Driving forward to the Big Six

News Analysis: Car making is again awash with merger talk. Is DaimlerChrysler the deal that unleashes a flood of global consolidation?

AS THE Detroit Motor Show got into full swing yesterday, the world car industry was again awash with merger speculation.

Ford of the US was said to be planning takeovers of Honda of Japan and Germany's BMW, both of which denied they were in talks. A day earlier, Japan's Nissan poured scorn on reports that it was preparing to link up with Ford.

Meanwhile Robert Eaton, co-chairman of DaimlerChrysler, itself the product of $90bn merger last year, fanned the flames by predicting that two European car manufacturers would join forces in the next 90 days.

Everyone in the car industry seems to think that consolidation is inevitable. Most also believe it will be a good thing. But guessing who will jump into bed with whom, and on what terms, is a less exact science.

In the past decade not a single major car maker - and very few minor ones - has escaped being confidently linked to takeover deals. Perm virtually any pair from a long list. Apart from this week's flurry, the more recent crop of rumours has had Volvo merging with Fiat or Ford, or perhaps Renault, and BMW merging with Fiat - or is it Volkswagen?

But what corporate activity there has been has tended to take place at the fringes of the industry. Thus Fiat has swallowed Lancia and Ferrari, Volkswagen has taken Seat, Skoda and Rolls-Royce under its wing, BMW has acquired Rover, Ford now owns Jaguar and General Motors has assumed control of Saab of Sweden.

But the much vaunted mega-mergers - the deals that would carve the world car market up among a handful of major players - have failed to materialise. Until DaimlerChrysler, that is.

At a stroke, the takeover created a group with revenues of $130bn (pounds 78bn) and unit sales of 4 million cars and light commercial vehicles a year, propelling DaimlerChrysler into fifth place in the world automotive league, above the likes of Fiat, Nissan, Honda and Peugeot-Citroen. Suddenly, Sir Alex Trotman's vision of the "Big Six" seemed within reach once more.

The idea that within a few short years there may only be half a dozen car makers which matter - two in North America, two in Asia and two in Europe - may sound extreme. But the economic argument for rationalisation is persuasive. The world car industry is generally reckoned to have 40 per cent surplus manufacturing capacity. The vast bulk of this is in Europe, where the industry is estimated to have the capacity to build 22 million vehicles compared with the 16 million produced last year.

According to a recent report from consultants KPMG, the world's car makers plan to build 15 million more cars over the next three years than most forecasters believe there is demand for. James Bentley, the chairman of the firm's European automotive practice in Birmingham, says: "There are too many assembly factories in Europe and there is too much capacity, although there will still be waiting lists for the sought-after models. Even more capacity is being brought on stream. Something has to happen, and the high-cost, low-productivity sites will inevitably lose out."

The striking thing about DaimlerChrysler, however, is that the merger involved no plant closures and no job losses. In terms of geographic coverage and product range, the deal was as near a perfect fit as could be achieved, with Daimler's focus on Europe and the luxury end of the car market and Chrysler's concentration on the US and the light truck and utility vehicle market.

Even so, DaimlerChrysler still expects to achieve savings worth $3bn in three years through better procurement, more efficient use of capacity and the sharing of technology and best working practices.

A takeover of BMW by either General Motors or Ford would be a complementary fit in many respects. So, too, would an acquisition of Volvo, although GM's ownership of the other Swedish car maker, Saab, could be an obstacle. It is not obvious, however, that the Qandt family, which controls BMW, is interested in selling out, while Volvo's institutional shareholders would surely hold out for a high price.

If Ford were to acquire BMW, the combined group would be equal in size to GM, the world's biggest car maker. There would be a product and capacity overlap in the UK, where Ford would end up with six production sites because of BMW's ownership of Rover.

At least half of these would probably go. But the carnage in terms of job losses and plant closures, and the subsequent political uproar, would be infinitely greater if two of Europe's volume car makers were to merge.

For this reason, some observers are cautious about the likelihood of European consolidation. John Lawson, automotive analyst with Salomon Smith Barney, says: "Everyone can see that the structure of the industry is not right, but at the same time it isn't in the interests of any two manufacturers to solve the problem for their competitors."

He thinks, however, that Asia is a different proposition. Car makers there are in a much weaker position now than two years ago, and the two most vulnerable to an approach from Ford or GM are Nissan and Mitsubishi. "If their cash flow from the US is good and Europe remains stable, then this may be a good time to recycle some funds by expanding into Asia," adds Mr Lawson.

But then again, both Nissan and Mitsubishi have poison pills built into their balance sheets in the shape of enormous debts - in Nissan's case these stand at $36bn. "Unless the banks take a haircut, that makes them quite indigestible at the moment," says Mr Lawson.

So will the great rumour mill produce any real corporate activity this year? Jim Donaldson, president of Ford of Europe, says 1999 will be the year of restructuring. Mr Eaton, too, is sticking by his prediction of a European tie-up within the next three months.

But, as Mr Lawson observes: "There is sometimes an element of mischievousness in what the senior managements of car companies say. They have to be taken with a certain pinch of salt."

If Mr Eaton is right, we will not have to wait long to find out.