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What happens after the auto company shakeout

Bailouts shmailouts. Everyone knows somebody is going to fold their tent, close the doors, buy the farm, and go the way of the dinosaur in the auto industry. Since this recession is poised to break the 16 month record and become the longest business downturn since the Great Depression, the shakeout in the auto industry is going to much, much greater than losing, say, Land Rover and Kia.

In a must-read interview in Automotive News Europe, the CEO of Fiat, Sergio Marchionne predicts only about six companies will still be standing by 2011. And it won’t be Fiat, because his line in the sand is sales volume of 5.5 million cars per year (by the way, only five companies currently sell more than 5.5 million cars per year). Money quote:

“By the time we finish with this in the next 24 months, as far as mass-producers are concerned, we’re going to end up with one American house, one German of size; one French-Japanese, maybe with an extension in the US; one in Japan; one in China and one potential European player,” Marchionne said.

This will allow companies to exploit economies of scale and reduce the per-unit cost of research and development, since innovation can be spread to more models of cars. To make all this happen, of course, we’ll need a wave of M&A in the auto industry such as has never been seen before.

As followers of this blog may remember, I see other possibilities rather than consolidation.

To quote from the same article, it seems unlikely that auto makers in trouble will want to double their trouble by acquiring, well, other automakers in trouble:

Rhys said the car companies have too many problems of their own to look into merging with rivals.

He also questioned the logic of two companies in trouble pooling resources. “Two drowning men do not make a good swimmer,” he said.

As I discussed in a previous post, “One More Reason to Let the Big Three Go Bankrupt,” we don’t know that the best industrial model for a post-gasoline world might look like. If the post-gasoline world were like today’s automotive world where you have one “operating system,” so to speak (say, DC electric cars with battery storage instead of gasoline-based internal combustion engines), then having a centralized industry with five or six powerhouses and a few midgets might make sense.

But the post-gasoline world, I’m convinced, will be characterized by massive innovation and fortunes to be made by upstarts, entrepreneurs, and start-ups, a world of continual change and multiple “operating systems.” If this is the case, the auto company shakeout could be good news, but the real “news” is that the struggling auto industry opens the door to entrepreneurs right now.

After the shakout, the remaining players will have to develop an industrial and distributive structure that will allow for continual innovation by entrepreneurs outside their companies. The model is the PC world, where the “manufacturers” essentially package other companys’ innovations into standards-compliant architectures.

In one of his many but feeble attempts at metaphor, Bill Gates once compared innovation in the PC world with the auto industry, where, if they were comparable, we’d all be purchasing cars that went hundreds of miles per hour getting thousands of miles per gallon at an average price of a few hundred dollars. Of course, what makes that impossible is the industrial structure of the auto industry. If the structure looked more like the PC model, where innovation takes place among feeder companies run by entrepreneurs and manufacture is just that, manufacture, then we’d indeed be driving cars similar to the ones Gates described.

I’m outlining this in a book I finished last month called “The Ten Great Opportunities of the Next Decade.” While out of reach for a shoestring venture, I believe that this is absolutely the right time for companies with moderate capitalization to be moving ahead with automotive innovation.

You can start with Tesla Motors. Imagine 20 or 30 more companies like this with dozens more feeder companies. That’s where we’re heading.

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  1. [...] Wall Street Journal, January 19) Back in early December, Sergio Marchionne, the CEO of Fiat, gave a must-read interview to Automotive News Europe, where he said that only six companies with sales volumes of 5.5 million cars per year would [...]


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