Auto marriage on the anvil- Ford & Daewoo Motors - Views on News from Equitymaster

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Auto marriage on the anvil- Ford & Daewoo Motors

Jun 30, 2000

Ford Motor Company has emerged as an exclusive bidder for Daewoo Motors. There have been many contenders for the ailing Korean major Daewoo Motors, as it is strapped with high debt, declining volumes and low productivity. This acquisition as and when it happens will have many implications on India's automobile sector. Assuming that it has taken place, Ford's tie-up with Daewoo Motors will lead to consolidation in the passenger car segment. Ford's presence in the Indian car market is through its successful brand the "Ikon" (in a joint venture with the M&M group) which has done well in the mid size segment. On the other hand Daewoo's "Matiz" has done well in the small car segment. The joint efforts would enable them to have an important presence in the both the small car as well as the mid sized segments.

The combined entity reported a sales volume figure of 48,240 units in FY2000, though this is much lower than the market leader Maruti who sells close to 0.4 m units annually. However their combined efforts could result in better volumes in the current year as they would have a joint marketing, distribution, export strategy which would lead to economies of scale. The combined entity would have a large production capacity of 0.25 m units annually. In their distribution strategy for example Daewoo's plants which are located in the North and Ford's which is located in the South would result in economies of scale as transportation costs could be reduced.

General Motors (US) and Fiat (Italy) have announced an alliance that has resulted in a cross holding between the two companies. While GM will have a 20% stake in Fiat, the latter will own 5% of the GM. GM also has a right of first offer to buy the remaining 80% if Fiat were to decide to offload the stake. This could lead to GM (India) and Fiat (India) consolidate their operations.

This global consolidation will lead to a shake up in the Indian passenger car market. In an industry which is saddled with over capacity and steep competition, the key to survival will be consolidation. Economies of scale in manufacturing, marketing, distribution are the answer for better performance in future. This will lead to many such combined ventures in the Indian passenger car market in future.

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