improved buying power that comes with massive production volumes.

In reality, there is very little fat in the world of component supply. With margins already slim, hard bargaining by an important customer to get costs down further will simply force weaker players out of business.

Component suppliers in Britain, especially smaller ones, will find life getting tougher as car makers consolidate. Established first-tier suppliers of components and systems have already driven substantial cost reductions through their supply chains, to the point where some firms are claiming that they cannot get much leaner without letting quality slip, or going out of business.

If the newly united car makers believe they can trim component costs even further, their urge to merge will have to be mirrored by further consolidation among component suppliers if the expected cost savings are to materialise.