Aside from the partial buyout of Chrysler by Fiat, the current auto market should dissuade big manufacturers from moving further into the business. That did not stop Volkswagen from taking over of Porsche, a deal seven years in the making. VW paid $5.58 billion for the 50.1% of Porsche it does not already own.
The deal could make VW the largest car company in the world, edging ahead of General Motors (NYSE: GM) and Toyota (NYSE: TM). Each faces trouble in Europe, and a slowing U.S. economy may make the trouble worse. The Chinese market, once believed to be the most important one in the world, has ended its long growth period for now.
Having large product lines means that huge manufacturers leave themselves exposed to more failures. That likely has made BMW and Daimler, the maker of Mercedes, attractive investments. Each caters exclusively to the high end of the market, where margins mostly have remained high in the past several years, and does so with a very limited number of models.
Ford (NYSE: F) offers a good example of extensive brand maintenance. Its Lincoln division has strained the firm’s marketing and product development resources. Ford might like to be without Lincoln as GM wanted to be without Saturn and Oldsmobile. GM jettisoned its two failed units. Ford could pour billions of dollars into Lincoln but the investment may fail completely. The brand runs too far behind BMW, Cadillac, Lexus, Mercedes and Honda’s (NYSE: HMC) Acura.
VW already has substantial exposure because of its large European operations. Investors ought to be concerned about why it has decided to increase that exposure now, when the car market may be set for a multiyear slowdown. At least Porsche products have enough appeal and speed for VW management to drive them.
Douglas A. McIntyre