21COE, University of Tokyo

MMRC Discussion Paper No. 52

MMRC
DISCUSSION PAPER SERIES

MMRC-F-52

The Long-Term Value of M&A Activity toEnhance Organizational Learning:
Findings from the Automobile Industry
Daniel Arturo HELLER(Int’l Grad. School of Social Science, Yokohama National Univ.)
Takahiro FUJIMOTO(Graduate School of Economics, the University of Tokyo)
Glenn MERCER(Cleveland Office, McKinsey and Company)
September 2005

21COE, University of Tokyo

MMRC Discussion Paper No. 52

The Long-Term Value of M&A Activity toEnhance Organizational Learning:
Findings from the Automobile Industry1

Daniel Arturo HELLER(Int’l Grad. School of Social Science, Yokohama National Univ.)
Takahiro FUJIMOTO(Graduate School of Economics, the University of Tokyo)
Glenn MERCER(Cleveland Office, McKinsey and Company)
Please cite only with permission (contact: daheller@ynu.ac.jp).

1

This document is a revised English-version of a paper to be published in Japanese in Hitotsubashi Business

Review in September 2005.
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HELLER, FUJIMOTO, MERCER

Introduction
In the last year and a half, we have witnessed some dramatic examples of bothconsolidation and de-consolidation in the world auto industry. 2 The industry lost a competitor in May

2005, when MG Rover of the U.K., a company with over 100 years of proud automotive history,

became insolvent and began the liquidation of its sole remaining factory in Longbridge. 3 As forde-consolidation, a few months earlier, Fiat and GM ended their equity relationship and dissolved

their various joint ventures, while a year or so before that, DaimlerChrysler (DCX) decided not toinvest additional capital in Mitsubishi Motors, thereby relinquishing its control over that firm in amove that attracted much attention in Japan and around the world. Further, in 2004, DaimlerChrysler

also sold its minority stake in Hyundai Motors: the two divestitures taken together served to unwind

DCX’s entire “Asia strategy.”

Nevertheless, despite this recent flurry of activity, the basic industrial organization of the

auto industry, when viewed from a global perspective 4 , remains relatively stable, after a period of2

To simplify the presentation of our argument, we focus our attention in this paper on passenger cars andlight commercial vehicle assemblers. We do not explicitly analyze manufacturers of medium and heavy-duty
trucks and buses. Nevertheless, we expect the paper findings will also largely hold for manufacturers of theselarger vehicles.
3

Holweg and Oliver (2005) contains a detailed analysis of the fall of Rover.

4

Since many automakers compete with each other in multiple markets around the world, it is reasonable to2

The Long-Term Value of M&A Activity to Enhance Organizational Learning

aggressive consolidation. The number of existing alliances (including mergers and acquisitions)

between Japanese, European, and U.S. auto assemblers increased dramatically in the latter half of

1980s, from 36 in 1985 to 102 in 1990, and then remained at this elevated level throughout the 1990s(Fujimoto, Takeishi, and Nobeoka, 1999). Parallel to this increased use of alliances, over the past

twenty or so years five or six very large auto groups have formed, alongside of which coexist a

shifting roster of smaller industry players. (For example, even as Rover bows out firms such as Tata

enter the fray.)We estimate that the combined output of the top five large groups accounts forapproximately 60% of total worldwide auto sales. 5 The affiliated automakers that make up eachgroup are connected to each other through a web of equity-based relationships. Such capital ties

discuss the auto industry as a global industry. However, it is important to note that there is no "world market"
for any given automobile, as there may be for an .mp3 player or a sweater. Instead, for automobiles we see a
mixture of local product differentiation and global corporate competition. Thus, for example, the three “Triad”
product markets are very distinctive: the U.S. market remains dominated by gasoline-powered pickups andSUVs, the European market by diesel-powered sedans, and the Japanese market is distinctive in its highnumber of gasoline-powered minicars. On the other hand, many markets around the world have globalized
dramatically from the point of view of who competes where. For example, Grant (1998) describes the dramaticshare losses in their home countries of "national" car companies from the 1960s to the 1990s: 85% to 64% for
the Big Three in the U.S. (as the Japanese entered the market), and, as cross-European competition increased,from 66% to 40% for Fiat in Italy, 40% to 11% for Rover (formerly British Leyland) in the U.K, and 50% to
28% for VW & Mercedes in Germany.
5

When DaimlerChrysler, the 6th largest auto group, is included the combined share rises to 67%.
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HELLER, FUJIMOTO, MERCER

consist of a mix of full, majority, and minority ownership stakes. Table 1 lists the industry's major

global players and some of their key linkages.

<<Table 1 about here>>

The emergence of these large auto groups, however, in no way means that there are now

essentially “only 5 automakers" left in the world, as is often asserted by pundits. Nor does it meanthat the five largest auto groups are necessarily the strongest players in the industry or the only ones

that will survive. In fact, there may be a very loose inverse relationship between size of group andprofitability, as is suggested by the May 2005 downgrading of the debt ratings of two of the largest

firms, GM and Ford, to "junk bond" status, while smaller firms such as BMW and Honda continue tothrive. Large size does not guarantee good economic health in this industry, although there arecertainly minimum economic scales to be found at both the plant and corporate levels. 6

On a related theme, there seems to be little correlation between the amount of formal(financial) alliance activity an automaker undertakes and its long-term success. Famously, very

healthy firms such as Toyota, Honda and BMW (now that its acquisition of Rover has been reversed)

6

Fujimoto, Takeishi, and Nobeoka (1999) and Fujimoto and Heller (2004) explain why manufacturing scale

can only be reasonably expected to give a positive effect in the auto industry up to a certain limit, which isestimated to be about 250,000 per platform and 1 to 1.25 million per automaker. See also Conybeare (2004).
4

The Long-Term Value of M&A Activity to Enhance Organizational Learning

have generally avoided outright acquisitions. Further, Mercer (2001) surveyed five large mergers

between assemblers that occurred in the 1980s and found that it was rare for such mergers to createshareholder value, based strictly on financial or sales volume measures. 7

Despite these findings, given the competitive dynamics of the auto industry, where

capability building is the long-term driver of firm performance (most vividly demonstrated byindustry leader Toyota’s frank admission that its success is based almost wholly on its mastery of the

Toyota Production System), if we view the industry as made up of (semi-)independent learningorganizations, rather than as financial "groups," we may still find that some alliance arrangements

can generate great value that is not easily revealed by traditional financial metrics.

