The turmoil and uncertainty in the motor industry have left many wondering when a shakeout can be expected. And to prepare for this shakeout, many automakers had toughened themselves up through a series of mergers, acquisitions and alliances (M&As) in recent years. However, as the expected shakeout unfolds, these supposedly more ‘prepared’ automakers have ironically become the most vulnerable victims. So, I think it is worthwhile to re-examine the rationale behind these M&As before deciding whether Honda should also be looking for a merger partner.

This most common type of M&As in the motor industry is the Overcapacity M&A. In recent years, the demand growth for motors in developed countries had slowed, and this gave rise to an environment of declining capacity utilisation. As a result, many automakers registered losses in their operations. And, even more surprising was that they were willing to operate at a loss because of the industry’s high exit costs. So, automakers began looking to M;As to remove the excess capacity in the market.

In so doing, the automakers could really benefit in two different ways; first, the acquirers could gain massive operation efficiency from closing the less productive factories, laying off the effective staff and having a smaller overhead for the combined company; second, the smaller production capacity would also put less pressure on the industry’s profit margin. So, taking these reasons into account, automakers believed successful M&As could help them gain a more efficient operation, better managers, and subsequently, a greater market share and clout in this saturated industry.

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In fact, the European automaker, Volkswagen has just recently undertaken a couple of Europe-wide M&As for exactly the same reason. The second type is the Geographical Roll-up M&A. At first glance, this strategy is very similar to the overcapacity M&A. But, there are only subtle differences between the two; the Overcapacity M&A usually happen in a matured industry, while the Geographical Roll-up M&A happen in a rapidly growing industry. While the former is aimed at reducing capacity and duplication, the latter is aimed to achieve economies of scale and scope.

Besides, M&As of this type have an additional incentive because they help reduce the acquirer’s huge dependence on a single market. For example, when General Motors and Ford of America acquired a portfolio of European and Asian brands in the 90s, they were not only just aiming for volume and diversity in their corporate strategy, they were also trying to reduce their over-dependence on their home market. The third type of deals is related to research and development synergy.

In today’s rapidly shifting marketplace, automakers that are motivated to move into a new product area do not usually have to the luxury of time to build up their own teams. So, automakers usually had to acquire a company with a head-start in the relevant technology. In this way, the acquirers not only could build up their teams much faster, but also build them at lower costs and lower risks. On the other hand, the acquired company could also benefit from the financially more stable parent company.

This rationale was, in fact, the motivation for Toyota to acquire Daihatsu in Japan. At that time, Toyota was weak in the small car segment and wanted to get Daihatsu’s small-car engineering and engines through the acquisition. The last type of M;As in the automotive industry is undertaken to extend the acquirers’ product range. Throughout the 90s, carmakers became increasingly worried about their ability to defend their own market segments. It started off with the move of mass-volume automakers into the luxury segments to diversify their operations.

But, as it happened, the niche automakers, like Daimler and BMW, felt that they could no longer compete with a few brands that captured just the upmarket. So, they began their M&A activities to extend their products to the lower end of car range. As a result, Daimler captured Chrysler to complete its line-up, all the way from the tiniest passenger car to the freight truck. So, given all these rationale, why shouldn’t Honda also be pursuing an M;A strategy?

This is a challenging question and I intend to approach it by analysing the failure of the recent M;As and to judge if Honda could have realistically coming out stronger in any of these mergers: First of all, M;As in this industry have been largely disappointing because automobile operations are usually complicated and often have long history and strong union affiliations that could easily hamper the integration effort. So, it is no easy task to integrate just any two large companies successfully. What more two large automakers like Daimler and Chrysler?

Daimler and Chrysler were two large automakers with very different cultures and working styles. As a result, their staffs never really integrated even many years after the merger. According to Bower in his HBR article, they probably spent more time fighting to maintain their positions in the company than working together to improve it. So, in short, integrating automakers which have often long history and entrenched cultures is highly complex. And, since Honda is extremely unique in its culture and strategy, I do not think integration with other automakers will be any easier than those undertaken in recent years.

Furthermore, Honda’s experience with Rover in the past is probably a good indicator that they are not adept at working with partners of equal stature. To sum up, post-M&A integration for Honda should be highly challenging if one is ever undertaken. Another reason to explain these M&A failures is the difficulty to effectively manage the messy brand portfolio left after integration. In past years, most acquirers have chosen to keep the acquired brands because these brands had taken years to build and probably still had a premium in them.

However, keeping all the brands is one thing, managing them effectively is quite another. After a series of rapid M&As in recent years, the acquirers’ portfolios are probably full of brands that the acquirers do not quite understand. As a result, these brands were not managed in a coordinated way. Sometimes, the acquirers even invested in overlapping product-development and marketing efforts. And, they started multiplying its brands at its own rather than its competitor’s expense.

In fact, it is quoted in The Economist that there is an inverse correlation between the number of brands a firm possess and its profitability. So, even Honda may do better with one or two more brands, it should never risk pursuing an M&A strategy just to acquire brands/products that fit its strategy. Rather, it should rely on its strength in innovation and flexibility to build its brands/products organically. Besides, M&As in the motor industry have been difficult because this is an ultra competitive industry and the consumers are often very unforgiving.

For example, the recent slip-ups of GM and Ford have allowed the Asian automakers, such Toyota and Honda, to gain so much ground in America. This, I believe, is due to the fact the consumers now access to more choices and naturally become less brand-loyal. As a result, they switch brands when there is only a little disappointment with the products they have bought. So, if one is operating in such a competitive environment, there is really not much room for error and I, therefore, do not recommend Honda to risk losing their current momentum with a large M&A.

Instead, it should build on this momentum to become the Champion of tomorrow, just like the way it captured two-thirds of the US motorcycle market. So far, I have been arguing against having an M&A strategy in the developed countries. But, the newly emerging countries, like China, Brazil, and India are increasingly part of this industry and if there is any hope to break into these tough markets, Honda probably needs a local partner to help provide them with local information like the local taste, terrain and even weather.

Besides, this alliance has more a chance to succeed because it requires less commitment and Honda can continue to function independently while feeding on its local partner for information and even safety from government bureaucracy. Besides, it can also draw on its experience of selling small engines and motorcycles in these countries to work better with its partners. If anything, this experience should be an advantage (e. g. screening for possible partners) for Honda when it considers whether to form alliance with the local automakers.

So, essentially, I think they should consider an alliance with a local partner and if only the alliance has worked out successfully, Honda can then consider acquiring the partner. Summing up, I do not think Honda should have any form of M&As with automakers of equal stature in the developed markets to preserve its independence. However, an alliance with newly formed local automakers in the emerging countries is an attractive option to consider.

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