When down is up

Merger-and-acquisition activity will ramp up in the coming months. The recent move by Ford to downsize, or right-size, and Dana's move to shed its trailer operation, shows the way for the coming months.

Merger-and-acquisition activity will ramp up in the coming months. The recent move by Ford to downsize, or right-size, and Dana's move to shed its trailer operation, shows the way for the coming months.

Most mature industries, such as auto, steel and trucking, are experiencing some growth, but with ever increasing pressure on margins. While the individual end markets are tantalizing with their overall size, the number of suppliers and the ease with which companies can switch sources makes the long-term profitability outlook less certain.

The steel industry faced significant pressure from imported products that were made with more sophisticated processes, fewer environmental restrictions and less labor per ton of product. The market's need for a quality product produced in a timely manner, however, turned out to be advantageous for the U.S. steel industry. Nevertheless, the available market for this domestic product decreased. And although capacity decreased as well, it did so at such a grudgingly slow pace that many wondered if the entire domestic steel industry was doomed to collapse.

In response, the steel industry consolidated and closed capacity. In addition, it made the investments necessary to upgrade quality and output per man-hour. And having a steel hog across the Pacific helped keep demand strong enough to maintain and improve current output levels for domestic production. The result was a bounce off the floor and a return to profitability. A perfect example of successful downsizing.

The automotive sector faces a different challenge, however. Rather than an overall decline in demand for automobiles, what we're seeing is a change in market share. U.S. consumers continue to demand more vehicles than any other single market in the world.

The change that hit this industry was a change in product that was not widely provided by all suppliers. Imported autos were once shrugged off as wannabes and the people who bought them were considered to be on the fringe. Part of this fringe group, I purchased a long-bed Toyota pickup and a GS1000E Suzuki motorcycle. Both vehicles served my needs at the time — and at prices that were very competitive. The fact that the GS is still running is a demonstration of the quality built into the product.

This fringe group of customers eventually expanded to the point where market shares no longer supported the major domestic auto companies. Their business model was also out of line with new production methods and labor relations. What is happening in the domestic auto industry today was predicted by analysts years ago.

Trucking faces a third and fairly unique market condition — and one that we haven't seen since before deregulation: plenty of demand, but constrained resources. Although there is plenty of demand for carriers' services, their ability to meet the demand is severely limited by the shortage of drivers.

No doubt, capacity can be increased to some extent through more efficient utilization of resources. In fact, this is happening every day. But an easier way to do this is to buy a competitor's capacity. This, too, is happening every day. Carriers are forming partnerships to haul freight and moving to acquire one another's assets, i.e., the drivers.

With driver turnover greater than 100% and likely to stay there, one cost-effective way to increase the number of employed drivers is to acquire another trucking company. This is an example of a shortage of raw materials that necessitates changes in the supplier base.

If you think that any of these changes could have been accomplished more efficiently in another type of economy, lay off the Kool Aid.

TAGS: News
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