We use the term learning organization in its most basic sense to mean an organization that is

capable of engaging in organizational learning. 8 That is, an organization capable (or potentiallycapable) of building up the competitiveness of its productive and administrative capabilities (e.g., its

product development, manufacturing, purchasing, sales & marketing, human resource managment,

corporate finance, and other functions.) By independent, we mean organizations that possesses some

7

The five cases examined in Mercer (2001) are AMC-Chrysler in 1986, Fiat-Alfa Romeo in 1987,

Ford-Jaguar in 1989, GM-SAAB in 1989, and Volkswagen-SEAT in 1986 through 1990.
8

Regarding this usage of the term, see Tsang (1997). Additional reading on learning organizations can befound in Easterby-Smith and Lyles (2003), Tsang (1997), and Senge (1990), among others.
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HELLER, FUJIMOTO, MERCER

significant level of autonomy. 9

Using learning organizations as a starting point, our interpretation of the effects of recent

developments in the auto industry may differ markedly from the financial-based perspective. Pending

a more detailed discussion below, the key question to be answered when considering M&A activity

between automakers from this perspective is how the formation of such a relationship (or its

dissolution) may affect the organizational learning of the concerned automakers. Any financial andmanufacturing scale effects are likely to be secondary issues or secondary outcomes, from thisperspective.

Context: Capability-building competition in the Auto Industry 10
At least three general measures of a manufacturing firm’s competitiveness can be identified:deep-level (“productive”) competitiveness, surface-level (“product”) competitiveness, and financial

9

Since automakers compete in oligopolistic markets, they are all interdependent to some degree. As such, inthis paper "independent" is meant to indicate a "self-contained entity" with a non-trivial level of autonomy.
Even wholly owned organizations may possess high levels of autonomy (e.g., in the auto industry, Audi within
VW, Volvo within Ford, etc.)
10This text of the first part of this section draws on Heller and Fujimoto (2004). For additional reading on

capability-building competition, see Fujimoto (2003, 1999, 1997).
6

The Long-Term Value of M&A Activity to Enhance Organizational Learning(“profit”) competitiveness. 11 Firm performance according to each measure will tend to vary based on

firm strategy and the degree to which each measure is influenced by factors external to the firm.

Financial performance is often highly volatile even from quarter to quarter. Surface-level

performance generally varies more moderately as product lineups are renewed, prices are adjusted,

and user needs change. Deep-level performance tends to be relatively stable for a given productarchitecture. The stability of deep-level performance comes from it being the least exposed of thethree measures to external factors, and from the relative stability of productive capabilities for agiven product architecture.

Capability building in the auto industry takes place within the context of the long history of

the automobile. Since the era of Ford Model T, the product architecture of the automobile has been

integral, closed, and stable. 12 Thus, the auto industry since the early 1900s can be seen as anindustrial sector in which cumulative evolution, rather than revolution (cf., Christensen, 1997), hasbeen a powerful engine for industrial change. 13 Ongoing incremental change has produced great

11

In the auto industry, deep-level competitiveness is typically measured by product development lead time,assembly productivity, assembly defects per car, among others; surface-level competitiveness is typicallymeasured by product appeal, price, time to delivery, among others; and financial competitiveness is measured
by operating profit, return on invested capital, stock price, among others.
12

As such, the auto industry may be viewed as an industry with a very slow "clockspeed" (Fine, 1998).

13

Evolutionary change is also encouraged, according to some industry observers, because of the dramatic
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HELLER, FUJIMOTO, MERCER

technological advancement and improvements in the productive and product performances ofautomakers worldwide. In this context, the long-term competitive foci of automakers have tended tobe the organizational capabilities that determine a company’s performance on key productive

measures. Competition by firms to build increasingly more effective productive capabilities (e.g., inproduct development, manufacturing, and retailing) has been a powerful driver of the industry’schanges over the years.

While capability-building competition in the auto industry has tended to center on

factory-based productive capabilities, building a strong automobile brand and consistently achieving

appropriate financial management also requires competitive marketing and administrative

capabilities. Such capabilities may be considered increasingly valuable as industrial competition

intensifies at the factory level (as we have already seen, in terms of metrics such as hours/car build

times, which are converging among automakers over time), and more difficult to build as firm size

increases. (For example, while BMW is acknowledged as an excellent product developer on a global

level, and Toyota as an excellent manufacturer in countries all around the world, no automaker iscapacity for harm that the product offers: with hundreds of thousands of people annually killed in auto
accidents, there is enormous incentive not to take significant risk in product design, lest it lead to unsustainableamounts of corporate legal and financial liability.
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The Long-Term Value of M&A Activity to Enhance Organizational Learning

ever cited as strong in retailing in every country in which it competes, or as uniformly superior invarious “white collar” functions.) As in other industries, automakers worldwide thus engage in theactive building of these capabilities.

