November 14, 1998
NEWS ANALYSIS
Capacity Glut Likely to Spur More Auto Mergers
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By KEITH BRADSHER
ETROIT, -- Further large mergers are likely among auto makers because of a worldwide
excess of assembly plants and the just-completed marriage of Daimler-Benz A.G. and the
Chrysler Corporation, industry leaders said in interviews this week.
Auto makers around the globe have the ability to produce 70 million vehicles a year. But global
demand has been around 50 million vehicles a year even in good times, and is eroding now with
economic slumps in East Asia and Latin America. This week's creation of DaimlerChrysler A.G., in
an industry in which big cross-border mergers have historically been hard to accomplish, has forced
every auto manufacturer to reassess its strategic options.
"With the world economy in the situation it is, and the fact that only about 10 out of the 40
manufacturers in the world are making money, there's going to be a dramatic restructuring," said
Robert J. Eaton, now one of the two co-chairmen of DaimlerChrysler A.G.
"Everybody's talking to everybody in the auto industry," said William Clay Ford Jr., the
chairman-elect of the Ford Motor Company. "What may come of it, I don't know, maybe nothing
actually, but there are a lot of people that are talking and it'll be very interesting -- I think it'll be very
interesting a year from now."
The two companies most talked about by industry executives as potential acquirers are Ford Motor,
which has $22 billion in cash and will soon have a new management team, and Volkswagen A.G.,
which already bought Rolls-Royce this year. The three companies most discussed as potential
targets are the Nissan Motor Company of Japan, A.B. Volvo of Sweden and Bayerische Motoren
Werke A.G. of Germany.
The auto maker attracting the most attention, particularly as a potential merger partner for Ford, is
Nissan. Japan's second-largest auto maker has lost money for six of the last seven years and has
had difficulty this year finding banks to lend it money, particularly after its credit rating dropped again
this summer.
The Government-run Japan Development Bank agreed this week to lend 100 billion yen, or $817
million, to Nissan, a move with some parallels to the Government loan guarantees that helped rescue
Chrysler in 1980. Nissan's troubles have left many auto industry leaders convinced that a merger or
some other deal is likely for Nissan, although Nissan officials insist that their company has a plan
for recovery and is better off than Chrysler was a generation ago.
Only five global auto makers are likely to have the resources to cope with Nissan's $35 billion debt:
Ford, Volkswagen, DaimlerChrysler, the General Motors Corporation and the Toyota Motor
Corporation.
But G.M. and Toyota already work together closely, so a bid by either of them for Nissan could
raise antitrust problems. And top executives of DaimlerChrysler have ruled out any further big
mergers until they work out the details of this week's transaction, which could take years.
That leaves Volkswagen and Ford Motor. Volkswagen's chairman, Ferdinand Piëch, has indicated
an interest in Volvo and BMW. Volvo has shown little enthusiasm, while the Quandt family, which
owns 45.6 percent of BMW, moved most of its stake into holding companies last month to improve
defenses against any hostile takeover bid.
But so far, Volkswagen has shown little interest in East Asia. Volkswagen did not even participate in
this autumn's auctions of the Kia Motors Corporation of Korea.
Ford Motor has been trying to expand in East Asia. It lost to the Hyundai Motor Company in the
final Kia auction, although Hyundai has mentioned an interest in taking Ford Motor as a partner.
Now, Ford Motor is eyeing the Japanese market.
Asked whether his company might do a deal with Nissan, Ford was cautious. "We would certainly
look at anything, but given the balance sheet and the off-balance sheet problems that exist in a lot of
the Japanese companies, you have to be very careful any time you went into any kind of venture
there," he said. "We all believe at Ford that it's going to emerge as a very important market from
their troubles, so we would like to have a stronger Japanese presence, but what form it takes has yet
to be determined."
Some Wall Street analysts have criticized Ford Motor for holding so much cash, but Ford said that
he refused to be rushed. "I'm not going to let it burn a hole in our pocket," he said. "I think that we're
not in any hurry to spend it. We're always looking at things like buybacks and dividends and
acquisitions."
If Ford decides to do a deal in Asia, he will not have to look far for investment banking expertise.
John L. Thornton, the chairman of Goldman Sachs Asia, joined Ford's 11-member board two years
ago.
Nissan is trying hard now to turn around its troubled North American operations, and will soon
introduce a series of new cars and sport utility vehicles. Jason Vines, a Nissan spokesman, said the
goal was improved operating results, not preparation by the company for a sale.
Renault and Peugeot are struggling in France, but French nationalism has discouraged international
auto makers from seriously considering them as takeover candidates. But Fiat S.p.A. of Italy
persuaded Renault on Monday to agree to a merger of most of the two companies' foundry
operations, which cast heavy metal parts.
Even as auto makers study possible merger options, they are looking at ways to profit from rivals'
mergers. Ronald Zarrella, the president of G.M.'s North American operations, said the difficulty of
combining Chrysler and Daimler-Benz might be useful. "I hope they're very distracted and we can
take some market share from them," he said.
Thomas Stallkamp, the president of DaimlerChrysler and formerly the president of Chrysler, said
that the German and American auto makers had been able to work together with even fewer
difficulties than anticipated when the merger was first announced last May.
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