Should BMW buy Mercedes stake to thwart Audi, Lexus?
11-25-07 | 02:30 PM
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Should BMW buy Mercedes stake to thwart Audi, Lexus?
German luxury car manufacturers BMW and Mercedes are riding the crest of a wave, growing richer as they sell more and more premium vehicles to traditional and emerging markets around the world.
But increasingly effective competition from Audi, Lexus, and Porsche, is ganging up against the traditional market leaders, and according to a report from investment banker Morgan Stanley, the interlopers have two ace cards which are likely to become ever more powerful.
Audi is owned by German mass car maker Volkswagen, and Lexus by Japan's gigantic Toyota. This means that the cost of many basic components like engines, transmissions and components, which are used under the skin of ordinary as well as exotic machines, can be spread over huge numbers of vehicles allowing the interlopers what could be a killer long-term cost advantage.
And there's another huge cost problem looming over the horizon.
New rules expected from the European Union will force all car manufacturers to raise the fuel efficiency of their engines in the name of saving the planet from global warming caused, it says, by excess carbon dioxide (CO2) from energy in general and cars in particular. This will mean another hugely expensive investment which will inevitably cost BMW and Mercedes more per car than its massive rivals, giving Audi and Lexus another cost advantage.
Morgan Stanley, in its report, paints a chilling picture of BMW and Mercedes parent company Daimler's prospects.
Creeping threat
"As the auto industry consolidates, both BMW and Daimler face increasing risk of being marginalised as larger competitors benefit from greater economies of scale in research and development. Strong brands provide above sector average profitability today. However, the relative deterioration in their cost positions is a creeping threat," said Morgan Stanleyauto analyst Adam Jonas in the report.
Jonas said BMW has acknowledged a readiness to start alliances with other car makers, and for joint projects to produce engines, or perhaps even a small car. BMW already cooperates with Daimler and General Motors to produce petrol-electric hybrid engines. It also uses diesel engines and small petrol motors made by Peugeot of France. Daimler CEO Dieter Zetsche told the Detroit News at the Frankfurt Car Show in September he is willing to join ad hoc alliances, as long as brand values are not compromised.
But Jonas is thinking the unthinkable.
"We believe BMW would benefit from a strategic alliance with Daimler," his report says, in the form of buying 20 per cent of Daimler.
Jonas says expected E.U. CO2 rules strengthen the rationale for cooperation.
Cost advantage
"Over time, we believe Lexus derives a cost advantage from being part of the 9 million unit Toyota group. Closer to home, Porsche's takeover of Volkswagen has global implications, in our opinion, as Audi and Porsche enjoy the scale advantages of VW's 6 million unit global volume," said Jonas.
In 2006, BMW sold close to 1.4 million vehicles, while Mercedes sold about 1-1/4 million. BMW has raised sales by 40 per cent since 2002
"We have used 20 per cent as a level that would give BMW a material voting influence at Daimler without potentially dominating the strategic direction of the company," said Jonas.
"While many companies collaborate without involving equity tie-ups, we believe a deep collaboration involving BMW's or Mercedes engineering and intellectual property would best be executed as an equity partnership," Jonas said.
This doesn't make any sense at all to Professor Ferdinand Dudenhoeffer, managing director of Bochum, Germany based B&D Forecast, who points to the chronic series of merger failures in the automotive business, not least by BMW and Daimler.
"Be aware of all what we have learned about mergers in the last 20 years was a lesson of failure. The car industry is more complex than just saying let's pool anything at anytime," he said.
Morgan Stanley profits
"Just look at great mergers like Daimler and Chrysler, GM-Fiat, BMW-Rover, or Ford and its Premier Automotive Group. We learned that BMW is far better alone as compared with its time with Rover. The success of Toyota is its own and not that of strange synergies; the success of Porsche is its own. The only thing that makes sense is that Morgan Stanley as investment bankers is going to make strong profits if they can sell someone a merger," Dudenhoeffer said.
Dudenhoeffer agrees that BMW and Mercedes need to cut costs, but their brand power will trump any cost advantage which the likes of Lexus and Audi can achieve.
Phil Dunne, London based vice-president of automotive consultancy A.T. Kearney, agrees that BMW and Mercedes face tough challenges, but getting together in the way Morgan Stanley suggests would be a dead end.
"I don't think an equity position would be the way forward, but I could see some kind of alliance on a particular product, like the rumoured small car tieup," he said.
