Auto's New Look

Although the auto industry again dominates the top positions of the IW 1000, wrenching changes are taking place in the industry. Spurred by the merger that created DaimlerChrysler AG in late 1998, as well as the economic woes that have left Asian automakers in need of cash and vulnerable to takeovers, the last 18 months have seen a whirlwind of M&As and alliances. Those combinations are changing the geographic composition of the industry, as well as the complexion of individual companies. For example, in Japan only two of the five largest Japanese auto manufacturers -- Toyota Motor Corp. and Honda Motor Co. Ltd. -- remain completely independent. In South Korea bankrupt Daewoo Motor Co. Ltd. is expected to announce by September the winner of a nonbinding sealed bid process that ended last month. French automaker Renault SA bought 36.8% of Japan's Nissan Motor Co. Ltd. in 1999 and this past April acquired a 70% stake in bankrupt Samsung Motors Inc. of South Korea. That made Renault the first foreign automaker to obtain a foothold in that market. Swedish heavy-duty truck and bus maker Volvo AB sold its car business to Ford Motor Co. last year and has agreed to purchase a 20% stake in Daewoo's truck business when it is spun off as a separate company next April. Then, after its bid to acquire fellow Swedish truckmaker Scania AB was nixed by the European Commission, Volvo acquired Renault's truck operations, creating the world's second-largest truck manufacturer. (In exchange, Renault got a 15% stake in Volvo.) Volvo now plans to unload the 45% stake in Scania it had acquired earlier (Volkswagen AG holds 19% of Scania). In an effort to remain independent, Germany's Bayerische Motoren Werke AG (BMW) -- this year sold its Land Rover off-road-vehicle business to Ford and its Rover car business in the UK to the Phoenix Consortium led by former Rover executive John Towers. Now Towers is pursuing an alliance with Honda Motor Co. Ltd. In an effort to acquire Daewoo Motor, Ford is talking about partnering with Hyundai Motor Co. Ltd. But General Motors Corp. -- which increased its holdings in Isuzu Motors Ltd. and Sukuzi Motor Corp. in 1999 and earlier this year acquired a 20% stake in both Italian car maker Fiat SpA and Subaru manufacturer Fuji Heavy Industries Ltd., is rumored to be the most eager of five potential suitors to obtain Daewoo Motors. The massive upheaval isn't restricted to car and truck builders. GM's spinoff in early 1999 of its $29 billion parts-making operation, Delphi Automotive Systems Corp., and Ford's decision two months ago to do the same with its $20 billion Visteon Automotive Systems parts arm -- along with the demands by automakers that suppliers deliver systems in module form for assembly -- has created a similar M&A frenzy among suppliers. In April shocks and struts manufacturer Arvin Industries Inc. and wheels/torsion bar maker Meritor Automotive Inc. agreed to merge and create a $7.5 billion company. And rumors persist that American Axle & Manufacturing Holdings Inc. -- a spinoff from GM six years ago -- might join that alliance. All of these companies are trying to do two things: grow to survive globally and eliminate product-line or geographical weaknesses. As GM Chairman Jack Smith said when Fiat and GM announced their alliance in March, "In the era when Fiat and General Motors were founded, automaking was a national or regional affair. Today, it has become a global affair." Companies are looking to share the costs of engine building, research, and design, and to spread the costs of developing and building cars and trucks over higher volumes. Those buying into Asian companies have a second, equally strong, motivation. It provides them market entry into a region of the world that has been considered largely inaccessible to outsiders. The winner of the Daewoo sweepstakes, for instance, will get an instant 27% market share in Korea and nearly 800,000 vehicle sales annually. Renault's acquisition of Samsung's 240,000-vehicle-capacity plant in Pusan (now operating at 10% capacity after being shuttered for a year) gives it a platform, once it begins to increase production next month, to build small cars with inexpensive labor that can be sold for higher margins around the globe. Likewise, when DaimlerChrysler added a 34% stake in Mitsubishi Motors Corp. in March it increased the Asian portion of its sales from 3% to 21%. What's more, the size of DaimlerChrysler's stake by Japanese law gives it veto power over any management decisions. Yet whether the consolidations will increase the profits of the companies involved is still debatable. DaimlerChrysler, for example, in its first two years has yet to achieve a profit margin as high as the two companies had separately the year before they merged. Ford's European margins have been a drag on its earnings. GM has struggled in both Europe and Asia. To be certain, the Big Three automakers aren't starving; a record $5.5 billion in profits for the first quarter of 2000 attests to that. But the most consistent profit margins in the auto industry the past three years belong to transmission and drivetrain systems manufacturer Borg-Warner Automotive Inc., revitalized Porsche AG, tool manufacturer Danaher Corp., UK drivetrain manufacturer GKN PLC, and Paccar Inc. -- the world's third-largest heavy-duty truck manufacturer. Borg Warner, the world's second-largest turbocharger supplier, was 13th in profit margin among auto companies on the IW 1000 this year and, with margins between 5.2% and 5.8%, had been among the top 10 in profit margins since 1996. Danaher, which began diversifying into process control and instrumentation in 1998, has had profit margins between 6.3% and 11.5% the past four years -- -including an 8.2% margin this year, good for sixth place among profit margin leaders in the auto industry. Paccar has increased its profit margin from 5.1% to 6.5% over the last three years, climbing from 11th to ninth among auto-industry companies. Its sales, earnings, and production hit record highs in 1999. Return on equity (ROE) climbed to 32.1% -- ninth best in the industry. It also has increased its quarterly dividend by 140% over the last five years. GKN, last year's auto-industry profit-margin leader at 19.1%, was fourth this year with a 9.7% profit margin. It was eighth in ROE at 35.5%. Credit the expansion of its powdered-metals technology business. After record low sales in 1993, Porsche revamped production (see Back In High Gear), introduced the two-seat Boxster roadster in 1996, and set record profits and volumes in fiscal 1999. Its profit margins put it in 12th place this year among auto firms on the IW 1000. It is Volvo, however, that has the most bragging rights -- at least for one year. It had the highest profit margin, 25.8%, and the fourth-highest ROE, 47.3%, among auto firms on the IW 1000. Top Companies in Motor Vehicles and Parts