Marriage may trigger a new wave of consolidation

THE MERGER could trigger a wave of consolidation across the rest of the car industry. But the intriguing question is what sort of alliances might emerge. Daimler's takeover of Chrysler, for all its size, is not really about cost-cutting, nor is it aimed at removing some of the chronic excess capacity with which the world's automotive industry continues to be burdened, particularly in Europe.

In terms of both product range and geography Germany's second biggest car maker and the number three player in the US market are a near perfect complementary fit. Although it has launched both a sports utility vehicle and a small A class car, Daimler's strength remains in the upper reaches and its area of dominance is Europe. Chrysler, by contrast, is more of a light truck producer these days than a car manufacturer. Last year it produced 1.2m Jeeps, utility vehicles and pick-ups against only 450,000 passenger cars. Its market is overwhelmingly the US.

There will be opportunities for cost savings - Daimler puts the potential at pounds 500m - through joint component purchasing and the streamlining of sales and distribution channels. But it will not be a cost-driven merger like some that have been contemplated before , such as the abortive negotiations a decade ago about merging Ford and Fiat's European car operations.

Recently the pace of consolidation has quickened. Fiat has swallowed Lancia and Ferrari, Volkswagen/Audi has taken Seat and Skoda under its wing, BMW has acquired Rover and Saab has come under General Motors' control. But there is still surplus capacity and a received wisdom that ultimately the world car industry will be divided up among a dozen global players at most. That suggests two or three predominant Asian manufacturers -centred perhaps around Toyota and Nissan - two US contenders and three, perhaps four European groups.

This scenario leaves room for only one French manufacturer, suggesting that sooner or later Renault and Peugeot-Citroen will be forced into one another's arms. Presuming Fiat survives as an independent southern European player, that means the three German manufacturers - Daimler, VW and BMW, would, at some stage become two. The Daimler-Chrysler deal rather upsets that neat theory by creating a powerful transatlantic axis. While BMW and VW have been pre-occupied with a private tussle for control of Rolls- Royce Motor Cars, Daimler has stolen the bigger prize from under their noses.

Professor Garel Rhys, director of the Centre for Automotive Industry Research at Cardiff University Business School, thinks that Daimler's two German rivals may have most to worry about after yesterday. In terms of light vehicle sales the merger puts Daimler within a whisker of VW and gives it a powerful presence in the off-road market where VW has none.

Meanwhile BMW's acquisition of Rover continues to be an expensive distraction. Rover has yet to produce a profit after pounds 2bn of investment and even its jewel in the crown, Land Rover, will be a small player against the likes of Chrysler's Jeep which produces four times as many off-road vehicles. Whether Daimler can turn Chrysler into a real competitive threat to the two giants of the US car industry, GM and Ford, is another matter. Chrysler has continued to lose market share to its bigger domestic brothers and the Japanese are its attempt to take the car range up-market has had limited success. The prestige that a link to Mercedes will bring might jut do the trick but it will be a mighty expensive exercise for Daimler and there can be little doubt that GM will hit back. As the world's biggest car maker said yesterday with ominous understatement: "We are always flexible and can respond to changing business conditions and opportunities."