To the extent that capability building has been the primary driver of the automobile

industry’s evolutionary development, other industry dynamics, such as mergers and alliances, areonly likely to be supplementary factors. Their long-run relevance to industrial competition will tend

to be determined by the extent to which they impact an automaker’s qualitative capability building:that is, in how they influence, not replace, the industry’s long-term competitive dynamic of capability

building.

In the automobile industry, we may operationalize the concept of a learning organization byidentifying organizations that have the capability and autonomous authority to develop a vehicle on

their own from the concept creation to production preparation stages. Such an organization may becalled an independent product-development organization. Learning for such an organization would

consist of developing increasingly higher-performing organizational routines to shorten development

lead times, improve a vehicle's overall customer satisfaction, improve the ease in which the vehicle

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HELLER, FUJIMOTO, MERCER

can be assembled, etc. 14

The existence of an independent full-fledged research and development (R&D) center could

be used as a rough proxy for determining what qualifies as an independent product development

organization. 15 By this definition, for example, Ford and Mazda would be counted as separate entities,

but Peugeot and Citroen would not. Any particular categorization , however, would be open to somelevel of debate due to the rather subjective nature of determining what would qualify as"independent" and what constitutes a "full-fledged" R&D center. Table 1 shows a categorization of

the industry's learning organizations based on the authors’ varied experiences and many years ofanalyzing the auto industry. We have included a "semi-independent learning organization"

designation for Skoda and SEAT, two of the more debatable or unclear cases.

As is shown in the Table 1, counting by independent learning organizations (ILOs) we get a

total number of global players in the auto industry of at least 28, or twice the number (14) of

14

We define organizational learning here as changes in organizational routines (Levitt and March, 1988;

Nelson and Winter, 1982) that produce more competitive organizational capabilities.
15

At this point clarification as to terminology is required. In North America the activity of designing andbringing to production readiness a new car model is called “product development,” whereas in Europe andJapan this is more often termed “R&D.” To an American automaker “R&D” more typically refers to the
far-upstream development of technologies that may apply to any number of vehicles (e.g. intensified use of
exotic materials), while the design of a specific model or models is “product development.” In this paper we
use the Japanese/European definition of R&D.
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The Long-Term Value of M&A Activity to Enhance Organizational Learning

financially independent groups or firms. As this number of global ILOs has not changed markedly

over the past twenty years (Fujimoto, Takeishi, Nobeoka, 1999), the consolidation of the industry thathas occurred over this period has generally only been at the financial level and has not beenaccompanied by any great reduction in the number of independent learning organizations. This fact is

an indirect indicator of the value to the industry of having a relatively high number of ILOs, further

implying that they may reach minimum scale at lower levels than the financing community demandsof broader corporate entities. The value of having “too many” ILOs (relative to financial units) may

be linked to the brand and model proliferation that we can observe in the industry. As the industry

matures and commoditizes (in major markets such as Japan, the EU, and North America), automakers

chase fleeting pockets of price premiums by launching new models and even new brands (e.g.,

Toyota brings out Scion in the U.S., DaimlerChrysler adds Smart in Europe and elsewhere). It may

enhance a company’s ability to propagate many diverse brands and models by having at its disposal

more than one learning organization within its financial grouping.

Case studies
In order to obtain insights into how M&A may be used to enhance learning organizations,

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HELLER, FUJIMOTO, MERCER

we present three case studies to examine how such activity in the auto industry has affected thelearning organizations of the automakers involved. 16 The longitudinal and qualitative researchmethod we employ allows us to examine not only M&A outcomes but also processes.

Opportunities to engage in horizontal merger activity in the auto industry by one automakeracquiring a full or partial equity position in another automaker have frequently come when theacquired company had experienced financial distress. The cases examined here all fall into thiscategory. The first two cases, Ford-Mazda and Renault-Nissan, involve very significant but stillminority equity-stakes between Japanese and Western automakers. The third case, Chrysler-AMC,

involves the full acquisition of one U.S. firm by another U.S. firm.

Case #1: Renault-Nissan

The alliance between Renault and Nissan began in the late 1990s. At the time, Nissan’s

productive performance was strong in many aspects (especially in assembly plant productivity,

product development lead-time reduction, engine and key component technologies); however, thecompany had difficulty using these productive capabilities and technologies to produce attractive

products cost efficiently: on the revenue side designs were seen as too weak to earn brand premiums,
16

The first two case studies draw from Heller and Fujimoto (2004). The third case is based on Mercer (2001).
12

The Long-Term Value of M&A Activity to Enhance Organizational Learningand on the cost side a disorganized purchasing department was failing to deliver componentry (which

can make up 80% of the manufacturing cost of a car) at globally competitive prices. Nissan’s overall

weaknesses at the time can generally be said to have been in brand management, product design, andcomponent purchasing. These weaknesses, together with strategic mistakes (e.g., excessive

proliferation of models and distribution channels in Japan to match Toyota despite a stagnant or

shrinking sales volume), led to poor profitability and chronic deterioration of Nissan’s market sharethroughout the 1990s in markets around the world.

Renault, on the other hand, was experiencing strong financial and product performance asof the late 1990s through a series of successful new vehicles with novel product concepts. This good

performance followed the completion of corporate restructuring at Renault in the mid-1980s andmid-1990s (cf., Freyssenet, 1998). The poor performance that triggered these restructurings can be

attributed to factors such as a high-cost/low-profit structure, an excessive number of productplatforms, and difficulties in developing a consistently attractive product lineup. Renault’s recovery

was based on a series of extensive corporate-wide efforts, including financial restructuring, learningfrom best-practice operations, cost-reduction initiatives mainly in parts procurement, and thedevelopment of a series of successful and innovative new products.

