News

ereguly@globeandmail.com

What is really driving Sergio Marchionne's auto takeover fantasy?

Mr. Marchionne is the Italian-Canadian Fiat boss trying to elevate his company from the industry's No. 9 position to No. 2 through the takeovers of Chrysler and GM Europe. He has been called a brazen opportunist - because he intends to shake down the U.S. and Germany for enough loot to weld the three struggling companies together - and an egomaniacal empire builder.

The accusations are unfair. The auto world is falling apart and Mr. Marchionne thinks only rapid consolidation can fix it. Toyota's awful results leave no doubt of a genuine crisis. On Friday, the biggest and most successful name in the business reported a $7.7-billon (U.S.) loss in the first quarter and said the rest of the year would be a writeoff.

There is another reason for his madness: carbon dioxide - and too much of it. Governments everywhere want the industry to make cleaner, more fuel-efficient cars. This is not a polite request; it is already the law in some countries and soon will be in others. It means auto makers will have to find enough money to survive the crisis and fund a radical overhaul of their products' propulsion systems. "The automotive industry is set to undergo a technological revolution," says Deutsche Bank's Eric Heymann.

"The key drivers are climate policy and the expectation that energy prices will start rising again," the auto sector analyst says.

Making cars cleaner will be fantastically expensive because the easy gains have already been made. The average car produces a lot less carbon dioxide that it did in the mid-1990s, but not much less than in the middle part of this decade. Last year, Germany's environment agency estimated that a 20-per-cent reduction in emissions would cost about €1,000 ($1,540) per vehicle. But a 40-per-cent reduction would add €5,000, taking cars to a price that would kill the auto makers overnight unless they find ways to save fortunes on overall development costs.

Car companies have hired armies of lobbyists to fight carbon dioxide regulations. Their reluctance to create cleaner engines was easy to understand. Big cars and SUVS with big engines had fat profit margins; small cars with small engines were loss leaders. The stalling tactics worked for a while. Now the best the companies can hope for is some government assistance to help them meet the new targets.

The European Union is leading the campaign to reduce carbon dioxide emissions.

More than a decade ago, the environment gnomes in Brussels secured pledges from the auto industry to reduce emissions by 2008/09 to 140 grams per kilometre travelled. The industry blew it. Last year, the average emissions of new cars were 157 grams. No more Mr. Nice EU. The EU's new regulations will insist on a 120-gram limit by 2012, though only two-thirds of new cars will have to comply by that year. The rest have to fall into line by 2015 and fines will be imposed on the violators. The longer-term goal is 95 grams - almost 40 per cent less than last year's average emissions.

Other countries, including Japan and China, are following the EU's example. The 2007 U.S. energy bill requires fleet fuel economy to rise by 40 per cent by 2020.

While the level of allowable carbon dioxide output will vary country by country, the direction is clear: Emissions have to come down. Ultraefficient gasoline and diesel engines will have to be created. Ditto electric and hybrid cars. The era of the internal combustion engine may be coming to an end.

Which brings us to the man with the plan: Sergio Marchionne.

The easiest way to meet carbon dioxide targets is to make sure your fleet is stuffed with small, lean cars, not barge-like Chrysler SUVs or highway frigates like BMWs and Mercedes. Guess what? Fiat knows a thing or two about small cars. The Fiat Panda and the new Fiat Cinquecento (Italian for 500) are the best-selling rolling runts in Europe. The European Federation of Transport and Environment says average emissions of new Fiats are the second-lowest among the 14 top European marques (France's Peugeot Citroën is the lowest; the German brands are the highest).

All of a sudden, Mr. Marchionne has something to offer, and it's not cash - Fiat has none to offer. It's access to small-car technology, including the platforms, the four-cylinder engines (remember those?) and a promising new two-cylinder engine. Chrysler would save billions in development costs by taking Fiat's small-car technology and slapping a Chrysler badge on it.

GM Europe, dominated by Germany's Opel brand, has a decent fleet of small cars. In that sense, it doesn't need Fiat. But developing Fiat and Opel models from the same platform, and getting rid of redundancies, would help free up the vast amounts of money required to invent low-emission cars. The Fiat Grande Punto and the Opel Corsa already share the so-called B platform. Mr. Marchionne's idea is to use a merger to ensure platforms are shared on every model.

Many things could derail Mr. Marchionne's grand transatlantic strategy. Chrysler may not emerge from its Chapter 11 bankruptcy proceedings intact, though the chances of a successful debt restructuring are growing by the day. In Europe, a battle is emerging over whose factories will get sacrificed - Fiat's or Opel's - if the companies come together.

Italy and Germany might impose merger rules on Fiat and Opel that are unacceptable to Mr. Marchionne and Fiat's shareholders.

As the auto makers, their workers and their sponsor governments bicker over money, jobs and power, oil prices are rising again. The carbon dioxide emission regulations are not going away. Technology costs are about to explode. None of these car companies can afford to finance the new technology on their own. That's why the Fiat-inspired mergers have to happen. Blame - or credit - the environment.