By Edward Taylor
FRANKFURT (Reuters) - The proposed alliance between Volkswagen <VOWG_p.DE> and Ford <F.N> shows that the days of carmakers going it alone are over, as tariffs, new technology and tougher emissions rules fragment markets that were once global.gi
It and similar tie-ups may be the fulfilment of late Fiat chief executive Sergio Marchionne's 2015 prediction of a new era of auto industry consolidation.
Firms that once sought a vehicle with universal global appeal to create economies of scale are now seeking advantages in specific market segments like hybrid SUVs, North American pickup trucks or European city cars.
The shift towards electric and autonomous vehicles and a trade war that is forcing carmakers to build separate factories for Europe, the United States and China are helping accelerate the trend. So is the global clampdown on emissions following VW's 2015 diesel cheating scandal.
Carmakers long aspired to follow Henry Ford's ideal of using one set of production tools to supply markets all over the world at the lowest possible cost.
They now see standardisation of some technologies -- particularly engines and vehicle underpinnings, known as platforms -- as a potential source of cost savings, with other features used to lure consumers.
"Economies of scale matter in architecture and powertrain," industry veteran Carl-Peter Forster, now a director of Volvo Cars, told Reuters.
"In theory you can keep costs down through lower tooling costs, but you need to make the product in different places in the world, which means double-tooling."
Ford and VW are not attempting a merger but want to share costs by joining forces in markets and technologies they have found problematic but do not want to retreat from.
After struggling to make money from passenger cars in South America, China and Europe, Ford has dropped its focus on the Mondeo as a model for the world and abandoned new sedans.
Volkswagen meanwhile remains a niche player in the profitable U.S. pickup truck segment. In September, it said it will cease producing its iconic Beetle as it readies for a future of mass-market electric cars.
Similar tie-ups point to a trend. Honda and General Motors have agreed to split development costs on autonomous driving while Toyota and Mazda plan to follow Mercedes-Benz and Nissan in sharing a factory to serve the NAFTA markets. Jaguar Land Rover is looking at alliances in the area of powertrains.
Forster, who declined to comment on Ford and VW's proposed deal, said focused partnerships can work better than formal mergers, based on his experiences overseeing transformational takeovers and alliances at Tata, BMW and GM Europe.
Speaking about the merits of consolidation to Reuters in 2015, Forster said there were limits to economies of scale.
"With scale you reach a point when you no longer reap the benefits of lower cost per unit because of the added challenges of management complexity and bureaucracy," he said, citing an engine factory as an example.
Forster confirmed through a spokesman this week that his remarks are still current.
For a FACTBOX on auto industry mergers and alliances, click
Marchionne, who died in July, is part of the reason Ford's shareholders are demanding it undertake a radical rethink of its global footprint and put greater emphasis on profitability.
In an April 2015 presentation entitled 'Confessions of a Capital Junkie', the Italian accused the auto industry of wasting billions on duplicate products.
He argued that about half of all investment spending went on developing technologies like four-cylinder engines, which customers mostly can't distinguish from each other and which are now secondary to styling and connectivity in driving purchases. bit.ly/1RTrLIn
"Broadly speaking, I think it is reasonable that people are trying to establish alliances to get access to both markets and technologies to lower the cost of execution," Marchionne told journalists at the Geneva car show last March.
The advent of electric and autonomous cars, which shift the marketing focus to vehicles as cleaner and more intelligent, reinforces the case for alliances and consolidation, he said.
"If ... we are moving to a world where powertrains will significantly change ... the question then is, could that development be shared efficiently ...? The answer is yes," Marchionne said.
Ford Chief Executive Jim Hackett is bearing those comments in mind as he considers investments in expensive hybrid and electric technologies.
"The capital it takes, and God bless Sergio, there is something wrong with that we think we can fix," Hackett told Reuters.
ECONOMIES OF SCALE
Volkswagen also needs to bring down the cost of developing new cars, while at the same boosting sales of zero-emission vehicles to some 30 percent of new car sales by 2030 to meet new European clean air rules.
To tempt customers away from diesel, VW Chief Executive Herbert Diess wants to sell an electric car for less than 20,000 euros ($22,836), a source familiar with the plans told Reuters.
That gives scope for Ford to broaden its alliance with VW from commercial vehicles into passenger cars, helping VW create more economies of scale in production and R&D.
VW may free up capacity for electric cars at its Hannover plant by shifting production of transporter vans to a Ford plant in Turkey, a person familiar with VW's plans told Reuters.
It could offer Ford access to its electric cars platform in exchange for help developing the next VW Amarok midsized pickup.
New competitors from China and the U.S. tech sector and the need to accelerate investments have prompted VW to abandon its approach of developing everything in-house.
"We need a massive increase in our competencies, partnerships and acquisitions," Diess said recently, identifying software and autonomous driving as key areas to catch up in.
Last March, months before his death, Marchionne warned about overspending on autonomous driving, which he compared to the 19th century development of British railways.
"How much (capital) needs to be wasted to provide progress is a very good question ... There is not a single railway company that built the network in the UK which is alive today.
Although the technology endured, "it was overbuilt, overspent, overburdened, most of them economically failed," Marchionne said.
"Maybe we are living through a similar process."
(Reporting by Edward Taylor, Ben Klayman, Joe White and Jan Schwartz; Editing by Catherine Evans)