Autos' year of living dangerously
New money entered the industry in 2007, and life will never be the same again.
(Fortune) -- Deep Throat told Woodward and Bernstein to "follow the money" if they wanted to understand the Watergate break-in. If you followed the money in the auto industry in 2007 you got some clues about where the industry is headed. And the future doesn't look anything like the past.
Start with Chrysler going private. The money guys at Cerberus Capital who now own Detroit's Number Three automaker are turning it upside down. They brought in industry outsider, Bob Nardelli, as CEO and Nardelli is taking a fresh look at everything. Going forward, Chrysler will be eliminating models and possibly some brands, closing dealers, and laying off workers.
Nardelli's got a lot of work to do. Chrysler is expected to lose more than $1 billion in 2007. With 2008 is shaping up as an even tougher year, he's going to have keep cutting and hope that new models like the Dodge Journey crossover can stop the slide. Crosstown rivals are watching carefully because a Chrysler in distress could lead to suicidal industry-wide price-cutting.
One area where Nardelli has been particularly aggressive is in pursuing foreign partnerships. Chrysler is talking to China's Chery about building small cars, Russia's GAZ about expanding overseas production, and Japan's Nissan about a range of cooperative ventures, including a new pickup truck. Such deals are notoriously difficult to pull off - ask General Motors (GM, Fortune 500) about its now-defunct alliances with Isuzu, Suzuki, Fuji, and Fiat. But if Chrysler succeeds, it could create a new model of cross-national alliances.
Meanwhile, speculation is building about Cerberus' exit strategy from Chrysler, as well as its timing. Will it try to merge Chrysler with Ford (F, Fortune 500), or sell it to another automaker, or go to the public with an IPO? If Chrysler continues to pile up losses, investors may get anxious and Cerberus will have to bail out sooner than it wants to. In an industry used to working in four-year product cycles, fast private-equity money will likely speed things up.
For another cataclysmic change, how about minnow Porsche moving ahead with its plan to swallow whale-like Volkswagen? Porsche already owns 31% of VW and CEO Wendelin Wiedeking is champing at the bit to buy more. His ambition seem preposterous on its face: VW has 324,000 workers while Porsche has fewer than 12,000.
But under Wiedeking, Porsche has become a money machine and merging with VW could solve a lot of problems. VW gets Porsche's management expertise and a greater sense of urgency, while Porsche obtains needed access to VW's scale efficiencies and advanced technology. Competitors will have to come up with their own ambitious strategies to fight this new combine or fall by wayside.
Meanwhile, Wiedeking's place in history was assured when he became the industry's first $100 million man, snagging $116 million in annual compensation. Will any other CEOs be trying to top that?
Finally, there is the evolving adventure of India's Tata Motors pursuit of two iconic British brands, Jaguar and Land Rover. At $2 billion, the price could be a secondary concern. The larger question: is the manufacturer of a $2,500 car is capable of designing, building, and marketing luxury vehicles? Winston Churchill must be spinning in his grave.
If the Tata deal goes through, it turns the entire auto industry into a global bazaar. What's next -- a Chinese company buying Alfa-Romeo? BMW linking up with Honda? Nissan arranging a partnership with General Motors? (Well, that last idea has already been tried and found wanting. But you get the idea.)
With rivers of capital free-flowing across national boundaries, the possibilities are endless. The failed marriage of Daimler and Chrysler may have been only the beginning of a global shuffling of brands and owners. The other day, a GM executive was speculating that the auto industry was sorting itself into two categories: two super-companies, GM and Toyota, with annual production of nine million vehicles each, and all the rest. But the ability of companies to arrange deals and form ventures in ways that no one would have suspected five years ago leads one to believe that nothing is fixed any more. Even for a century-old business with enormous fixed assets, the world is becoming a fluid place.