Opinion

Detroit's Big Three: Purge the urge to merge.

Does anyone think GM, Chrysler, and Ford are too small to be effective?

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Detroit is feeling the urge to merge. The Big Three automakers are burning through billions in cash. Stock values for GM and Ford are plummeting. So, in desperation, GM engaged in merger discussions with Ford earlier this year, and reportedly is now entertaining the prospect of merging with Chrysler.

Such a merger, though, is an awful idea.

First, the track record of corporate acquisitions involving Detroit's Big Three has been disastrous over the past decade: GM spent $2.4 billion on an option to acquire Fiat in 2000, only to spend another $2 billion to escape taking over Fiat five years later. GM's acquisition of Saab in 2000 has been followed by a succession of financial losses, is estimated to have cost GM a cumulative $4 billion, and has been dubbed a corporate "Saab story."

Ford acquired Jaguar in 1989 and Land Rover in 2000, but was compelled to divest both firms earlier this year for about half the original purchase price.

Nor has Ford's $6.5 billion acquisition of Volvo in 1999 worked wonders.

And don't forget the mother of all mergers, the combination of Daimler and Chrysler in 1998 – a $36 billion deal billed at the time as "a marriage made in heaven," but which subsequently wiped out tens of billions of dollars in stockholder value, dragged down Mercedes, and was de-merged and undone last year.

If mergers really were an elixir for success, then GM today should be the world's most admired firm, since it was originally formed by merging scores of formerly independent automotive firms (including Oldsmobile, Buick, Pontiac, Cadillac, Chevrolet, Fisher Body, and Delco). Obviously, things haven't turned out that way.

Second, megamergers combining the Big Three make economic sense only if their problem is that they're too small to be effective. In reality, however, the Big Three's problems stem fundamentally from the daunting diseconomies of their excessive size and the bureaucratic resistance to change that accompanies it.

As former GM chairman Jack Smith put it, GM by the 1990s was "a mess": "We had multiple vehicle and component divisions, all of them doing things differently. We had a huge central office. We had over 13,000 people with an elaborate maze of policy groups trying to coordinate the businesses, not manage them."

In light of this, why would it make sense to merge even more divisions, even more operations, and even more plants and facilities?

Third, Detroit's automakers have made substantial efficiency gains by divesting scores of major operations and facilities. Think GM and Delphi, or Ford and Visteon. The newfound and hard-fought focus on the core business that remains would be shattered by merging them.

Fourth, combining these giants would unleash organizational chaos, throwing administrative lines of authority into disarray, and igniting an epic game of musical chairs among hordes of managerial people contesting to define and occupy legions of new offices and positions.

Again, it is hard to imagine how this would enhance the merged firms' economic efficiency or their technological innovation in reinventing the automobile.

Finally, the one sure gain from combining these giants would be to significantly reinforce their already potent political power in lobbying government for privileges and favors, such as the just-enacted federal loan program providing them $25 billion of taxpayer funds to modernize their plants and products (something that in a private enterprise system they are expected to do on their own).

Their merged size would bolster their already impressive political clout – and clear the way for even greater government largess (as they already have vowed to demand).

Perhaps the ethical obligation for doctors is as compelling for automotive sickness as it is for medical maladies: "First, do no harm." If so, then rejecting the false allure of megamergers may be a turn in the right direction.

James Brock is a professor of economics at Miami University in Ohio.

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