The German luxury maker's brand power will be their most powerful tool.
Premium prices
"BMW and Mercedes must concentrate on relentlessly driving down costs, but they still have stronger brand positioning in most markets, certainly in Europe and that enables them to charge premium prices," Dunne said.
Professor David Bailey of Birmingham University's Business School is also disdainful of mergers, and reckons that the German luxury leaders' brand power will win in the end.
"I think BMW has got a particular structure which doesn't sit well with takeovers. It had a terrible time when it bought Rover; it's not cut out for mergers, and most mergers fail anyway. And Daimler has just got itself out of a messy divorce. But a joint venture could be very fruitful," Bailey said.
Bailey agrees with Morgan Stanley's Jonas that Audi and Lexus have a built in advantage, but that won't worry BMW and Mercedes.
"In an absolute cost sense they are at an absolute disadvantage, that's right, but they do have very strong brands and can recoup much more per car. They can cooperate though with engines, yes, and sharing platforms for small cars," Bailey said.
BMW and Mercedes are said to be exploring the possibility of collaborating on producing a new small car. Experts like the idea, but hope that any collaboration by BMW and Mercedes is not with each other, but with a company that knows how to make and profit from little cars.
Use small car specialist
"If they want to do an alliance for a small car, better to go with someone who knows how, like Fiat (of Italy) or Peugeot. Neither of them (BMW or Mercedes) are very good at doing small cars, and they are going to need smaller vehicles because of the CO2 rules to get average emissions down," said A.T. Kearney's Dunne.
Morgan Stanley's Jonas though is sticking to his guns. The problems are worsening and the need for action becoming critical.
"We see a compelling strategic rationale for an alliance between BMW and Daimler. ........ We believe an alliance of BMW and Daimler could be a win-win result for both companies. The regulatory environment is changing faster than BMW's or Daimler's ability to adapt," said Jonas.
http://www.detnews.com/apps/pbcs.dll...03/1148/AUTO01
But increasingly effective competition from Audi, Lexus, and Porsche, is ganging up against the traditional market leaders, and according to a report from investment banker Morgan Stanley, the interlopers have two ace cards which are likely to become ever more powerful.
Audi is owned by German mass car maker Volkswagen, and Lexus by Japan's gigantic Toyota. This means that the cost of many basic components like engines, transmissions and components, which are used under the skin of ordinary as well as exotic machines, can be spread over huge numbers of vehicles allowing the interlopers what could be a killer long-term cost advantage.
And there's another huge cost problem looming over the horizon.
New rules expected from the European Union will force all car manufacturers to raise the fuel efficiency of their engines in the name of saving the planet from global warming caused, it says, by excess carbon dioxide (CO2) from energy in general and cars in particular. This will mean another hugely expensive investment which will inevitably cost BMW and Mercedes more per car than its massive rivals, giving Audi and Lexus another cost advantage.
Morgan Stanley, in its report, paints a chilling picture of BMW and Mercedes parent company Daimler's prospects.
Creeping threat
"As the auto industry consolidates, both BMW and Daimler face increasing risk of being marginalised as larger competitors benefit from greater economies of scale in research and development. Strong brands provide above sector average profitability today. However, the relative deterioration in their cost positions is a creeping threat," said Morgan Stanleyauto analyst Adam Jonas in the report.
Jonas said BMW has acknowledged a readiness to start alliances with other car makers, and for joint projects to produce engines, or perhaps even a small car. BMW already cooperates with Daimler and General Motors to produce petrol-electric hybrid engines. It also uses diesel engines and small petrol motors made by Peugeot of France. Daimler CEO Dieter Zetsche told the Detroit News at the Frankfurt Car Show in September he is willing to join ad hoc alliances, as long as brand values are not compromised.
But Jonas is thinking the unthinkable.
"We believe BMW would benefit from a strategic alliance with Daimler," his report says, in the form of buying 20 per cent of Daimler.
Jonas says expected E.U. CO2 rules strengthen the rationale for cooperation.
Cost advantage
"Over time, we believe Lexus derives a cost advantage from being part of the 9 million unit Toyota group. Closer to home, Porsche's takeover of Volkswagen has global implications, in our opinion, as Audi and Porsche enjoy the scale advantages of VW's 6 million unit global volume," said Jonas.
In 2006, BMW sold close to 1.4 million vehicles, while Mercedes sold about 1-1/4 million. BMW has raised sales by 40 per cent since 2002
"We have used 20 per cent as a level that would give BMW a material voting influence at Daimler without potentially dominating the strategic direction of the company," said Jonas.
