The new MotorWorld order

By Alex Taylor III, senior editor

(Fortune) -- A couple of items in recent news clearly point to a new direction for the global auto industry:

One was the decision by Daimler and Renault-Nissan last week to cooperate in the development of small cars and small engines.

The other was the news that General Motors sold more vehicles in China during the first quarter of 2010 than it did in its home market of North America.

The two messages couldn't be clearer: Automakers need scale in order to amortize the escalating costs of new technology and product development.

And they also need a strong presence in developing markets because their traditional strongholds in the U.S., Western Europe, and Japan have all but stopped growing or in some cases are shrinking.

Strategies are still emerging and, to date, few have a clear advantage. Indeed some traditional industry powerhouses are revealing some cracks.

Toyota (TM) has always preferred organic growth to either alliance or acquisition. But as its handling of the sudden acceleration crisis shows, its internal management capabilities have not been able to keep up with its global expansion.

The automaker now faces the necessity of ceding some authority to its overseas affiliates or collapsing under its own weight and complexity.

Honda (HMC) has steadfastly determined to follow its own road by shunning all partnerships. But in the absence of a consensus on the development of alternative fuels, it may find that the demands of multiple technologies may outstrip its resources.

In Europe, Daimler must prove that it learned enough from its failed merger with Chrysler to make its new partnership more successful.

And tiny BMW, which was unsuccessful in striking a deal with Daimler, must seek another partner -- did someone say Ford (F, Fortune 500)? -- that can expand its scale without detracting from its renowned brand.

Among the North American giants, General Motors has demonstrated that even the grandest strategies require execution of the details. Its trail of failed alliances over the past several decades, including those with Toyota, Fiat, Suzuki Subaru, demonstrates that good intentions are not sufficient.

To be sure, analysts and automakers have been talking about consolidation of the industry into supergroups since at least the 1970s. Instead, Independents like BMW and Honda have thrived. And Korea has emerged as a power, some 100 automakers have sprung up in China, and India has leapt onto the world stage with the innovative Nanocar.

Who five years ago could have predicted that Land Rover, Jaguar, and Volvo would be owned by mainland Asian manufacturers?

The barriers to industry entry, once thought to be nearly insurmountable, have proved to be not so daunting to those building from a strong market base. And with the rise of the newcomers, a number of long-established automakers have significant questions associated with them.

Can Renault-Nissan CEO Carlos Ghosn rebuild Renault at the same time that he works with Daimler -- and can he get it all done before he collapses under the strain of running two companies?

Can Fiat-Chrysler CEO Sergio Marchionne resuscitate both Fiat and Chrysler -- and add an Asian company to his complex -- before HE collapses under the strain of running two companies?

How long will it be before medium-sized companies like Peugeot-Citroen, Subaru, Mazda and others are absorbed by larger competitors?

Finally, it is always dangerous to pick winners in this business. Despite the industry's capital intensity and complexity, fortunes can change rapidly.

But one company seems particularly well positioned to succeed in this environment. At this moment, Volkswagen has a clear advantage. It has scale, global reach with successful operations in South America and China, and an impressive portfolio of brands that includes Porsche, Bentley, and Audi.

VW has demonstrated its skill at one of the most difficult feats in the business: sharing components among its brands without detracting from those that produce the highest margins. That enables it to leverage its size to its best advantage. Who notices that Bentley uses parts from Audi, or that Audi uses parts from Volkswagen?

VW is on a tear right now, setting ambitious growth targets and about to open a new U.S. plant. In the past, it has suffered from inconsistency, poor quality, and having a home base in high-wage Germany hasn't helped.

But current management seems to have a hand on its problems. Onlookers will be watching to see if VW can keep it up -- and which competitor rises up to challenge it. To top of page

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