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June 12, 2007

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MJW

I suspect that in order to achieve economies of scale there has to exist significant overlap in the activities being carried out; the question is does simply being a car manufacturer acquiring another car manufacturer offer that? It might do if cars are generic goods, where the same materials and labour can be used to produce and market them, but if they are not generic goods but are sold as distinct products, with distinct features, sold to distinct markets or market segments then the production and marketing process may require significant enough differentiations to lose the overlap required to generate effective economies of scale.

Matthew

If Ford's legacy costs (healthcare and pensions for its ex-employees) are a major factor in its unprofitability, and I suppose they are, then it's always seemed to me that it's no so much it is unprofitable now, but that it was unprofitable back in its heyday. Then, however, it masked it by not correctly funding its workers' entitlements.

dearieme

Good points, Mr D. I've seen mergers in my own little world, and when I've enquired about the evidence for the predicted economies of scale, I've been told "It stands to reason". That's an expression in English, I've decided, that means 'I have neither evidence nor logic to support my case'.

dsquared

[It's just a matter of computing to determine them]

hmmm, not sure this model works very well in the automotive industry. For one thing, it's not obvious that the marginal cost or revenue schedule exists at every point. For another (and more fundamentally), whatever the solution for Jaguar is, if there is one it's going to involve new models which will have to be designed well and targeted at the right point in the market, and that's *not* a matter of computation.

I hate to say it (it feels like swearing in church to raise this possibility on S&M!), but the reason that ownership matters is that Jaguar's problems are the result of specific managers who were in charge of it and made bad decisions, Toyota and Porsche have succeeded in similar conditions by having good managers who made good decisions and the key to Jaguar's recovery (if it ever happens; some business problems don't have solutions) will be that an individual marketing manager will have to make a correct decision on marketing, the design of the product will have to be right, and somebody will have to take on the task of delivering the right model at the right price with good reliability. This looks to me like the very definition of a situation where the fundamental attribution error isn't an error.

Alex

And it also requires that no stupidity-generating institutions get in his or her way..

dsquared

maybe yeah, but I think it's possible to overdo the institutional side, particularly in an industry that's so dependent on big product launches. Renault in the 1990s was a boody functional company (as evidenced by the fact that the Japanese actually called them in to help), but still nearly managed to kill themselves with the Laguna. Otoh, Ferrari is (I was told once by a bloke in a pub) the epitome of frustrating, bureaucratic hellholes, with a case of "not invented here syndrome" from heck, but they keep churning out good cars.

Bob B

Ownership matters.

Ford bought Jaguar in 1989 for $2.5bn. Over the years that followed, Ford invested a further $10 billion in Jaguar. Who or what else could or would have put in that kind of money?

UK owned component suppliers to Jaguar and the workforce did well out of the deal. When Jaguar was put up for sale from the public sector in 1989, GM was also an early bidder besides Ford but quickly dropped out saying the price was getting too steep. In hindsight, it looks like GM made a smart decision.

Mark Wadsworth

Ford, Jaguar, how cares?

I believe that Daimler is now going to demerge Chrysler again, now that is a f*** up in the range of hundreds rather than tens of billions of dollars.

A primo ultimo macho alpha male total and utter f*** up.

Meh

Since when was the plural of anecdote (Jaguar/Ford) data? Other companies have had different records of success (VAG, Toyota) when dealing with this issue.

Jaguar even had a profitable period, before (as dsquared points us to) they made some bad product line decisions.

Hell, Land Rover, also owned by Ford has been quite profitable. It seems the main reason they will sell Land Rover is to persuade someone to take Jaguar as part of the package.

Thus, it seems a stretch to say that this single instance really tells us a lot about diseconomies of scale or synergies.

And Ford (contrary to the propaganda) aren't in the hole because of legacy costs, but because they haven't been consistently profitable for over a decade. Successful incumbents have financing advantages (e.g. Toyota) whilst failing ones don't. (e.g. Ford, GM.) Given that the market is an oligopoly one, then this isn't unexpected.

Once again, this hardly seems make the case for a waning of the incumbency effect overall.

Glenn

Let's not underestimate the importance of mediocrity and/or incompetence. What is it exactly about Ford that should lead a person to expect ideal outcomes?

You can probably list on one hand - and maybe have a couple fingers to spare - the truly good global auto manufacturers. Have they made acquisitions, or have they relied on internal, organic growth?

Sadira

People should read this.

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