Case
Alliance Formation, Both Globally and Locally, in the Global Automobile Industry
The academic literature on alliances has some interesting recent findings, one of which is the rationale that because firms are often located in the same country, and often in the same region of the country, it is easier for them to collaborate on major projects. As such, they compete globally, but may cooperate locally. Historically, firms have learned to collaborate by establishing strategic alliances and forming cooperative strategies when there is intensive competition. This interesting paradox is due to several reasons. First, when there is intense rivalry, it is difficult to maintain market power. As such, using a cooperative strategy can reduce market power through better norms of competition; this pertains to the idea of “mutual forbearance”. Another rationale that has emerged is based on the resource-based view of the firm (see Chapter 3). To compete, firms often need resources that they don’t have but may be found in other firms in or outside of the focal firm’s home industry. As such, these “complementary resources” are another rationale for why large firms form joint ventures and strategic alliances within the same industry or in vertically related industries. Because firms are co-located and have similar needs, it’s easier for them to jointly work together, for example, to produce engines and transmissions as part of the powertrain. This is evident in the European alliance between Peugeot-Citroën and Opel-Vauxhall (owned by General Motors). It is also the reason for a recent U.S. alliance between Ford and General Motors in developing upgraded nine- and ten-speed transmissions. Furthermore, Ford and GM are looking to develop, together, eleven- and twelve-speed automatic transmissions to improve fuel efficiency and help the firms meet new federal guidelines regarding such efficiency. In regard to resource complementarity, a very successful alliance was formed in 1999 by French-based Renault and Japan-based Nissan. Each of these firms lacked the necessary size to develop economies of scale and economies of scope that were critical to succeed in the 1990s and beyond in the global automobile industry. When the alliance was formed, each firm took an ownership stake in the other. The larger of the two companies, Renault, holds a 43.3 percent stake in Nissan, while Nissan has a 15 percent stake in Renault. It is interesting to note that Carlos Ghosn serves as the CEO of both companies. Over time, this corporate-level synergistic alliance has developed three values to guide the relationship between the two firms:
1. Trust (work fairly, impartially, and professionally)
2. Respect (honor commitments, liabilities, and responsibilities)
3. Transparency (be open, frank, and clear)
Largely due to these established principles, the Renault Nissan alliance is a recognized success. One could argue that the main reason for the success of this alliance is the complementary assets that the firms bring to the alliance; Nissan is strong in Asia, while Renault is strong in Europe. Together they have been able to establish other production locations, such as those in Latin America, which they may not have obtained independently. Some firms enter alliances because they are “squeezed in the middle;” that is, they have moderate volumes, mostly for the mass market, but need to collaborate to establish viable economies of scale. For example, FiatChrysler needs to boost its annual sales from $4.3 billion to something like $6 billion, and likewise needs to strengthen its presence in the booming Asian market to have enough global market power. As such, it is entering joint ventures with two undersized Japanese carmakers, Mazda and Suzuki. However, the past history of Mazda and Suzuki with alliances may be a reason for their not being overly enthusiastic about the prospects of the current alliances. Fiat broke up with GM, Chrysler with Daimler, and Mazda with Ford. This is also the situation in Europe locally for PeugeotCitroën of France, which is struggling for survival along with the GM European subsidiary, Opel-Vauxhall. More specifically, Peugeot-Citroën and Opel-Vauxhall have struck a tentative agreement to share platforms and engines to get the capital necessary for investment in future models. As such, in all these examples, the firms need additional market share, but also enough capital to make the investment necessary to realize more market power to compete. In summary, there are a number of rationales why competitors not only compete but also cooperate in establishing strategic alliances and joint ventures in order to meet strategic needs for increased market power, take advantage of complementary assets, and cooperate with close neighbors, often in the same region of a country.