The danger of being run over on the road to global consolidation

At the stub-end of the millennium, being global is almost as vital as being digital. The over-arching ambitions of corporations in functions such as financial services, pharmaceuticals and the motor industry demonstrate that the way we do business in the 21st century, through the facility of the information technology tiger that we hold by the tail, may be profoundly changed. The old criteria for measuring economic prosperity may be swept aside in the process.

The danger of this prospect is in being over-excited by it. The measured and sober way of addressing a global economy is to be led by the IT that facilitates it. The febrile way is to try to be global and then find ways through IT – not to mention through financing – to facilitate it.

The pharmaceutical industry is driven by models that demand global consolidation. Word had it at the weekend that Glaxo Wellcome was planning a deal with Bristol Meyers Squibb of the US to form a combine worth in the region of 140bn. I’ve long suggested that consolidation in this industry would bring us global companies worth well in excess of 100bn, but by Monday the talks were off.

We’ve been here before, of course. Last year, Glaxo failed to make a match with SmithKline Beecham amid reports of clashes of egos between the two managements. But, whatever the personal ambitions of the people who drive this industry, consolidation continues to be inevitable because there is an industrial logic to it.

This logic relates partly to economies of scale and compatibilities between the two giants. Bristol Myers is strong in cancer and cardio-vascular treatments, while Glaxo’s strengths lie in the likes of migraine and asthma, with their common ground being in Aids drugs, where rationalisation of effort can only enhance the prospect of a breakthrough in identifying a cure.

But, more importantly, it is about the strength that such consolidation can bring to the industry’s old friend, research and development. Glaxo’s chairman, Sir Richard Sykes, has a declared ambition to build a company which has ten per cent of the international pharmaceuticals market. He describes it as “ludicrous and unsustainable” that no company in the sector currently has a market share of more than five per cent. R&D will be the progenitor of such growth.

It is Sykes’ vision that there will be a second wave of major consolidation within his industry, following the defensive mergers among smaller European rivals. This process will be about out-performance, fuelled by gargantuan and sustainable R&D expenditure, rather than simply about earnings growth, which is the usual motivator for more prosaic industries.

According to Sykes “the more effort, the more money and the more power you put into research, the stronger the company’s going to be”. For such a demanding industry, that’s really quite a simple mission statement. Pfizer currently leads the R&D expenditure table with a budget of about $2.6bn (1.6bn); a combined Glaxo and Bristol Myers would have mobilised nearly $4bn (2.4bn).

Without sounding too grandiloquent, that’s not merely the way forward for the industry, it’s also the future for mankind. The current debate over the efficacy of genetically modified foods tends to obscure the fact that Dolly the sheep was not about some mad scientist playing God, but the first tentative step into areas of genetic engineering that will, undoubtedly, put cancer and leukaemia into the same category as tuberculosis and leprosy in the next century.

In short, there is overwhelming commercial and economic rationale to the merger proposal that has just collapsed. Unfortunately, this kind of global ambition in one industry is just the sort that persuades others that global consolidation is in itself a good thing. This way madness lies.

In particular, the motor industry is in danger of building a consolidation momentum that has strategic objectives which are as vague as Nato’s in Kosovo. Last year, we had, among the most significant moves, Daimler Benz merging with Chrysler, and Ford acquiring Volvo. The industrial logic of these deals could be dispensed with a shovel – there was masses of it.

It’s difficult to make the same case for this week’s news that Renault is spending almost $5.5bn (3.3bn) for a variety of significant stakes in Nissan’s global operations, the principal one being 36.8 per cent of the Nissan Motor Company of Japan.

Renault has not bought the right to take control of the balance of Nissan’s equity. Nor is there much prospect of the French combine achieving promised economies of scale without taking management control. Furthermore, I wonder seriously about the ability of the legendary protectionist French motor industry working co-operatively with the Japanese. There is a potential culture clash here that doesn’t exist in, say, the Anglo-American pharmaceuticals industry.

Nissan gets to pay down a large chunk of its debt mountain, without surrendering much management direction. In other words, this deal looks a lot better for the Japanese than for the French. Ford’s recent chairman, Alex Trotman, famously predicted that there would be only six world-class motor manufacturers within a decade. On the evidence, Renault/Nissan may not be among them.

I suspect that Renault is driven by a Gallic desire to take the world stage – as are many companies, in many industries all over the world. But globalisation must be driven by logic and practicalities. This week, the Americans and British have been – the French and Japanese have not.

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