"While many companies collaborate without involving equity tie-ups, we believe a deep collaboration involving BMW's or Mercedes engineering and intellectual property would best be executed as an equity partnership," Jonas said.
This doesn't make any sense at all to Professor Ferdinand Dudenhoeffer, managing director of Bochum, Germany based B&D Forecast, who points to the chronic series of merger failures in the automotive business, not least by BMW and Daimler.
"Be aware of all what we have learned about mergers in the last 20 years was a lesson of failure. The car industry is more complex than just saying let's pool anything at anytime," he said.
Morgan Stanley profits
"Just look at great mergers like Daimler and Chrysler, GM-Fiat, BMW-Rover, or Ford and its Premier Automotive Group. We learned that BMW is far better alone as compared with its time with Rover. The success of Toyota is its own and not that of strange synergies; the success of Porsche is its own. The only thing that makes sense is that Morgan Stanley as investment bankers is going to make strong profits if they can sell someone a merger," Dudenhoeffer said.
Dudenhoeffer agrees that BMW and Mercedes need to cut costs, but their brand power will trump any cost advantage which the likes of Lexus and Audi can achieve.
Phil Dunne, London based vice-president of automotive consultancy A.T. Kearney, agrees that BMW and Mercedes face tough challenges, but getting together in the way Morgan Stanley suggests would be a dead end.
"I don't think an equity position would be the way forward, but I could see some kind of alliance on a particular product, like the rumoured small car tieup," he said.
The German luxury maker's brand power will be their most powerful tool.
Premium prices
"BMW and Mercedes must concentrate on relentlessly driving down costs, but they still have stronger brand positioning in most markets, certainly in Europe and that enables them to charge premium prices," Dunne said.
Professor David Bailey of Birmingham University's Business School is also disdainful of mergers, and reckons that the German luxury leaders' brand power will win in the end.
"I think BMW has got a particular structure which doesn't sit well with takeovers. It had a terrible time when it bought Rover; it's not cut out for mergers, and most mergers fail anyway. And Daimler has just got itself out of a messy divorce. But a joint venture could be very fruitful," Bailey said.
Bailey agrees with Morgan Stanley's Jonas that Audi and Lexus have a built in advantage, but that won't worry BMW and Mercedes.
"In an absolute cost sense they are at an absolute disadvantage, that's right, but they do have very strong brands and can recoup much more per car. They can cooperate though with engines, yes, and sharing platforms for small cars," Bailey said.
BMW and Mercedes are said to be exploring the possibility of collaborating on producing a new small car. Experts like the idea, but hope that any collaboration by BMW and Mercedes is not with each other, but with a company that knows how to make and profit from little cars.
Use small car specialist
"If they want to do an alliance for a small car, better to go with someone who knows how, like Fiat (of Italy) or Peugeot. Neither of them (BMW or Mercedes) are very good at doing small cars, and they are going to need smaller vehicles because of the CO2 rules to get average emissions down," said A.T. Kearney's Dunne.
Morgan Stanley's Jonas though is sticking to his guns. The problems are worsening and the need for action becoming critical.
"We see a compelling strategic rationale for an alliance between BMW and Daimler. ........ We believe an alliance of BMW and Daimler could be a win-win result for both companies. The regulatory environment is changing faster than BMW's or Daimler's ability to adapt," said Jonas.
http://www.detnews.com/apps/pbcs.dll...03/1148/AUTO01
11-25-07 | 02:47 PM
#2
Lexus Champion
Joined: Mar 2005
Posts: 8,695
Likes: 2
From: CA
Just read this article, and it's interesting to see that the costs for MB and BMW leave them at a disadvantage. However, considering how MB fared with its Chrysler merger (which I thought was a terrible idea), the cooperation aspect may be overrated.
11-25-07 | 04:19 PM
#3
Lexus Fanatic
Joined: Oct 2003
Posts: 91,626
Likes: 89
From: Virginia/D.C. suburbs
Ford and Mazda, recently, both made the same mistake by jointly developing the Ford Edge and CX-7/CX-9 series, which neither company really needed.....another waste of money, IMO. Ford/Mercury already had the Escape/Mariner (and hybrids) and Explorer/Mountaineer SUV's in that rough size segment (small-to-medium size SUV's), and Mazda already had the Tribute, the Escape's twin.
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