When it comes to new car shows, no one gets more excited about future products than the new car dealers who will be selling them. Likewise, for the most part, the auto manufacturers really hype their upcoming products; they know that once it comes time to start ordering those new vehicles from the factory, they’ll need their dealer body in a state approaching nirvana. There’s absolutely nothing wrong with that, and besides, new car dealers are hard-wired that way — they’re America’s greatest business optimists. I’ve often said that, if NASA announced that a huge extinction level event asteroid would strike Earth in six months, new car dealers would read that to mean that all those procrastinators who had put off getting a new car would soon be busting down their dealership doors.
And so it was that, back in the middle of August, Fiat Chrysler head Sergio Marchionne met with his Chrysler dealers in Las Vegas. Showing them many of their upcoming products, Marchionne added that 30 new or refreshed products would be coming out in the next two years. According to a column in the Automotive News, dealers flipped out over the next generation of the Dodge Charger, which apparently is based on a 1999 concept car. That statement made little sense to me; more to the point, the next generation of the Charger will be based on the platform designed for the upcoming Alfa Romeo Giulia. (Local dealers said that the upcoming full-sized Jeep Wagoneer was the hit of the show.)
Then, however, Marchionne told his dealer body that Fiat Chrysler is strong enough to stand on its own and that it doesn’t have to merge with another automobile company to survive. But, if a merger did happen, it “would not impact [the company’s] brands, would not reduce the size of its manufacturing workforce and does not require a rationalization of the distribution network.” (That last part means they wouldn’t be cutting back on the number of dealerships they currently have.) All of which is not true.
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Almost immediately after that meeting, Sergio Marchionne went back to hawking his concept of merging with General Motors. He not only called it a high priority, but was even quoted in the Automotive News as saying that the savings would be so great, “it would be unconscionable not to force a partner.”
More important, that same article quoted an auto analyst who claimed that Fiat Chrysler is already working hard on the large institutional investors in General Motors to try to get them to see things Sergio’s way. Marchionne suggested that a combined GM-Fiat Chrysler would earn $30 billion a year, based on the savings to be had; and he says he’s gone through every product the three entities make plus the value of every factory in the world and analyzed them all. Which is amazing, seeing as how it took him nine months just to figure out what he wanted to do with Jeep Wrangler production in Toledo when the new model comes out in 2018.
Well, Sergio, since the business media won’t explain to readers what rationalization really means in discussing Fiat Chrysler doing a merger with General Motors, then we will, right now.
After all, I’ve had a front-row seat to the “rationalization” of the media over the past 18 years. And anyone who thinks that thousands and thousands won’t lose their jobs just hasn’t been paying attention to what’s been going on in the economy for almost an entire generation.
Likewise, the more corporate consolidations happen, the more real innovation fades.
If GM and Fiat Chrysler merged, as a combined company they would need to spend R&D and engineering money for only one pickup truck, instead of duplicating that work for the two entirely different trucks sold today as the Chevrolet Silverado/GMC Sierra and the Dodge Ram. Theoretically, merging would save them hundreds of millions of dollars in expenses, because they’d have to design just one truck in the future but would also get increased volume, thereby lowering the cost of production on that one truck.
Why Not Merge?
Last month the Silverado sold 54,997 units, the Ram sold 45,310, and the Sierra sold 21,241, or 121,548 trucks in all. Now, if the Dodge Ram became another variation of the Silverado, then overall volume would most likely decline. After all, Ram truck owners bought one because they didn’t want the GM product.
The real key here, though, is that what drives the auto industry today is the intense competition — beating your competitor with a better product for the money, or hitting one’s predicted volume simply by boosting the size of the rebates. But if you remove the competition by merging, you also remove two companies’ competitive drive to beat the other.
Remember, GM was created as a result of massive mergers in the auto industry. And within 15 years of its creation it was on the brink of failure; most of the acquired companies had to be shut down just so GM could survive. But we Boomers have watched “rationalization” take GM from owning almost 50 percent of the car market in the Sixties to under 20 percent today. After the real automotive competitors became Japan and Germany — not just Ford, Chrysler and American Motors. Then GM found selling basically the same car badged as the Chevy Monte Carlo, Pontiac Grand Prix, Olds Cutlass and Buick Regal didn’t work anymore.
Like Marchionne is doing now, when Lee Iacocca purchased American Motors for Chrysler in the late Eighties, he promised that factories and jobs would not be at risk. Barely a year later American Motors was gone and only Jeep remained. True, a handful of key AMC employees stayed with Chrysler; but most, including factory workers and most corporate personnel, just weren’t needed any longer.
Warning: Bad History Rerun
The ultimate problem with all of this is that it’s a rerun of what happened during the Gilded Age. J.P. Morgan drove the concept of major corporate mergers because it was so financially logical. It’s why Andrew Carnegie would be given a fortune for his steelworks to become a huge part of US Steel, where one group controlled most of the steel production in America; because it had the monopoly power, it could drive down supplier costs and wages while destroying what was left of competitors, then charge whatever it wanted for its last products.
Consolidation is why my Marcus Cable and my telephone bills in July 1996 totaled $77.58, and today my cable and phone bills come out to over $300. True, I do have an Internet connection today; but the merger “promise” was lower prices and better service because of more competition.
World business history clearly shows that the rationalization of an industry has rarely delivered on that promise and most likely never will. Just look at the airline industry: Deregulation in the Seventies led to a dramatic fall-off in ticket prices, which caused many airlines to fail over the past three decades; that led to merger mania, which led to less competition — which allowed them to charge fees for everything from taking luggage along to, on some flights, getting a simple a cup of coffee.
So we’ve seen that long term as competition decreases, the cost of flying increases, while our satisfaction with the airline industry continues to fall. And those are many of the reasons we regulate an industry to begin with.
Then again, it’s been so long since we’ve done it, everyone forgot why we broke up the huge trusts and regulated industry to begin with.
© Ed Wallace 2015
Ed Wallace is a recipient of the Gerald R. Loeb Award for business journalism, given by the Anderson School of Business at UCLA, and is a member of the American Historical Association. He hosts the top-rated talk show, Wheels, 8:00 to 1:00 Saturdays on 570 KLIF AM. E-mail: firstname.lastname@example.org, and read all of Ed’s work at www.insideautomotive.com