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HELLER, FUJIMOTO, MERCER

Thus, as of the late 1990s, Nissan and Renault had complementary organizational capability

strengths: engineering and manufacturing capabilities at Nissan and design and sourcing capabilities

at Renault. In addition, Renault had free cash, whereas Nissan was deeply in debt. Finally, there wassome geographic complementarity: Renault’s operations tended to be limited to Europe and someparts of Latin America, whereas Nissan was more internationally active (especially in the key U.S.

market that Renault had abandoned earlier), though not a major player in either Europe or most Latin

American markets. An opportunity thus existed for an alliance that would exploit thesecomplementary positions. In 1999, the two companies entered into a broad based corporate alliancewhen Renault invested approximately 600 billion yen (about US$5.5 billion) to acquire a 37%

equity-stake in Nissan. Two years later Renault exercised the stock options it had acquired in the1999 alliance deal to increase its stake in Nissan to 44%. Shortly thereafter, Nissan acquired a 15%(non-voting) stake in Renault.

In the years since the alliance was formed, the two firms have sought to learn from eachother and have engaged in numerous cross-company projects, including joint product development

projects (cf., Segrestin, 2005) and third-country production and distribution collaboration. In addition,

the firms have actively sought to assist each other’s learning through the mutual dispatching of

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The Long-Term Value of M&A Activity to Enhance Organizational Learning

executives and managers in various functions. They have also broadly shared information andknowledge. For example, the companies established in 2001 a joint information systems organization

and a joint purchasing organization.

Learning at Renault has included codifying and refining the Renault Production System, an effort

that includes detailed benchmarking of Nissan plants, notably Nissan’s two large-scale production

facilities in Europe. Deep interaction between Renault and Nissan production engineers is a coreelement of this process. In part to aid this process, Nissan has strengthened its efforts to make its own

production system, the Nissan Production Way (NPW), more explicit, including establishing asection whose mission is to articulate and disseminate the NPW. In this way, Renault has been in theprocess of enhancing its productive organizational capabilities to improve its deep-level performance.

Since 1999, surface-level and financial performance at Renault have largely remained steady.

At Nissan, under the leadership of a team of upper- and mid-level managerial dispatcheesfrom Renault headed by Carlos Ghosn, a corporate revival plan was successfully executed and thecompany has subsequently embarked on an aggressive expansion plan. In many ways, Nissan’srecovery process looked as if it were a compressed version of Renault’s own revival experience(Fujimoto, 2001), including lessons Renault learned from its failed alliance with Volvo in the early

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HELLER, FUJIMOTO, MERCER

1990s. Numerous changes have been implemented at Nissan since 1999 to improve the company’s

strategic capabilities, including an emphasis on cross-functionalism at the corporate level, the morewidespread inclusion of front line (gemba) managers in corporate decision making, an integration ofbrand and corporate image building efforts, and an introduction of more rapid and globally orientatedmanagement systems (Bungsche and Heyder, 2004; Fujimoto, 2001; Heller, 2003; see also, Yoshino

and Egawa, 2003, 2002). Nissan has also benefited from its access to Renault’s purchasing database,which has assisted Nissan to move its sourcing spend toward more competitive Renault levels. Since

1999, Nissan’s deep-level performance has continued to be strong, surface-level performance has

improved, and record financial performance has been achieved since 2000. In fact, there is no

mass-market automaker which can now claim a higher profit margin than Nissan-Renault.

Case #2: Ford-Mazda

The Ford-Mazda relationship dates back to 1969, when the firms, together with Nissan,

formed a manufacturing joint venture in Japan. Following other cooperative initiatives between thecompanies, Ford purchased for approximately 30 billion yen (about US$130 million) a 25%

equity-stake in Mazda in 1979. At the time, other U.S. automakers were also forming alliance ties

16

The Long-Term Value of M&A Activity to Enhance Organizational Learningwith Japanese automakers as the Japanese auto industry and market grew (Yoshino and Rangan,

1995). For the Japanese side, these alliances may be viewed in some ways as defensive measures.

Once tied up in an alliance, it would be harder for a foreign firm to acquire one of the Japanese

automakers outright, which was of great concern to the Japanese government (MITI) and Japanese

automakers at the time.

Mazda, on the other hand, had less choice in entering into an alliance, requiring it in largepart just to stay alive. The firm had been experiencing severe financial difficulties in the 1970s,

which can be attributed to strategic mistakes such as over-investment in the Wankel rotary engine,which turned out to be a relatively fuel-inefficient and somewhat polluting design: a prescription fordisaster as the world was rocked by the Mideast oil shocks and as governments everywhere tightened

controls on pollution. Thus, as the 1970s unfolded, Ford’s alliance with Mazda moved from one offriendly exchange among equals to life-support for the weaker firm. Cooperative activities between

Ford and Mazda grew throughout the 1980s to include product development collaboration, a

distribution joint-venture in Japan, and mutual parts and product souring. But the support was not all

one-way: Mazda was skilled in flexible manufacturing and also car design – whereas Ford focused

mainly on trucks and SUVs. Due in part to learning from Mazda (Doz and Hamel, 1998; Harbison

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HELLER, FUJIMOTO, MERCER

and Pekar, 1998; Heller, 2001), Ford’s productive capabilities strengthened and the company’svarious performance measures improved markedly during the 1980s (Pascale, 1990; Shook, 1990;

Womack, Jones, and Roos, 1990).

