Economies of Scale, Clout, Product Diversification

This is a replication of a post on the Autos and Economics blog. Since we will be discussing economies of scale and numbers of firms in an industry this coming week, I thought I’d repost it here.
New turmoil dominates today’s [July 2012?] news. First, there is the not-quite-yet announced linkup between PSA and GM. Fiat-Chrysler claims to be looking for an alliance partner. So we are seeing a resurrection of the idea that a modern auto manufacturer needs a bigger scale than these already large firms have—call it the mantra of “clout.”
A second piece of news is that Subaru (Fuji Heavy Industries) is withdrawing from the “kei” (minicar) segment in Japan, leaving three players, Suzuki, Daihatsu and the faltering Mitsubishi. Meanwhile, there are rumors of plant closings in the EU. This represents another long-standing industry mantra, “overcapacity.”
In Japan, the 30-odd manufacturers present in the 1950s shrank to 11 by 1966, with new entry Honda offset by the acquisition of Prince by Nissan. Now in Japan little changed until the 1990s, but since then Toyota took over Hino, Isuzu, Daihatsu and now has exerted control though not full ownership over Subaru (Fuji Heavy). Renault took over Nissan, Volvo took over Nissan Diesel, and Mercedes took over Fuso, the truck portion of Mitsubishi. Honda remains fiercely independent, while Mazda and Mitsubishi failed to turn themselves around in alliances with Ford and Chrysler/Daimler, respectively. Suzuki is presently unwinding an abortive alliance with Volkswagen.
Confusing? Yes! And it’s not just Japan. In Europe brands such as Simca disappeared in the 1970s, along with the remnants of other firms; a few have mutated, with Mini shifting to BMW, Land Rover and Jaguar to the Indian firm Tata, and Rover to a Chinese firm. VW has gobbled up a range of makers, from SEAT and Skoda to Audi and Porsche. Of course the US has seen all sorts of drama, too.
But that hasn’t necessarily meant fewer players, at the national level. To give one example, Toyota, Honda and Nissan all have plants in the UK, and the number of models expanded. While many words have been spilled on overcapacity at the pan-European level, there’s a puzzling disconnect: aren’t there also therefore too many brands and models in the market? “Lean” manufacturing and common platforms, and now manufacturing design standards [off the top of my head I’m not sure there’s standard jargon] allow firms to make multiple (and sometimes quite different) models in the same plant. There is still however an association between plants and models, or at least size-based market segments.
This is from an old draft that somehow remained “unpublished”. For the moment I will leave it merely as an observation that these multiple levels of analysis haven’t been integrated, and that the received wisdom is almost surely comprised of mutually inconsistent elements. I’ve still got some slogging and blogging to go on these topics…
Mike Smitka

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