Themes > Current Issues
14.07.2000
C.P.
Chandrasekhar
If current trends persist, Asia's once independent and dynamic automobile
industry will remain Asian only in a geographical sense. In terms of
ownership, it would be a mere 'branch' of Western capitalism. This is
because, during and after the years of slow growth in Japan and the
financial crises in East Asia, large chunks of the industry have been
acquired by bargain-hunting Western automobile companies.
This 'Western coup' in the Asian automobile sector is the culmination of two trends. To start with, a merger, acquisition and alliance wave in the international automobile industry that has gained momentum ever since the DaimlerChrysler merger in 1998. As a result of that wave, six big players control 75 per cent of the 44 million-strong global vehicle market. Since Asia is the most rapidly growing segment of that market, it has emerged the thrust area for these leading players. Secondly, this process has been substantially aided by the liberalisation wave of the 1990s in Asia and the crises that afflicted some Asian countries more recently, which have not merely opened up the Asian automobile industry to foreign investors, but virtually forced some of them to go out in search international suitors for ailing domestic firms.
The most recent instance of an Asian automobile group that has fallen victim to these tendencies is debt-ridden Daewoo, saddled with liabilities estimated at $16 billion. At the end of June, after a three-month long process, a restructuring committee consisting of Daewoo's creditors chose Ford Motors as the sole bidder for the South Korean car manufacturer. Ford, the world's second largest carmaker, had reportedly offered Daewoo's creditors $6.8 billion for full control over the automobile giant. If the final terms of takeover offered by Ford within a sixty-day period are found acceptable to the Daewoo Restructuring Committee, Ford would have access to a 2 million cars-a-year manufacturing capacity in Asia.
The run up to Ford's preliminary victory, saw five players involved in the race for Daewoo: Ford, GM, DaimlerChrysler, Fiat and Hyundai Motors. GM, which had a joint venture with Daewoo sometime in the past and was working out a strategic alliance with it subsequently was the most favoured candidate. And till about a year back GM was the only player Daewoo's creditors were negotiating with. Perhaps because GM expected too favourable a bargain, the restructuring committee decided to go in for an auction involving five players.
However, the worldwide restructuring of automobile industry through mergers, acquisitions and strategic alliances soon reduced the field to three. One alliance resulting from that wave was between GM and Fiat Auto in which the former acquired a 20 per cent stake in the latter and Fiat's top shareholders took a 6 per cent stake in GM. These crossholdings were expected to provide the material base for a strategic alliance in world markets. Not surprisingly the two firms joined hands to bid for Daewoo.
The other joint bid came from DaimlerChrysler and Hyundai. As part of its bid for Daewoo, DaimlerChrysler struck a deal with Hyundai, wherein it acquired a 10 per cent stake in the latter for an estimated $400 billion. What is significant is that, as part of the transaction, DaimlerChrysler secured an option to increase its initial 9.9 per cent stake by an additional 5 per cent in three years. This, together with the 4.6 per cent of Hyundai owned by Mitsubishi companies, of which Mitsubishi Motors is DaimlerChrysler's Japanese alliance partner, could take the stake of the German-US group to almost 20 per cent of the South Korean carmaker. This could change the balance of ownership at Hyundai, with DaimlerChrysler emerge eventually as the largest shareholder, ahead of the family of Chung Ju-yung, the founder of the Hyundai group, which holds a 11.8 per cent stake in the company.
This potential change at Hyundai seems with hindsight more significant that the joint bid for Daewoo made by the two companies. If the bid had succeeded, Hyundai would have indirectly controlled 99 per cent of Korean car market. Since the government would have been forced to respond to the emergence of such a monopoly, it is unlikely that even Juergen Schrempp, DaimlerChrysler chairman, would have expected to win Daewoo. What in all probability was far more important for him was the tie-up with Hyundai, which gave the group access to the Korean market and a major presence in the Asian market as a whole.