In the 1990s the relations between Ford and Mazda grew closer at an increasing rate, as

Mazda experienced another financial crisis, again attributable to strategic missteps (in this case therapid proliferation of products and dealer channels in Japan, despite decreasing sales volume), evenas productive performance at Mazda remained strong. In 1992, Ford acquired a 50% equity stake andmanagement control of Mazda’s assembly plant in the United States. Ford then began acomprehensive review of the overall potential of the Mazda organization with an eye toward

increasing its equity stake. Positive results to this study were followed in 1993 by Ford and Mazda

formally announcing the strengthening of their alliance, and in 1996 Ford invested approximately 50

billion yen (about US$500 million) to increase its equity stake in Mazda to 33.4%, which underJapanese law essentially gave Ford full control over the Hiroshima-based firm. With this additional

investment, Henry Wallace, who had been dispatched from Ford to serve as an executive

vice-president at Mazda since 1994, was promoted to become Mazda’s president. With the increased

strategic nature of the relationship between the two companies, both were allowed access to each18

The Long-Term Value of M&A Activity to Enhance Organizational Learning

other’s information systems and broad based sharing of knowledge in numerous functional areas

accelerated.

Ford’s increased influence over Mazda’s management led to a shift in the focus of alliancelearning from Ford mostly learning from Mazda in productive capabilities to Mazda mostly learningfrom Ford in strategic, purchasing, and administrative capabilities. Under the leadership of various

Ford-dispatched upper- and mid-level managers who brought with them expertise in financial

management, product planning and marketing, many changes were enacted at Mazda, which

included: strengthening the strategic business skills of Mazda managers, elevating Mazda’s asset

management and financial planning capacities, rationalization of Mazda’s fragmented supply base,introducing a more rigorous integration of financial and market analysis into Mazda’s productdevelopment processes, and the strategic clarification of Mazda’s worldwide brand positioning andoverall marketing processes (Bungsche and Heyder, 2004; Heller, 2003; Taniguchi and Nobeoka,

2003; Taniguchi, 1998). Ford and Mazda have also been closely cooperating in various joint productdevelopment projects (Heller, 2003) and third-country ventures (Heller and Orihashi, 2003, 2004).

Throughout the time when these changes were occurring at Mazda, the firm has continued theinternal building of its productive capabilities, and the company’s deep-level performance has

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HELLER, FUJIMOTO, MERCER

remained strong, especially in manufacturing and product design. Since 2001, Mazda’s surface-level

performance has improved, and the company’s financial performance has greatly improved over what

it was in the early-to-mid 1990s. At Ford, depressed financial performance in the early 2000s and arecognition that Ford’s deep-level performance still trails Mazda in various key dimensions appear tohave spurred recently renewed broad-based efforts at Ford to use its relationship with Mazda as alearning instrument. As part of this effort, as of the year 2005, a significant number of Ford car

products were based on Mazda-developed platforms, such as the Mazda6, or based on Ford/Mazda

co-developed platforms.

Case #3: Chrysler-AMC

In 1987, Chrysler Motor Corporation acquired American Motors Corporation (AMC) from

Renault SA of France. The case is typically viewed as a great coup for Chrysler because theacquisition gave that firm the Jeep vehicles and brand, which enabled Chrysler to participate heavily

in the high margin sport-utility vehicle (SUV) boom of the 1990s.17 A close look at the case, however,reveals that in addition to the timely acquisition of a profitable vehicle line, Chrysler also benefited

17

AMC had acquired the Jeep brand in 1970 when it bought the Kaiser Jeep Corporation for $75 million.
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The Long-Term Value of M&A Activity to Enhance Organizational Learning

greatly by its learning of the successful product development practices that had been employed at

AMC.

Prior to the acquisition, Chrysler had completed a recovery from a severe financial crisis, inwhich the company had to be bailed out by the U.S. government in 1979, with $1.2 billion ingovernment-backed loans. 18 This recovery, which while it included cost reduction efforts such aslarge-scale layoffs and plant closures, was primarily based on the revenue success of Chrysler's

pioneering and then dominating the minivan segment of the market. 19 The ensuing financial stability

allowed Chrysler to fund its strategy to achieve a leading position in the SUV segment, which it(correctly) forecast as becoming an attractive and high-growth market segment, by acquiring AMC's

Jeep brand.

AMC, on the other hand, was struggling as of the mid-1980s as a minority-owned (46%)

partner of Renault. AMC's product strategy of distributing minimally modified Renault-developed

vehicles (notably the Alliance and Encore models) through the AMC dealer network resulted in

massive recalls, primarily for faulty air conditioning systems and secondarily for issues such as body18

The loans were ultimately fully repaid by 1983, with an additional amount of $311 million paid to the U.S.

government as guarantee fees. See Reich and Donahue (1985) for additional details.
19

The first minivans, which debuted in 1983, were the Plymouth Voyager and Dodge Caravan.
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HELLER, FUJIMOTO, MERCER

rust and suspension failure, all of which problems derived from Renault’s insufficient understandingof the demands of the American market and driving environment. The ensuing public-relationsdifficulties, combined with accumulating losses at AMC and a prolonged financial crisis and risinglabor-management struggles for Renault in France, pushed the company to sell off its controllingstake in its U.S. partner, which it had held since 1978.

Renault agreed to the Chrysler acquisition of AMC on March 9, 1987. The deal wasapproved by AMC shareholders on August 5, 1987 and cost Chrysler approximately US$1.7

billion. 20 As part of the agreement, Chrysler absorbed 5,500 salaried and 17,400 hourly employees of

AMC, three large-scale assembly plants, and 1,472 AMC-Jeep-Renault dealers in the U.S. Chrysler

had two primary objectives following the acquisition: (1) to return AMC's operations to profitability,and (2) to preserve and build upon the strengths of the Jeep brand. These two objectives and themeans by which they were pursued are described below.

