Where size is not everything

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Concentration in the car industry is increasing as the market goes global: a common story, and an untrue one.

When we talk of the effects of globalisation and scale economies on industrial structure, there is one industry that comes first to everyone’s mind: the automobile industry. This is, above all, where the advantages of economies of scale and global manufacturing and sourcing are leading inexorably to the concentration of output in the hands of fewer and fewer firms. For those in the car industry, this is present reality: for other business people, this is the future.

Up to a point. In 1969 the three largest car producers, General Motors, Ford and Chrysler, made one in every two cars. By 1996, this figure had fallen to one in three. Chrysler was not in the top three any more, displaced by Toyota, but still the share of the new top three was only 36%.

Nor is it just the very large American producers which have lost share. In 1969 there were nine mega-producers, each manufacturing more than 1m vehicles per year. In 1996, there were fourteen. These included companies like Suzuki and Hyundai, which did not make cars in 1969, and BMW, which did, but not in large numbers.

In 1969, the share of the original nine mega-producers was 84%. In 1996, the share of the largest nine firms in the industry had fallen to 66%, and the sales of the 1969 leaders had fallen further, with some, like British Leyland, having dropped out of the running altogether. In 1996 firms with production over 1 million units were responsible for about 80% of all sales. This figure was more or less exactly what it was in 1969. The main difference is that 80% of the market is now divided between fourteen firms, rather than nine.

How many car producers are there today? Hard to say, and perhaps misleading to ask. There are firms like Morgan, which make only a few hundred cars a year – important to enthusiasts, but almost irrelevant to the structure of the global market. If we define a significant producer as one with 1% of total world sales of cars, there were fifteen significant producers in 1969, and seventeen in 1996.

However one looks at it, the trend the data shows is clear. The world automobile industry has been becoming steadily less concentrated. Larger players have been losing market share, and the number of manufacturers at all scales of production has been increasing. Frequent alliances, consolidations and mergers, in which failing firms have been picked up by their competitors, have not been enough to offset these basic facts of market evolution. And the trend is of long standing. The peak of concentration in the car industry was probably in the early 1950s, when three out of every four cars made in the world came from the American majors.

There are advantages to size in the automobile industry. And the globalisation of markets has helped the major producers increase these advantages by international sourcing and by planning production on a world-wide basis. But these have not been the main influence on the changing structure of the industry. That has been the shift from historic market share to competitive advantage as the basis of the success of firms.

That is why weak national producers, like British Leyland, were the big losers from globalisation, and why General Motors’ position has been eroded, not strengthened, by the shift from national to global industry. Leyland’s problem was not its size, except in the indirect sense that if the company had been better at making cars it would have sold more of them and might still have been independent. It is the growth of global markets which has allowed companies like BMW, Hyundai and Suzuki, which could not have been successful if confined to their home markets, to become major players in the industry.

Alec Trotman of Ford may have been right when he tells us that there will soon be only five major producers in the world car industry. If he is right, it will be a dramatic reversal of the historic trend. There were only five major producers in the world car industry in 1950 and since then number has risen steadily, although predictions like Lord Trotman’s have been made consistently through that period. The fundamental economics of the industry may be changing. But probably in directions that will make size less important, as manufacturing processes become more flexible and consumers more willing to pay a premium for differentiated products. The era of immensely long runs of the same car – which began with Ford’s model T and reached its climax with the Beetle and Mini – probably ended with the Toyota Corolla.

People are right to look at the world automobile industry to understand the effects of globalisation. The problem is that they look at what people say is happening rather than what is really happening. The key development is that history and market position matter less, competitive advantage more. The outcome will be greater concentration only if size is the main source of competitive advantage. There are not many industries of which that is true and the automobile industry is not one of them.

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