The proposed merger of Fiat Chrysler Automobiles and France’s PSA Group is an admission that the future of car manufacturing is going to be highly expensive, arduous and possibly nothing more than a fight against long-term decline. Bulking up will buy time, not guarantee a prosperous future.
On Thursday morning, the two car groups unveiled a plan that would create the world’s No. 4 automaker (measured by unit sales totalling 8.7 million), putting it behind Volkswagen, Toyota and Renault-Nissan and just ahead of General Motors.
The enlarged group would be enormous, one with the clout to challenge mighty VW in Europe. It would have combined revenues of €170-billion, recurring annual operating profit of about €11-billion, a market value based on current prices of about €45-billion and more than 400,000 employees scattered around the planet, though mostly in Europe and the United States.
Its brands would include Peugeot, Citroën, Vauxhall and Opel (from PSA); Fiat, Alfa Romeo and Maserati (from Fiat); and Jeep, Ram and Dodge (from Chrysler). The shares of the as-yet-unnamed – and possibly unwieldy – fusion of French, Italian and American car makers would trade in Paris, Milan and New York. Trilingual managers would be welcome.
The outline of the structure has already been banged out, according to the companies’ joint statement. Shareholders of each company would own 50 per cent of the enlarged group and unite two billionaire car-making dynasties, the Agnellis of Italy and the Peugeots of France. FCA chairman John Elkann, the grandson of Gianni Agnelli, the Italian industrial prince who briefly turned Fiat into Europe’s biggest automaker before surrendering the lead to German competitors, will be chairman. PSA CEO Carlos Tavares will carry the same title in the new group. Six board members will come from PSA, five from FCA. While the deal is billed as a merger of equals, it is in effect a PSA takeover.
The companies expect annual synergies – cost savings – of €3.7-billion and said that no factory closures went into the calculation, which is not to say that they made a no-closure pledge – they did not. Europe suffers from massive automotive overcapacity and factory cull at some point seems likely. The first casualties are bound to be PSA’s operations in Brexit Britain, where Vauxhall makes vehicles (PSA bought Opel-Vauxhall from GM in 2017). Struggling brands such as Fiat’s single-product Lancia division and PSA’s unremarkable range of premium cars, under the DS badge, appear vulnerable too.
Sergio Marchionne, the late Italian-Canadian boss of FCA and the man who put Fiat and Chrysler together after the two companies’ near-death experiences in the 2008 financial crisis, would have approved. Mr. Marchionne was a deal machine because he believed only the largest companies would have the financial heft and endurance to invest the fortunes needed to meet ever-tighter pollution rules and create zero-emission and autonomous cars.
He believed the auto industry was doomed unless car companies stopped blowing their brains out developing models that were roughly identical to those of their competitors. He noted that the industry was a proficient value-destroyer, as the urge to merely replicate produced the worst returns on invested capital of any industrial sector. The solution? Merge to produce synergies, ditch surplus capacity and combine R&D budgets.
Under Mr. Marchionne, unsuccessful merger attempts with Opel and GM were made. Were he alive today – he died last year – he no doubt would have pushed for deals with PSA or its cross-town rival, Renault (in fact, earlier this year, FCA came close to a merger with Renault, only to see it tripped up by French politics).
The merger won’t be easy, given the overlapping models and the sheer cultural and operational complexity of the new company: a Dutch headquarters; FCA’s operating headquarters in a country that is leaving the European Union; French, Italian and American executives defending their turf; and, no doubt, the French and Italian governments battling one another over factory closures. The French government owns 12.2 per cent of PSA.
Nor is the long-term outlook encouraging. Both FCA nor PSA are well behind the Germans and the Japanese in launching fully electric and hybrid cars. Mr. Marchionne resisted electrification, arguing that it was senseless to bet the ranch on lithium-ion car batteries when a better type of zero-emission propulsion technology might emerge from a laboratory at any time. His mistake was betting that regulators and big-city mayors would allow him to keep his fleet of pollution belchers on the road until the miracle cure arrived. They did not. To avoid carbon dioxide-output fines, FCA had to strike a regulatory credit deal with Tesla, the U.S. maker of all-electric cars.
Of course, the synergies arising from the FCA-PSA deal would free up capital to invest in electrification. But that alone might not save the company from long-term decline. The whole auto industry is under threat by Uber, the transition to self-driving cars and the emerging backlash in cities and among millennials against cars in general. Many of them don’t see cars in their future. Cities everywhere are at maximum vehicle capacity. Car-shaming is under way as a generation inspired by teenage Swedish environmental activist Greta Thunberg takes to bikes, subways and trains. Peak car may have already arrived, at least in the Western world.
A merger between FCA and PSA makes sense on so many levels and was probably inevitable. What it won’t do is remove the ample and sustained threats facing an industry that gathers more enemies every day.
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