GM Ford Review

I decided to take up the challenge to review this article. Please enjoy.

To put into context, the main reason why GM and Ford are deciding to merge is due to the fact that Toyota is catching up in market share and is a big threat. Toyota has the edge over GM and Ford because it decided to research into small, cheap, energy efficient cars as opposed to that of GM’s and Ford’s large, expensive, energy-guzzlers. As global warming sets in and petrol prices skyrocket, Toyota’s cars are seen as more environmentally friendly and cheaper, so Toyota may soon become the number 1 car producer, so GM and Ford considered merger to prevent this scenario.

Times are so tough in the American auto industry that the country's two biggest nameplates have actually talked about a massive combination. Reports out of Detroit suggest that GM and Ford had discussions about the possibility of a merger or alliance.

In this case, it would probably be a horizontal integration since both GM and Ford are car manufacturers and both companies are quite well established, with considerable experience, technology and market share."

It's a joke, there's no real meat on that bone," said Kevin Tynan, senior auto analyst at Argus Research Company. "They need to get smaller, not bigger. They need to be more flexible, not continue in their old way of doing business."

I am not sure whether I agree to this comment here because being bigger certainly allows GM and Ford to reap significant EOS and increase their competitiveness. The motivation for this merger is actually to deal with the increasing threat from Toyota, so I believe that GM and Ford will not “continue in their old way of doing business”.

But the tantilizing possibility of a mega merger has many industry experts rubbing their eyes in disbelief, wondering if these two icons could actually find a way to marry, and if they did, how that would change the auto industry landscape."Does it become General Ford? Gord? Ford Motors?" asked Karl Brauer, editor-in-chief of auto web site Edmunds.com. "That's actually one of the strengths of a merger -- they'd be combining two of the world's most recognized brands."

Indeed, the brand name will be extremely powerful as both consumers of GM and Ford will come to recognize this name. Also, advertisement will be made cheaper as advertisement costs can be spread over larger outputs (or 2 companies, if you like to think of it that way).

Combined, Ford and General Motors would be a force to be reckoned with.Based on their most recent sales reports, a merged company would have accounted for more than 4.6 million cars and trucks sold in the United States so far this year. That's an astounding 41 percent of the U.S. auto market and almost three times the size of Toyota's slice of the auto pie.

The aim of most vertical integrations is to increase market share so that the companies can enjoy greater internal EOS, especially in the car manufacturing, where start-up costs are generally high and companies can enjoy significant technical EOS. R&D is especially important (research into energy-efficient cars to compete with Toyoya.)

As such, GM-Ford will have a lower LRAC, which will be beneficial as it can reduce pricing to compete with Toyota, which is extremely important since people are starting to prefer Toyota’s small, CHEAP, energy-efficient cars over GM-Ford’s large, EXPENSIVE, fuel-guzzlers. Therefore, to win over market share, a low price is crucial.

That new sizable company would have leverage with suppliers that neither has enjoyed for decades. Experts say a combination could allow for better deals on everything from steel components to tires, air conditioners to ad time.

Being large means that GM-Ford will be able to experience bulk purchase and distribution EOS.

But in this case, size doesn't necessarily make for success in the car business. Today the companies are too big, with expensive plants that are not running and thousands of union workers they have to pay even when they do not need them. Combine that with the financial burden of pensions and providing health care to workers and their families, and you see that size can, in fact, hurt a company."

Even when the companies are split, their total costs in these areas are still almost about the same. So I don’t see what they are arguing about here.

Even if a merger happened, they'd still face these costs," said Brauer. "Becoming a single company doesn't reduce their obligations to the UAW or their health care costs. Unless they made these issues a part of the alliance negotiations and included the unions in whatever deal they struck."

Asian competitors Toyota and Honda -- both of which have made big headway in grabbing market share from GM and Ford in recent years -- have a younger work force, which means lower pension obligations and less expensive health care costs. Those foreign competitors have used those lower financial burdens to make cars in the United States for less than their American competitors.

Well I guess this is something GM and Ford can’t change: Toyota’s advantage of a younger workforce, unless it tries to hire foreign workers.

A merger would allow the combined company to negotiate simultaneously with its unions about cost reducing moves, but GM is already a few steps ahead of Ford in cutting these costs with aggressive hourly-worker buyouts and layoffs of salaried managers.

GM chief Rick Wagoner says that the company's restructuring plan, announced late last year, has already succeeded in cutting some $9 billion out of the struggling company's expenses. Ford's recent acceleration of its "Way Forward" plan is taking a line from GM's script, offering one-time payouts of up to $140,000 to workers willing to walk away from their jobs and drop corporate health insurance in their retirement years.

I’m not sure whether this is an EOS, but this move will certainly lower its LRAC and lower the overall production costs.

But success is not just about reducing costs. It is about making cars and trucks that people want to buy.

"You could easily end up with a stronger line-up of vehicles and nameplates," said Bauer. He says both GM and Ford have brands that they could jettison without having a negative effect on their bottom lines. Losing the car and truck nameplates that haven't found a place in the marketplace would make the overall car market stronger; a Darwinian thinning of the herd. A big auto merger like the one reportedly discussed by GM and Ford has happened before. The $38 billion combination of Chrysler with German auto giant Daimler-Benz in 1998 offers a precedent. It took years and a shift in top management to get the merger to work."

Indeed, the larger the company, the more internal DEOS it experiences in management difficulties, such as problems with communication, coordination and low morale. So management needs to be really good, but of course, big companies can buy better management.

The real challenge will be getting somebody that can actually manage it and make it stronger, instead of just creating an unwieldy monster," said Bauer. "It would take a hell of a management effort.

"But the speculation about a merged GM/Ford is just that: speculation.

Most analysts are not confident that a GM/Ford marriage is in the offing, pointing out that there's no real financial benefit to either company that would justify the Herculean effort of pulling off a combination.