Global Automotive Industry: Global mergers and acquisitions (M&A)

 

Too much debt and risk of bankruptcy

            When it comes to capitalism and interdependencies, the differences is primarily evident on the type of debt used rather than the relative importance of debt. The financial aspect of any organisation includes financial distress cost, moral hazards, tax deductions, profitability and growth and size among others. Financial distress states that in the presence of bankruptcy there is a higher cost in earnings. As such, the higher risk of bankruptcy leads to less debt. Also, there are dangers of engaging in risky investments or under investments after acquiring debt. Nevertheless, the high expenditures on intangible assets such as research and development (R&D) are supposed to decrease long term debt (Rugman and Verbeke, 2005, p. 151).

            Further, presence of tax deductions other than those related to debt may reduce firm level needs for tax deductions through debt. Higher profitability is expected to lead to lower debt. Firms with high sales growth are also assumed to use less debt. Larger firms, nonetheless, may face lower transaction costs when issuing long term debt than their smaller counterpart and can therefore be expected to have higher debt (Rugman and Verbeke, 2005, p. 151).

            While this may be the case, capital reserves typically provide a financial buffer in the organisation (Anderssen, 2006, p. 17). It is therefore utilised to absorb the adverse economic impact of exogenous shocks especially those imposed by the unexpected event such that the most recent financial tsunami. Critically, these unexpected events that affect the conduct of the business particularly at the international level, firms should be able to reduce variability in periodic cash flows and reported earnings so as to veer away from debt and eventually being bankrupt.

            This is active risk management which can lower the business risk in general (Anderssen, 2006, p. 17). All the same, there is a need for firms to provide management with an opportunity to increase financial risk associated with a higher debt load. As such, when firms are able to impose effective risk management practices in reducing the volatility of corporate earnings, there is a reduced need for capital reserves. Basically, effective risk management reduces the risk of bankruptcy and makes it possible to increase financial leverage.

            It was in the 1953 when Honda was on the verge of bankruptcy. While the company’s manufacturing systems were being refined, there was a major change in the way Honda sold its products. Honda halted all sales of engines to outside motorcycle assembly makers, pushing distributors that sell the company’s products into purchasing finished motorcycles. As it is a decision that strangled several rival companies’ production lines, the move drew angry reactions and distributors abandoned the Honda brand. Honda reacted by establishing new network of excusive distributors. Aside from the fact that purchasing exclusive retail territories was rather difficult then, Honda products often met with complaints from the users resulting to poor sales and piling up of inventories. Honda responded to this by securing advance payments while simultaneously deferring payments (Alexander, 2009, pp. 115-123).

            To analyse, there are two ways the actions of Honda can be explained. Firstly, Honda demonstrated an effective risk management capability which was then associated to eventual higher financial leverage. Secondly, Honda demonstrated the capability which was then resulted in eventual higher economic performance. However, the problem had dampened the volatility of Honda’s corporate cash flows thereby increasing the potential of financial distress. This affects the unimproved debt capacity of the organisation hence they came up with alternative risk transferring solution. In this way, Honda can diminish the need for capital reserves. What had happened is that the funding available for payments was readily extended thus making it more attractive to engage in good incremental business activities. Plainly, improved risk management capability within Honda tends to reduce under investment problems (Andersssen, 2006, p. 18).

Potential for product synergies

            Synergy is simply defined as the joint effect basing on the assumption that the process of combining resources may yield an output that is greater than the sum of those input resources. Being positive, the achievement of synergy is one of the key objectives of business development strategies. Synergy could be also achieved by increasing the capital or resource base of the enterprise. Some of the examples of positive synergy is scaling effect or moving down the experience curve, enhancing capability for competing in wider markets, entering markets that were hitherto inaccessible, employing more highly specialized and productive capacity personnel and increasing investments in knowledge management, competence development and R&D (Morden, 2007, p. 557).   

            Generally speaking, the opportunity to create synergy is reduced when an acquisition combines firms or business units that are both strong and/or weak in the same business activities. Newly created firms exhibits same capabilities although the magnitude of either strength or weakness is greater. Synergy leads to integration of value-enhancing activities. Operations synergy and marketing synergy would be able to link strategic activities including management synergies which then result in increased competitive edge (Hitt et al, 2001, p. 395). 

            As such, the word synergy is irrelevant when applied to a firm that makes only one product or offers a single form of service. The advantage is comparatively with competitors who do not have that particular attribute. Considering that Honda pursued a related diversification strategy, it is able to synergise across a range of products such as motorcycles, diesel generator sets and gardening equipments among others. The internal combustion engine is the common denominator of its operation. Competitors engaged in each individual product line would be able to capture this synergy and thereby would have a disadvantage while competing with Honda (Phansalkar, 2005, p. 108; Harrison and St. John, 2009, p. 118).    

Access to new technologies and emerging markets

            There is an increasingly accepted view that technically appropriate technologies should be widespread. But the problem is that these technologies are not available everywhere. While there are modernisation projects in corporations, the integration strategy is costly and often fails and the necessary additional funding is required (Tallman, 2007, p. 87). Noteworthy is the fact that new technologies will be indispensable. However, while new or emerging technologies are critical, few of the needed new technologies are available to those who need them most.     

            When it comes to accessing emerging markets, the question is beyond their still developing home market how they can become globally competitive. With the advances of technologies, for instance, corporations can quickly displace domestic companies from the segment of emerging markets. Because emerging market companies often cannot access experienced research talent from their home markets, it is difficult for them to invest in large sums such as R&D which is a critical investment if these companies aim to effectively compete against global giants (Khanna et al, 2010, p. 129).

            For Honda, before 1969 it was believed that the only way to reduce the impact of internal combustion engines on the environment was by means of end-of-pipe technology. Car manufacturers widely believed that there was a trade-off among the various pollutants emitted from internal combustion engines (as cited in Nel, 2007, p, 428) which could only be solved by means of the add-on process of catalytic conversion. Honda, however, designed the CVCC engine during the years 1969-1971. With this engine, Honda engineers tried not to produce pollutants in the first place, thereby reducing the need for later clean up. In similar way, Honda overcame the traditional trade-off between fuel economy and engine power by means of their VTEC technology.

            Belonging to an emerging itself in itself, Honda’s considered home market is Japan which is a major source of its revenues. Japan auto sellers are dominated by a series of large dealerships that are typically owned by one of the large Japanese business groups. Often the large dealerships are owned by companies other than Honda although the large dealerships are still part of a business group (Alstrom and Bruton, 2009, p. 404).