First, the AMC operations may not have been in as dire financial straits as they were

20

While the overall number of $1.7 billion seems equitable, the “fire sale” nature of the transaction, driven by

Renault’s eagerness to exit the USA, is revealed in the details of the deal. Chrysler paid Renault only $35
million in cash for AMC, with the rest of its compensation being made up of a $200 million promissory note, apledge to pay up to $350 million more in future years in accordance with AMC profitability, assumption of
AMC's full debt load of $750 million, and issuance of $525 million of its own stock to obtain the AMC sharesthat Renault did not own.
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generally perceived to be. While the company had lost money for eight straight years, accumulating

losses of $767 million from 1980 to 1986, Joe Cappy, the president of AMC in 1987 has said, "Thefact is, American Motors had (already) turned the corner. In the fourth quarter of 1986 we made $20

million…" 21 In the first two quarters of 1987 AMC earned nearly $54 million. However, given thefact that AMC had been unable to achieve lasting profitability throughout the 1970s and 1980s, it's

turnaround from the end of 1986 may not have been sustainable in the long term without the

restructuring that was done after the merger. But in any case, at the time of the transaction AMC’s

bleeding had (at least temporarily) come to a halt.

One of the leaders of the post-acquisition restructuring of AMC's operations was Chrysler's

Manufacturing Chief Richard Dauch, who said, "We knew how to fix Chrysler in 1980 and we know

how to fix AMC now." 22 Restructuring measures that were taken included closing the AMC plant in

Kenosha, Wisconsin in 1988 and renegotiating the labor contract at the Jeep Cherokee plant inToledo, Ohio. In addition, the Renault-developed vehicles (Alliance, Encore, and Premier) were all

dropped by the end of 1990. All of the Eagle dealers (the name applied to AMC dealers carrying the21

Source: Automotive News, October 20, 2003, Vol. 78, Issue 6062, p. 6

22

Source: Mercer (2001), p. 3
23

HELLER, FUJIMOTO, MERCER

Renault products) were also phased out by 1997. AMC's newly completed passenger car plant 23 inBramalea, Ontario was converted to produce Chrysler's LH sedans (the Chrysler Concorde and LHS,

Dodge Intrepid, and Eagle Vision), which sold well from the early 1990s onward.

In 1988, the year following the acquisition, Chrysler saw its first payoff: profit attributable

to AMC reached $200 million due to an average $1,000 profit on each of 250,000 Jeeps sold. These

funds plus minivan profits helped Chrysler weather an automobile market downturn in the late 1980s

and early 1990s. It was especially gratifying to Chrysler management that they had foreseen thisgrowing market opportunity for Jeep. In 1987, Chrysler president Hal Sperlich said, "Thefundamental reason for our interest in AMC was one word: Jeep. The core of the acquisition was

aimed at that brand…. We think its position… will explode, from a market standpoint." 24 In an

industry not known for its forecasting abilities, Sperlich proved to be uncannily on the mark.

Jeep’s success centered on the Grand Cherokee model, an upscale revision of its basic

Cherokee off-roader and the first incarnation of the novel concept of the “civilized” SUV, one thatcombined car-like comfort with utility vehicle robustness. The Grand Cherokee almost did not see

the light of day, as some Chrysler sales and marketing managers feared cannibalization of the base23

This plant was jointly constructed by AMC and Renault, with assistance from Fuji Heavy Industries.

24

Source: Mercer (2001), p. 4
24

The Long-Term Value of M&A Activity to Enhance Organizational Learningmodel Cherokee’s sales and therefore were opposed to expanding the Jeep lineup to include thisupscale model. The Grand Cherokee had been in development at AMC from 1986, under the ZJ

project headed by Francois Castaing. 25 Although the vehicle's first skinned prototypes were alreadybeing built in 1987, 26 opposition at Chrysler delayed the project for two years, from 1989 to 1991. 27

The vehicle was finally put on sale in the Spring of 1992 and was an immediate hit, helping propel

sales of Jeep vehicles from under 200,000 units in 1991 (slightly less than the amount sold in 1987)

to 400,000 units by 1993. Sales continued at or above this level into the 2000s. Total Jeep operating

profit per unit was estimated to be $5000 (for the Cherokee, Grand Cherokee, and the third model,

the Wrangler) in 1998. 28

Jeep development at AMC used the cross-functional "platform-team" practice, whereengineers, designers, purchasing personnel, marketing managers and supplier representatives all

work closely together. This practice mirrored the product development organization that had been

25

Source: Automotive News, November 8, 1999, Vol. 74, Issue 5847, p. 36. Castaing had been initiallydispatched from Renault to AMC in 1980 as a product engineering director to support the 1982 production
launch of the Renault Alliance subcompact.
26

Source: Automotive News, August 4, 1997, Vol. 71, Issue 5725, p. 27

27

Source: Automotive News, November 8, 1999, Vol. 74, Issue 5847, p. 36 AMC had planned to assemble

the vehicle in an extension at its Kenosha plant. However, the vehicle was ultimately produced in a new planton Jefferson Avenue in Detroit after the Kenosha plant was closed in 1988.
28