The point to note is that, if Ford takes Daewoo and DaimlerChrysler succeeds in winning control at Hyundai the take over of the Korean car industry by Western capital would be near complete. That take over deserves more attention than it has received, given the fact that South Korea is the second largest car maker in Asia and Daewoo and Hyundai have a major presence in international markets as well. However, the Western invasion does not stop even here. In May, Renault took over Samsung Motors at US$562 million through negotiation with its creditors and agreed to set up a joint venture with Samsung Group, which is capitalized at 360 billion won (US$415 million) and has assets worth 1 trillion won (US$870 million). Clearly, South Korea's automobile industry has been virtually recolonised.
But the process neither begins or ends in Korea. It has touched Asia's largest car producer Japan as well. More than a year ago, French car maker Renault looking for a place under the sun as a global firm, acquired a stake of 35 per cent in debt-ridden Japanese auto-major Nissan for $4.3 billion. The acquisition gave French firm a veto and a significant, even if not controlling voice, on the Board. For Renault, this meant a break from its European isolationism and a presence in Asian and American markets through its Japanese operations.
The Renault entry comes in the wake of a gradual increase in Western presence in Japan's highly-protected automobile industry. After Ford's acquisition of small car-maker Mazda two decades ago, the world's largest automobile producer General Motors begam investing in a number of Japanese car makers. It now owns 49 per cent of Isuzu, 9.9 per cent of Suzuki Motors and 20 per cent of Fuji Heavy Industries, which controls Subaru. But the Western presence has grown rapidly more recently. In March this year, DaimlerChrysler bought a 34 per cent stake in Mitsubishi Motors, Japan's fourth-biggest car maker. The take-over came in the wake of serious financial trouble at Mitsubishi, which unlike other Japanese majors had concentrated on the Japanese market, selling 65 per cent of its vehicles there. When slowing growth generated financial difficulties, DaimlerChrysler found the opportunity. Since then Mitsubishi has been restructuring its operations, increasingly targeting markets abroad and even planning a shift in headquarters to the US.
As a result of such developments, to quote the London Economist, "the industry's composition is not what might have been expected ten years ago. The Japanese producers, who were then terrifying the world, are today mostly being folded into foreign groups. The biggest, Toyota, is slipping down the size league; little Honda survives only because it is nimble and makes products other than cars. Detroit, once tipped for the rustheap by doomsters, is back with a vengeance."
The reasons for this rush East are not hard to find. On the surface, the market for cars in the West (Europe and America) appears to be in the midst of an almost unprecedented long-boom. Yet, analysts report, the industry there is plagued with over-capacity to the tune of 25 per cent, with damaging consequences for the bottom line of companies. The results are most stark in the UK, where two of the largest car factories employing more than 12000 workers are on the brink of closure. The first is the BMW plant at Longbridge in Birmingham. The second is the Ford plant at Dagenham, which is reportedly on the block as part of a major reform by the company of its troubled European operations. These threats are real, because Rover the BMW major recorded close to a $1 billionm loss last year and Ford in Britain is reportedly leaking close to £60 million, besides being saddled with excess capacity and outdated capacities.
This problem of excess capacities and weak profits has forced firms to turn their attention to the Asian market, which is expected to revive sharply in the wake of the crisis. Also with Asian currencies having depreciated substantially, Asia has once again emerged as a competitive source for world markets. Not surprisingly, Daimler's chief, Jurgen Schrempp, has reportedly stated that he wants the surging Asian market to provide a quarter of sales within a decade, compared with 3.2 per cent today,
The way in which this Asia-based expansion is sought to be achieved is to use the voluntary and forced liberalisation of foreign investment laws, the depressed state of markets and the extremely difficult financial situation faced by debt-burdened corporations, to take over what were some of the most competitive industrial capacities at bargain prices. In the event, once independent challengers of Western automobile power are now turning into outsourcing subsidiaries of automobile majors from the West. As a corollary, the acquisitions, mergers and alliances that recent developments have spawned is changing the structure of the world's automobile industry, because Asia has been important in the international car industry both as market and supplier. Three big groups are expected to dominate the industry globally: GM, Ford and DaimlerChrysler in that order. Taking account of all partners and alliances GM is estimated to control 20 per cent of the world's market, with Ford following close behind. If these firms manage to acquire the likes of Toyota and Volkswagen, they could together occupy close to three-quarters of the markets. Concentration has proceed apace with the gradual erosion of indigenous production in Asia. In a virtual replay of an old act, centralised capital from the West is once again colonising the East. The difference is that this time around, the East is industrialised and internationally competitive.
