SIZE DOES
MATTER: BUT NOT THE WAY YOU THINK. Ford,
Chrysler, and GM said "size matters" and consolidated the
automobile industry. BMW,
Honda, and Porsche said "focus matters." All three stayed on the
sidelines during the industry consolidation. The
enclosed TIME article compares the results of these different strategies with
two companies that focus on similar niches: Mercedes vs BMW. We
think the results have application beyond the automobile industry. Each
company must find the tradeoff between size and focus What
do you think? Responses
to this article will be posted in www.boardoptions.com at the end of this
piece. Write
to lstybel@boardoptions.com BOARD OPTIONS, INC. Mercedes vs. BMW
The world's luxury-car leaders are debating how big
a company has to get to afford the new technologies their customers demand. By
Frank Gibney Jr. June
1, 2001
When
Daimler-Benz took over Chrysler three years ago, it argued that globalization
demanded not just speed but also size. Selling dozens of models in every
price range, the reasoning went, was the only way a car company could afford
the huge investments necessary to incorporate the latest technologies. That
meant that if you were a small independent, you would have to merge—or face
the Darwinian consequences. So Daimler coupled with Chrysler, Renault bought
Nissan, Ford scooped up Volvo, and everybody mused that it was just a matter
of time before the biggies gobbled up BMW and Honda, and maybe even Porsche. Here
we are in 2001, and the most successful players in the auto industry are ...
BMW, Honda and Porsche. **** Jurgen
Schrempp, the once-swaggering chairman of DaimlerChrysler, is praying that
the billions of dollars in losses at Chrysler and Mitsubishi (in which he
bought a ruling share last year) don't sink the entire company. Ford ceo
Jacques Nasser has a collection of premium brands in his stable: Aston
Martin, Jaguar, Land Rover and Volvo. But amid a weak economy, sales at Ford
and GM are down some 15% this year, and even the luxury brands are under new
pressure from smaller Japanese and German automakers. At
BMW headquarters in Munich, you'd never know there was a downturn.
First-quarter sales set records, and April sales soared 30% over last year's
numbers. In North America, BMW overtook Mercedes for the first time. BMW
executives have announced a plan to expand their selection to 76 models
from70. They expect to sell 200,000 units, up from 189,423 and to increase
their share of the luxury-car market. "I cannot recall ever having seen
such a clear correlation between size and success," BMW chairman Joachim
Milberg wryly told a Detroit audience."At the moment, it seems the
greater the size, the more the problems." Yet
it seems that only hours ago, most auto execs and industry analysts agreed
that global reach was essential to provide protection against
foreign-exchange swings and local labor crises. They also agreed that a
company had to produce about 2 million vehicles a year to achieve necessary
economies of scale. Schrempp still insists that buying Chrysler gives Daimler
the mass-market heft—and the profits—necessary to keep developing the cool
features that make Mercedes buyers drool. Schrempp
may be proved right over the next decade. But what's decisive now is not so
much size as (surprise!) sound management. Which car company is nimble enough
to hop in and out of new market niches and still provide high-quality, sexy
cars that people aspire to own? Mike Flynn, an auto expert at the University
of Michigan, observes that new technology is only one of the
elements—including styling and reliability—that make a car attractive.
"Companies like BMW and Honda," he says, "offer products that
keep them successful." So does Porsche, where sales are soaring 16% so
far this year. It produces a mere 48,815 cars a year—but at an enviable 11.9%
profit margin. What's
special about BMW is its management depth and persistence. Two years ago, the
company floundered when its attempt to get big—the 1994 takeover of Britain's
Rover—went awry. That cost the company $3.9 billion and prompted a flurry of
talk that BMW would be bought by Ford or GM or Toyota. But since Milberg
emerged as chairman in 1999, the company has stayed ahead of the luxury pack.
Although most of its 21 factories are located in Europe, BMW built a new
plant in Spartanburg, S.C., which now exports the company's popular X5 SUV to
100 countries. To develop technologies such as alternative-fuel engines and
drive-by-wire (an electronic, joystick-controlled steering system), Milberg
forged partnerships with Robert Bosch and Delphi Automotive. Karl Ludwigsen,
an independent auto analyst in London, contends that a carmaker need not be
huge to survive. Rather, he says, "you've got to be big in the segments
in which you compete, and you've got to be competitive in those segments
globally." BMW
and Porsche have defied the notion that keeping pace with tech advances will
break an indie's carmaker's bank. One reason: parts suppliers have become
powerful arbiters of success, as more auto companies outsource R&D on
their components. Traditionally, Mercedes would develop a new
antiskidtechnology in conjunction with a high-end component maker like
Germany's Robert Bosch. Then, after Mercedes had made a splash by being the
first to sell cars with the new technology, it would allow Bosch to sell the
technology elsewhere. Now, the suppliers are driving the process. Says Flynn:
"BMW is going to get a shot at the suppliers' best technology because
suppliers want to be associated with them." And Porsche has an engineering
services division that supplies other automakers with high-end equipment. Paradoxically,
Daimler and Chrysler began their union with long lists of rules that
prevented that kind of synergy. Chrysler parts were not allowed
in Mercedes cars, for instance—out of fear that the luxury brand might
somehow be cheapened. That stance has since been relaxed. Schrempp still
insists, however, that "Mercedes will never do a platform exchange
withChrysler." BMW's
Milberg, like top executives at Honda and Fiat, contends that the best way to
stay ahead is to rely on partnerships rather than mergers. Schrempp
disagrees, telling Time editors that "consolidation in the industry is
far from over." He may be right. But investors around the world are
placing wagers on these two visions. And, right now, most of the betting is
on BMW. —With
reporting by Joseph R. Szczesny/Detroit and Charles P. Wallace/Berlin |