Source: Mercer (2001), p. 4
25

HELLER, FUJIMOTO, MERCER

employed by leading Japanese automakers from the 1970s to increase product integrity, speed

development time, and lower costs (Clark and Fujimoto, 1991). The platform-team practice was firstused by Castaing at AMC to develop the 1985 Jeep Cherokee Limited. Castaing kept his 700

engineers together at Chrysler, as the first “platform” team at the merged company. It is interesting torealize that AMC’s learning from Japan in this regard was driven not by curiosity or the desire to

improve performance, but simply to save money at the financially-ailing firm. As an AMC executive

is quoted as saying, "We were already operating with teams at AMC, if for no other reason that we

didn't have enough money or personnel to do otherwise." 29

Bob Lutz, president of Chrysler from the late 1980s, pushed to expand the platform-teamdevelopment practice further within Chrysler, and accordingly five platform teams (small car, largecar, minivan, Jeep, and truck) were created. 30 Platform teams produced such vehicles as the Viperconcept muscle car, the LH sedans, the ensuing generation of the minivan, the hugely-successful

Dodge Ram pick-up, and the compact Neon. Chrysler received widespread praise in the 1990s for its"great styling, low cost structure, (and) nimble product teams." 31

29

Source: Mercer (2001), p. 330

Nobeoka (1996) and Cusumano and Nobeoka (1998) describe platform teams at Chrysler in more detail.

31

Source: Automotive News, September 1, 1997, Vol. 71, Issue 5729, p. 14. See also Belzowski (1998).
26

The Long-Term Value of M&A Activity to Enhance Organizational Learning

Chrysler's learning of the platform team and other practices from AMC was aided by mostof AMC's talented managers and executives having remained on at the merged company. Many went

on to be promoted to leading positions at Chrysler (e.g., Castaing as vice president of vehicle

engineering, and Rex Franson as vice president of quality and serviceability). These people remained

at Chrysler despite the initial cold treatment they received from many at the larger firm. Castaing said

that most at Chrysler looked at AMC as "this little lousy company that was barely making money,

that was associated with the French, and everybody knew they were not doing too well." 32 Also,"initially the small band (of AMC managers)… was treated more like refugees from a defeatednation" from whom little could be learned. 33 Bob Eaton, who joined Chrysler in March 1992 as vicechairman & COO and later succeeded Lee Iacocca as chairman on January 1, 1993, is credited withfurther encouraging the Chrysler organization to adopt successful AMC practices whenever possible.

Some observers have gone so far as to assert that in terms of product development at least, AMC

executed a “reverse takeover” of Chrysler, as little of the latter’s prior R&D system survived thewidespread adoption of AMC processes. The minivan, developed by Chrysler (although admittedly

with strong guidance from some ex-Ford employees who had jumped ship), had saved the company;
32

Source: Automotive News, August 4, 1997, Vol. 71, Issue 5725, p. 25

33

Source: Mercer (2001), p. 6 and Automotive News, August 4, 1997, Vol. 71, Issue 5725, p. 25
27

HELLER, FUJIMOTO, MERCER

but the Grand Cherokee Jeep and the product development processes which created it ensured

Chrysler’s success for years to come.

Lessons from the Case Studies: M&A activity as an opportunity for mutual
learning
The case studies described above suggest how mergers and acquisitions (ranging fromequity-stake alliances to full acquisitions) may positively affect the capability building oforganizations in the auto industry.

In the first two cases, the M&A activity was limited to minority equity stakes. As such, eachautomaker in the two pairs has remained a distinct organizational entity. 34 This organizational

separation has been maintained despite high levels of inter-organizational cooperation between

partners in the form of joint ventures, joint product development projects, distribution channel

cooperation, and the dispatching of managers and executives to work inside each partner'sorganizational hierarchy. As is described above, the widespread mutual learning of the capability

strengths of the partners has been seen as a “win” for both sides.

34

Organizational separation remains true for Renault and Nissan even after June 2005 when Ghosn became

the CEO of both automakers.
28

The Long-Term Value of M&A Activity to Enhance Organizational Learning

The pattern of cooperation found in these first two cases differs from what has traditionally been

observed in equity-stake alliances, where the dominant partner tends to reject learning from thesubordinate firm. Heller and Fujimoto (2004) describe one of the key differences in these more

successful cases as the ongoing existence of day-to-day contact between top managers of eachpartner both within and across organizational boundaries. This top-level interaction exists together

with similar interaction that occurs between people at lower hierarchical levels in the partners. Since

cooperation thus occurs at all hierarchical levels, the inter-organizational learning of capabilities canmore readily take place: middle managers see from the example of cooperative top management thatcollaboration at their own level will be endorsed as the right thing to do rather than condemned as

inappropriate for the “winning” or “losing” firm. The extent to which such learning has taken placein each of the firms in the cases suggests the inherent strength and confidence of the learningorganizations of each automaker.

In contrast to these first two cases, in the third case AMC was fully acquired and integrated

into the Chrysler organization, though some level of autonomy was kept for the Jeep productdevelopment team. This post-merger integration was accomplished without the large-scale departureof AMC management from the merged company, which is also relatively unusual. In fact, many

29

HELLER, FUJIMOTO, MERCER

former AMC managers went on to take key leadership positions in Chrysler. Over time, the strengthsof the AMC organization, particularly in product development, were diffused throughout Chrysler.

Here we do not see Chrysler and AMC continuing to exist as separate learning organizations.

Nevertheless, we do see Chrysler's learning organization stimulated through the acquisition.

In all three cases examined in this paper, extensive and ongoing contact between people from theacquired and the acquiring automaker occurred at all managerial levels, with explicit encouragementfrom the top. Obtaining positive learning results from such interaction required the creation of a work

environment conducive to mutual learning. Employees and managers needed to view the alliance ormerger as an opportunity to learn, both individually and as an organization, through the prolonged

exposure to new ways of thinking and the inevitable struggles that happen when people with different

backgrounds and corporate cultures work closely together. The view that “the other guys” were

threats to incumbent managers had to be skillfully overcome. Furthermore, this cooperation needed

to be based on accurate evaluations of the relative organizational strengths and weaknesses of thepeople and structures involved. It would seem to have been especially important for talented

executives and managers to be given the appropriate opportunities in the allied or mergedorganization(s), regardless of the firm from which they originally hailed.