This 'Western coup' in the Asian automobile sector is the culmination of two trends. To start with, a merger, acquisition and alliance wave in the international automobile industry that has gained momentum ever since the DaimlerChrysler merger in 1998. As a result of that wave, six big players control 75 per cent of the 44 million-strong global vehicle market. Since Asia is the most rapidly growing segment of that market, it has emerged the thrust area for these leading players. Secondly, this process has been substantially aided by the liberalisation wave of the 1990s in Asia and the crises that afflicted some Asian countries more recently, which have not merely opened up the Asian automobile industry to foreign investors, but virtually forced some of them to go out in search international suitors for ailing domestic firms.
The most recent instance of an Asian automobile group that has fallen victim to these tendencies is debt-ridden Daewoo, saddled with liabilities estimated at $16 billion. At the end of June, after a three-month long process, a restructuring committee consisting of Daewoo's creditors chose Ford Motors as the sole bidder for the South Korean car manufacturer. Ford, the world's second largest carmaker, had reportedly offered Daewoo's creditors $6.8 billion for full control over the automobile giant. If the final terms of takeover offered by Ford within a sixty-day period are found acceptable to the Daewoo Restructuring Committee, Ford would have access to a 2 million cars-a-year manufacturing capacity in Asia.
The run up to Ford's preliminary victory, saw five players involved in the race for Daewoo: Ford, GM, DaimlerChrysler, Fiat and Hyundai Motors. GM, which had a joint venture with Daewoo sometime in the past and was working out a strategic alliance with it subsequently was the most favoured candidate. And till about a year back GM was the only player Daewoo's creditors were negotiating with. Perhaps because GM expected too favourable a bargain, the restructuring committee decided to go in for an auction involving five players.
However, the worldwide restructuring of automobile industry through mergers, acquisitions and strategic alliances soon reduced the field to three. One alliance resulting from that wave was between GM and Fiat Auto in which the former acquired a 20 per cent stake in the latter and Fiat's top shareholders took a 6 per cent stake in GM. These crossholdings were expected to provide the material base for a strategic alliance in world markets. Not surprisingly the two firms joined hands to bid for Daewoo.
The other joint bid came from DaimlerChrysler and Hyundai. As part of its bid for Daewoo, DaimlerChrysler struck a deal with Hyundai, wherein it acquired a 10 per cent stake in the latter for an estimated $400 billion. What is significant is that, as part of the transaction, DaimlerChrysler secured an option to increase its initial 9.9 per cent stake by an additional 5 per cent in three years. This, together with the 4.6 per cent of Hyundai owned by Mitsubishi companies, of which Mitsubishi Motors is DaimlerChrysler's Japanese alliance partner, could take the stake of the German-US group to almost 20 per cent of the South Korean carmaker. This could change the balance of ownership at Hyundai, with DaimlerChrysler emerge eventually as the largest shareholder, ahead of the family of Chung Ju-yung, the founder of the Hyundai group, which holds a 11.8 per cent stake in the company.
This potential change at Hyundai seems with hindsight more significant that the joint bid for Daewoo made by the two companies. If the bid had succeeded, Hyundai would have indirectly controlled 99 per cent of Korean car market. Since the government would have been forced to respond to the emergence of such a monopoly, it is unlikely that even Juergen Schrempp, DaimlerChrysler chairman, would have expected to win Daewoo. What in all probability was far more important for him was the tie-up with Hyundai, which gave the group access to the Korean market and a major presence in the Asian market as a whole.
The point to note is that, if Ford takes Daewoo and DaimlerChrysler succeeds in winning control at Hyundai the take over of the Korean car industry by Western capital would be near complete. That take over deserves more attention than it has received, given the fact that South Korea is the second largest car maker in Asia and Daewoo and Hyundai have a major presence in international markets as well. However, the Western invasion does not stop even here. In May, Renault took over Samsung Motors at US$562 million through negotiation with its creditors and agreed to set up a joint venture with Samsung Group, which is capitalized at 360 billion won (US$415 million) and has assets worth 1 trillion won (US$870 million). Clearly, South Korea's automobile industry has been virtually recolonised.
