Survival of the fittest not the fattest


The increased concentration of the car industry has been a commonly used, yet increasingly untrue example on the effects of globalisation. There is still an important lesson to learn though.

I have heard it from people who make pharmaceuticals and from people who make defence equipment. From executives in utilities and executives in advertising. Among banks and law firms. From telecommunications companies and media businesses. They all expect their industry to develop the way the car industry has. In an increasingly globalised marketplace, maturing industries will become steadily more concentrated. Only a small number of big companies will survive.

There is one problem with these analogies. What is said about the motor industry is not true. The peak of concentration in the automobile industry was reached in the early 1950s and since then there has been a substantial decline. In the late 1960s, when globalisation of the motor industry began in earnest, the big three car manufacturers – General Motors, Ford and Chrysler – made half the world’s cars. Today’s big three – GM, Ford and Toyota – together have 36 per cent of world output.

However you look at it, small carmakers have been steadily gaining market share at the expense of large ones. Back in the 1960s, the 10 largest carmakers had a market share of 85 per cent; today it is about 75 per cent. Nine companies made more than 1m vehicles in 1969; 14 did so last year. Fifteen companies produced more than 1 per cent of world output in 1969. Seventeen companies have more than 1 per cent of world output today.

Concentration has fallen, even though weak firms have repeatedly been absorbed through mergers. Daimler Benz has taken over Chrysler, Renault has allied with Nissan and Ford has acquired Volvo. These transactions have stayed the decline in the market share of large car makers, for the first time in a generation; but since few of them are doing well, the downward trend is likely to resume.

People in business continue to deliver clichés about critical mass and global players although, with another part of their brains, they do not really believe them. When they talk about General Motors they usually employ a word such as “inflexible”, “bureaucratic”, or even “dinosaur”, and they buy Hondas because they think Honda makes better cars. Honda entered the industry in 1967, the same year that the UK government insisted on domestic companies merging to form British Leyland – a business with the critical mass to be global.

The evolution of the world car industry has followed a complex pattern, although one that is common to many other products. The hundreds, perhaps thousands, of small car manufacturers at the beginning of the 20th century mostly went out of business or were absorbed into larger companies. They simply were not good enough to compete with the few companies that managed to master the technology and understand the market. Cars were still then formidably expensive and low costs were vital. But cheapness ceased to be the most important competitive advantage as early as the 1920s. Henry Ford, who would give you any colour you wanted so long as it was black, was overtaken by General Motors, which offered any colour you wanted.

As markets evolve, differentiation becomes steadily more important. Better margins are made from specialist vehicles that cater for the differentiated tastes of rich customers. Sports utility vehicles, aimed at people who dream of a rugged outdoor lifestyle very different from the one they really lead, have been the lifeblood of the motorindustry in the past decade. Globalisation allows small producers that develop competitive advantages to deploy them on a world scale. That is how Toyota was able to grow from an unimportant Japanese maker of textile machinery into one of the big three world car manufacturers. Mercedes and BMW, rather than outgrowing their market niches, were able to develop them on a world scale.

The growth of companies such as these has led to a decline in concentration in the motor industry. Yet all of them are likely to be overtaken by new specialist producers whose names have not yet come to our attention. Success in the motor industry comes not from size and scale but from developing competitive advantages in operations and marketing these advantages internationally. The same is true in pharmaceuticals and defence equipment, utilities and advertising, banking, telecommunications and media.

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