30

The Long-Term Value of M&A Activity to Enhance Organizational Learning

The analysis of this paper suggests that ultimately the number of learning organizations in

an automobile group may not be particularly important: that is, both multiple and singular models

work. A larger automotive group does not necessarily have an advantage over a single firm which has

superior learning skills, as the Chrysler/AMC case shows. The critical issue is whether or not a firm's

learning organization functions properly. Are organizational capabilities consistently being improved

qualitatively? Is there an internal drive propelling this capability building? Is an organizationacquiring the outside knowledge and stimulation that is needed to stay vibrant? 35 Such learning fromthe outside does not necessarily require equity ties between organizations. 36 However, as shown inthese cases, an equity tie may be one effective way to stimulate organizational learning.

In this paper we have argued that the long-term value of automotive M&A is determined in

at least these cases by how it is used to enhance learning organizations. 37 The learning-organization

perspective described here complements the traditional financial-based perspective to give a fuller

picture of the competitive state of an industry, particularly one like the auto industry (i.e., global with35

See Rosenkopf and Nerkar (2001) for further discussion of the important role outside knowledge plays inmaintaining a learning organization.
36

Fujimoto (2003) and Fujimoto and Takeishi (1997) discus the role played by alliances, including

non-equity alliances, in the movement of organizational capabilities among automakers.
37

It may be instructive to examine further mergers involving these same firms to see if the same fortunate

story was repeated: there is certainly evidence to show that neither the Daimler/Chrysler merger nor theFord/Jaguar merger involved such positive learning experiences.
31

HELLER, FUJIMOTO, MERCER

relatively stable product architecture) where the existence or absence of capability building within afirm is so critical. By considering the capability-building effects of M&A, we may obtain a lensthrough which to analyze the long-run competitiveness of industry players.

Ultimately, the automaker that is able to use both internal efforts and inter-firm ties tostrengthen its learning organization and spur its own capability building will likely have theadvantage. Thus, we should not overreact to changes in the structures of auto groups, such as theFiat-GM or DaimlerChrysler-Hyundai breakups or the DaimlerChrysler-MMC cooling off. None ofthese firms are necessarily worse off because of the changes in ownership positions. In each of thesecases, the firms may actually now be better able to build up their own capabilities, having exitedfrom relationships that had only weak and perhaps even dysfunctional learning orientations.

Although some short-term difficulties may have been caused by these disengagements, if as a result

the firms become better able to strengthen their learning organizations, then this would be quite

positive in the long run.

32

The Long-Term Value of M&A Activity to Enhance Organizational Learning

Table 1: Major Players in the World Auto Industry
Group/Firm
GM
10,998,199

Organization/Brand
Equity ownership’04 Production Volume Independent Learning Ord.
Chevrolet/GMC/Buick/Pontiac/Cadillac/Saturn/Hummer
100%
6,161,934*
Opel/Vauxhall
100%
1,667,970*
Suzuki20%
1,318,681*
Subaru21%
595,325*
GM-Daewoo
67%
561,988*Isuzu
12%406,261*
Holden100%
165,552*
SAAB
100%
120,488*
FORD
Ford/Lincoln/Mercury
100%
5,893,259*
7,791,165
Mazda
33%
1,162,229
*
Volvo
100%
461,967*
Jaguar/Land Rover
100%
273,710*TOYOTA
Toyota/Lexus/Scion
100%
6,784,047*
7,516,713
Daihatsu
51%
732,666*
RENAULT-NISSAN
Nissan/Infiniti
44% (by Renault)
3,359,218*
5,907,233
Renault/Dacia/RSM
15% (by Nissan)
2,548,015*
VOLKSWAGEN
VW
100%
3,335,554*
5,102,325
Audi
100%
849,173
*
Skoda
100%
459,154
(*)
SEAT
100%
458,444(*)
DAIMLERCHRYSLER
Chrysler/Jeep/Dodge100%
2,729,694*
4,245,181
Mercedes-Benz/smart
100%
1,515,487*
HYUNDAI
Hyundai/Kia
100%
3,510,060*
PSA
Peugot/Citroen
100%
3,333,489*
HONDA
Honda/Acura
100%
3,177,201*
FIAT
Fiat/AlfaRomeo/Lancia
100%
1,875,743*
BMW
BMW/Mini
100%
1,273,305*
MITSUBISHI MOTORS
Mitsubishi
100%
1,169,261*
SSANGYONG
Ssangyong100%
135,375*
PORSCHE
Porsche100%
84,095*# of Groups/Companies: 14(2004 World Auto Sales = 61,991,002)
Total
56,119,345
28~30
NOTES: Only groups/firms headquartered in Japan, the U.S., Europe, and South Korea have been included. Production and sales figures are for passenger cars and lightcommercial vehicles for the 2004 calendar year. Some figures are estimates, and production by local affiliates in third countries may have been excluded in some cases.
Production of light commercial vehicles by Hino (Toyota affiliate) and Nissan Diesel have been excluded. Low volume specialty brands (e.g., Aston Martin, Lamborghini,
TVR, etc.) have been excluded. Equity ownership percentages are current as of June 2005. Designations of "learning organizations" are subject to change based on
automakers' integration strategies and other factors. Sources: Global Insight, Hoover's, Press

33

21COE, University of Tokyo

MMRC Discussion Paper No. 52

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