There Are Too Many Car Companies Anyway

There Are Too Many Car Companies Anyway

Michael E. Marks, 12.17.08, 07:05 PM EST

Even without Big Three bankruptcies, the industry badly needs consolidation.

By now, everyone has heard about and debated the plight of the Big Three automakers and whether they should be saved. Here is a slightly different approach to the question, taken by looking at the amount of product currently available from global brands in a couple of other categories compared with automobiles. It might lend some interesting perspective to the debate.

I've picked two other categories, cellphones and computers. Both are products bought by substantial numbers of consumers, and both are products sold globally by major international companies. First some overall numbers:

Product	Units Sold Globally	Units Sold in the U.S.
Cellphones	1.2 billion	146 million
Personal Computers	271 million	64 million
Automobiles	91 million	16 million

These are all 2007 numbers. They'll likely be lower for 2008 and 2009

Now let's look at the number of global brands of each, available in the U.S.:

Major Cellphone Brands (8)

Apple
BlackBerry
LG
Motorola
Nokia
Palm
Motorola
Samsung
Sony Ericsson

Major Personal Computer Brands (7)

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Apple
Dell
Hewlett-Packard
Lenovo (previously IBM)
Panasonic
Sony
Toshiba
Toshiba

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Car Brands Available in the U.S. (40)

Audi
BMW
Buick
Cadillac
Chevrolet
Chrysler
Corvette
Dodge
Ferrari
Ford
Honda
Hummer
Hyundai
Infiniti
Jaguar
Jeep
Kia
Lamborghini
Land Rover
Lexus
Lincoln
Lotus
Maserati
Mazda
Mercedes-Benz
Mini
Mitsubishi
Nissan
Pontiac
Porsche
Saab
Saturn
Scion
Smart
Subaru
Suzuki
Tesla
Toyota
Volkswagen
Volvo

I imagine you know where I'm going with this. Unit sales in the U.S. for automobiles are only 25% of the number of computers sold, 11% of the number of cellphones sold. Yet the number of brands available is far greater, approximately five times as many. Of course, the argument for this is that there is a far greater need for variety among automobiles, because of size, cost, personal preference and so forth. I thought I would eliminate some of the variables and look at how many brands have four-door sedans in a price range of $20,000 to $35,000. There are 16 with 2009 models. Here they are:

Buick
Chevrolet
Chrysler
Dodge
Ford
Honda
Hyundai
Kia
Mazda
Nissan
Pontiac
Saab
Suzuki
Saturn
Toyota
Volkswagen

This still seems like a lot, but wait--it get's better (or worse). Within each of these brands, there are several different types of four-door sedans. For example, Toyota has the Avalon, Camry, Corolla, Prius and Yaris. If you're looking for a four-passenger car but want only two doors, Toyota offers another model, the Solaris.

You get the point. All of this is to raise a very simple question: Why do we even need three U.S. automobile companies? Clearly, U.S. consumers have far more choice already than they need.

If we look back at cellphones even five years ago, there were also Siemens (nyse: SI - news - people ), Alcatel, Ericsson and other brands. Those companies went out of the cellphone business. Twenty years ago there were more than 50 brands of personal computer. They have consolidated or have gone out of business too. Isn't this what should happen with the global automobile business?

The only thing standing in the way of that, and an appropriate rationalization of companies and brands, is government support. Without it, we would soon have a list of global auto companies that looked like the lists above for cellphones and computers.

The result of having too many companies is exactly what we are now seeing. Not enough companies can earn their cost of capital. But with government support, they can hang on, often for a very long time, which reduces profits throughout the industry, which leads to less investment, lower quality and less innovation. So if our government is going to aid and abet this poor outcome, perhaps it should think about supporting only one of these companies, or two at the most. We just don't need three. Period. What we need isless choice.

Michael E. Marks manages a private equity fund, Riverwood Capital, which invests in rapidly growing private companies in North America and emerging markets. Prior to Riverwood, Marks spent a year as a member of Kohlberg, Kravis & Roberts and continued to serve as a senior adviser after he left to start his own fund. Preceding KKR, Marks served as chief executive officer of Flextronics, a leading electronics-manufacturing-services provider headquartered in San Jose, Calif. Marks sits on the boards of publicly traded SanDisk, Crocs, Schlumberger Limited and Sun Microsystems as well as nonprofits V Foundation for Cancer Research and the National Parks Conservation Association. He also teaches a course in global-supply-chain management at the Stanford Graduate School of Business.