But the process neither begins or ends in Korea. It has touched Asia's largest car producer Japan as well. More than a year ago, French car maker Renault looking for a place under the sun as a global firm, acquired a stake of 35 per cent in debt-ridden Japanese auto-major Nissan for $4.3 billion. The acquisition gave French firm a veto and a significant, even if not controlling voice, on the Board. For Renault, this meant a break from its European isolationism and a presence in Asian and American markets through its Japanese operations.
The Renault entry comes in the wake of a gradual increase in Western presence in Japan's highly-protected automobile industry. After Ford's acquisition of small car-maker Mazda two decades ago, the world's largest automobile producer General Motors begam investing in a number of Japanese car makers. It now owns 49 per cent of Isuzu, 9.9 per cent of Suzuki Motors and 20 per cent of Fuji Heavy Industries, which controls Subaru. But the Western presence has grown rapidly more recently. In March this year, DaimlerChrysler bought a 34 per cent stake in Mitsubishi Motors, Japan's fourth-biggest car maker. The take-over came in the wake of serious financial trouble at Mitsubishi, which unlike other Japanese majors had concentrated on the Japanese market, selling 65 per cent of its vehicles there. When slowing growth generated financial difficulties, DaimlerChrysler found the opportunity. Since then Mitsubishi has been restructuring its operations, increasingly targeting markets abroad and even planning a shift in headquarters to the US.
As a result of such developments, to quote the London Economist, "the industry's composition is not what might have been expected ten years ago. The Japanese producers, who were then terrifying the world, are today mostly being folded into foreign groups. The biggest, Toyota, is slipping down the size league; little Honda survives only because it is nimble and makes products other than cars. Detroit, once tipped for the rustheap by doomsters, is back with a vengeance."
The reasons for this rush East are not hard to find. On the surface, the market for cars in the West (Europe and America) appears to be in the midst of an almost unprecedented long-boom. Yet, analysts report, the industry there is plagued with over-capacity to the tune of 25 per cent, with damaging consequences for the bottom line of companies. The results are most stark in the UK, where two of the largest car factories employing more than 12000 workers are on the brink of closure. The first is the BMW plant at Longbridge in Birmingham. The second is the Ford plant at Dagenham, which is reportedly on the block as part of a major reform by the company of its troubled European operations. These threats are real, because Rover the BMW major recorded close to a $1 billionm loss last year and Ford in Britain is reportedly leaking close to £60 million, besides being saddled with excess capacity and outdated capacities.
This problem of excess capacities and weak profits has forced firms to turn their attention to the Asian market, which is expected to revive sharply in the wake of the crisis. Also with Asian currencies having depreciated substantially, Asia has once again emerged as a competitive source for world markets. Not surprisingly, Daimler's chief, Jurgen Schrempp, has reportedly stated that he wants the surging Asian market to provide a quarter of sales within a decade, compared with 3.2 per cent today,
The way in which this Asia-based expansion is sought to be achieved is to use the voluntary and forced liberalisation of foreign investment laws, the depressed state of markets and the extremely difficult financial situation faced by debt-burdened corporations, to take over what were some of the most competitive industrial capacities at bargain prices. In the event, once independent challengers of Western automobile power are now turning into outsourcing subsidiaries of automobile majors from the West. As a corollary, the acquisitions, mergers and alliances that recent developments have spawned is changing the structure of the world's automobile industry, because Asia has been important in the international car industry both as market and supplier. Three big groups are expected to dominate the industry globally: GM, Ford and DaimlerChrysler in that order. Taking account of all partners and alliances GM is estimated to control 20 per cent of the world's market, with Ford following close behind. If these firms manage to acquire the likes of Toyota and Volkswagen, they could together occupy close to three-quarters of the markets. Concentration has proceed apace with the gradual erosion of indigenous production in Asia. In a virtual replay of an old act, centralised capital from the West is once again colonising the East. The difference is that this time around, the East is industrialised and internationally competitive.
© MACROSCAN 2000