The game of alliances

Raghuvir Srinivasan

LAST YEAR saw immense flux in the international automobile industry, specifically in the passenger car segment.

There was a spate of mergers, strategic alliances and acquisitions, all with the hallowed objectives of cost-reduction and expanding market share. Strategies between rivals to share production facilities or joint development of vehicles are now passe. It is now the age of outright collaboration and alliance.

Consider this: General Motors has taken a 20 per cent stake in Fiat Auto at $2.4 billions (Rs. 10,400 crores) while giving the latter a 5 per cent stake in its own equity. DaimlerChrysler has paid $1.3 billions (Rs. 5,600 crores) for a 34 per cent share of Mitsubishi Motors' equity. Early in 1999, Renault of France picked up a 36.8 per cent stake in the troubled Nissan Motors of Japan, and Ford picked up the passenger car division of Volvo. Volvo itself picked up a minor equity stake in the commercial vehicles division of Mitsubishi Motors. And the craze has not abated yet -- only the action has shifted to a different stage.

It is now Daewoo Motor Corporation of South Korea that is in focus. And fighting for this South Korean car company are General Motors, Ford, Hyundai and DaimlerChrysler. Daewoo is a big prize as it brings with it a strong presence in the emerging markets of Eastern Europe where it was the first to enter. Given that Eastern Europe, Asia and Latin America are the growth areas of the future, it is a stiff fight that is on for Daewoo. The result will be known in the next couple of months.

GM's alliance with Fiat is expected to result in a cost-savings of up to $1.2 billions (Rs. 5,200 crores) annually from the third year of the deal -- that is 2003, and $2 billions (Rs. 8,700 crores) per annum from the fifth year on. Similarly, DaimlerChrysler's acquisition of a stake in Mitsubishi immediately gives it a 10 per cent share of the Japanese market and a 9 per cent share of the Asian market. Mitsubishi is a strong player in South-East Asia.

These global alignments and re-alignments are not without significance for the Indian market where almost all the global players are present. General Motors appears to be the strongest placed vis-a-vis the Indian market after the current spell of alignments. It already has a facility at Halol, Gujarat, where the Opel Astra and the Corsa are assembled. Its acquisition of a stake in Fiat would now give it access to the latter's Fiat's production facilities at Mumbai and Pune. This is apart from the advantage in terms of spread of models between them.

GM has an interest in Suzuki, which is the leader in the domestic market. Theoretically, GM could leverage on Fiat and Suzuki's interests in India some time in the future to strengthen its hold in the Indian market. Assuming that it also succeeds in grabbing Daewoo Motors, GM would then be unassailable in the domestic market.

On the other hand, DaimlerChrysler, which is out-priced in the Indian market, can now hope for a comeback through Mitsubishi, whose Lancer model is one of the success stories in the mid-size segment. Besides, Mitsubishi also has expertise in the small-car segment and in utility vehicles where its blockbuster Pajero can be introduced in India. In fact, if DaimlerChrysler were to decide to bring in Mitsubishi models, it would at once turn into a mass market manufacturer from a luxury car producer. Once the Mitsubishi models go into the DaimlerChrysler fold, Hindustan Motors, which now assembles the Lancer, could be affected.

In this game of alliances, Ford appears to be at a disadvantage. The company desperately needs to improve its market share, not just in India but worldwide and it has till now lost out in the alliance and merger sweepstakes. Of course, a success with Daewoo can change all that for Ford. Hyundai is the other suitor for Daewoo Motors and assuming that it succeeds, the Hyundai-Daewoo combine could become formidable in the Indian and East European markets. While the direct benefit may not be big for Hyundai in the Indian market, the indirect one would be significant -- that of cutting off a major base for its rivals, GM and Ford in India. The next three months would see a clearer picture emerge once the Daewoo sell-off goes through.