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Automotive Industry: Mergers and Acquisition Essay

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Updated: Jun 23rd, 2020

Introduction

In a perfectly competitive market, companies will always engage in activities that would be aimed at retaining their relevance and maintaining their market shares (Samuelson & Marks, 2011). In the modern economy, companies adopt managerial methods, such as mergers and acquisitions, to establish dominance in a given industry. This paper seeks to analyze mergers in the automotive industries with special attention to the factors that led to the mergers and the economic benefits that resulted from them.

Summary

Mergers and acquisitions refer to managerial efforts made by individual companies to consolidate a given industry in which they operate. Mergers and acquisition agreements are always achieved through the concentration of the resources of many small companies into a few larger companies, often with better economic advantages than the smaller companies (Donnelly, Morris & Donnelly, 2005).

The two concepts do not appear to have clear differences, especially if looked in terms of their ultimate economic outcomes (Samuelson & Marks, 2011). Both “mergers and acquisitions ultimately lead to an increase in the market share of the resultant association, with an increase in economies of scale and better services” (Samuelson & Marks, 2011, p. 45). The two concepts are, however, different in fundamental ways.

Mergers refers to “legal consolidation of two or more companies into a single entity, whereas acquisition is considered to have occurred when one company, usually the bigger one, takes over another one and establishes itself as the new owner” (Samuelson & Marks, 2011, p. 48). Unlike in mergers, acquired companies exist as independent legal entities controlled by the acquirer. Either arrangement has the same ultimate goal, i.e., to consolidate the economic and financial resources of smaller companies with a view to attaining a competitive advantage in the market (Donnelly et al., 2005).

Automotive Mergers and Acquisition

Mergers and acquisitions have contributed immensely to shaping the market structure of the automotive industry. In fact, mergers in the “industry ware largely seen as a means of increasing market shares and for improving the market reach for the products from the merging companies” (Donnelly et al., 2005, p. 435). The other reason that forced automotive companies to merger was to attain large economies of scale, which could allow them to outdo their rivals.

In the current market structure, the automotive firms cannot experience massive scales of mergers like those witnessed in the media and other industries, such as the healthcare sector. The trend is mainly because of the fact that the majority of the major deals in the automotive industry was achieved in the early 1990s and the beginning of the new century, reducing the future scope for further consolidations.

It is important to note that firms in the automobile sector are merging so that they can achieve excellent growth rates. Besides the corporate level alliance seen in the early 1990s, companies have also devised modern ways of achieving functional collaborations. Most automotive alliances have devised better ways to share technology and other platforms in an effective way in order to keep in pace with one another in a rapidly changing automotive industry. This new trend in the automotive industry eliminates the need for companies to incur the cost and spend time in doing research on new products

Renault-Nissan Automotive merger

The alliance between Renault Company and Nissan was signed at the beginning of the new millennium. In the deal, Nissan acquired part of Renault’s shares and vice-versa. Therefore, the two companies ended up buying the shares of one another.

The management teams of the two firms recognized the need to merge so that they could gain a competitive advantage in the market. However, it was agreed that the two business establishments could retain their brands in the market, but share resources. As a result of the merger, Renault supported Nissan’s marketing efforts in the European and South American regions as Nissan consolidates a market base in the North American and Asian regions (Segrestin, 2005). The Middle East and African regions were to be shared between the two companies.

The merger was very important for the reason that it helped them to improve their products and processes involved in procurement and marketing. From an economic point of view, the merging of the two companies was more likely to bring benefits than troubles to the alliance. First, the merger would result in massive cost reduction, increased market share, and market penetration, among others. As a result of the strategic approach, Renault Company was set to benefit from the up-to-date technological know-how, a wider network, wider market, and access to advanced managerial networks (Segrestin, 2005).

The impact of the merger has been nothing short of success for both firms. It is evident that the two firms recorded significant financial gains in 2002, which could be attributed to the success of the strategic management approach. Furthermore, it is important to note that the two business establishments have achieved significant cost savings due to utilization of a more efficient supplier base. Common platforms have also been formulated to reduce the cost and time taken to introduce new products. This would mean that the companies conduct joint research in relation to the market demand, and come up with designs based on the findings (Chanaron, 2007).

In their 2005 research paper, Donnelly and colleagues (2005) reported that a careful pre-merger approaches had been made by the two companies, and that Nissan had no alternative, but to consider the Renault as a rescuer. Their study emphasizes on the role played by the strong leadership of both companies and the necessity of speedy implementation of post-merger strategies. They highlight that decisions were made swiftly and the short-term goals set by the merger were achieved as a demonstration of their commitment to taking over the automotive industry by surprise.

Even though the merger was formed after a disappointing attempt by the individual companies to forge other alliances, the leaders of the business establishments realized that the automotive industry was experiencing strong competition and, therefore, the only way to survive was to forge a focused merger with clear goals and objectives (Chanaron, 2007). What resulted was a testimony to the fact that the merger was formed based on principles and desires to dominate a market that was increasingly becoming competitive.

Conclusion

In conclusion, mergers and acquisitions are strategic management tools that afre used by companies, especially those operating in highly competitive industries, to consolidate their resources and face the market with a huge competitive advantage over the other competing firms. The merger in the automotive industry is an example of such arrangement, which benefit the merging companies by reducing their costs of operations and increasing their market share.

References

Chanaron, J. (2007). Globalization: How Strategic alliances bring production and market advantages. The Sase of Renault/ Nisassan. HAL: Archives Ouvertes, 2(3), 65-76.

Donnelly, T., Morris, D., & Donnelly, T. (2005). Renault-Nissan: a marriage of necessity?. European Business Review, 17(5), 428-440.

Samuelson, W. F., & Marks, S. G. (2011). Managerial economics (7th ed.). Hoboken, NJ: John Wiley & Sons.

Segrestin, B. (2005). Partnering to explore: The Renault–Nissan Alliance as a forerunner of new cooperative patterns. Research policy, 34(5), 657-672.

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