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Fiat Chrysler Automobiles is a strong candidate for Jaguar Land Rover, should Tata Motors look for a buyer.
Phil Noble/Reuters
Sergio Marchionne, the late CEO of Fiat Chrysler Automobiles, didn’t much believe in electric-cars (big mistake) but he did believe in mergers – lots of them. A decade ago he predicted a consolidation wave would reshape the auto industry, and he was almost right. Only a few deals happened, none of them a game changer.
But Mr. Marchionne’s prediction may yet come true, and FCA seems the company to watch. Its deal-making instincts do not appear to have been restrained by Mr. Marchionne’s untimely death in 2018. Earlier this year, FCA attempted a merger with France’s Renault, one that proved politically volatile, given Renault’s ties to the French government and Japan’s Nissan. FCA publicly killed the proposed deal in June.
If the rumours are true, Jaguar Land Rover, the money-losing pride of what little remains of the British auto industry, is the next target. While India’s Tata Motors has denied it is looking for a buyer for JLR, everyone in the industry thinks Tata would happily walk away from its British experiment at the right price. PSA Group, owner of France’s Peugeot and Citroën marques, was widely thought to have considered purchasing JLR or merging with it at some point in the past year, and analysts have said that Germany’s BMW would be a natural JLR suitor, if only because the two companies recently confirmed they will develop electric cars together.
But FCA is also a strong candidate for JLR, and their merger certainly would make sense on some levels. FCA – owner of Fiat, Chrysler, Jeep, Alfa Romeo and Maserati – craves a full line of luxury SUVs, which JLR has in abundance, and an electrification strategy, which JLR also has.
Pity about JLR’s losses and enormous debt. In the last quarter, the company reported an after-tax loss of £402-million ($653-million), almost doubt the amount in the same period a year earlier, as sales waned. Enormous development spending has pushed its debt to £5.1-billon.
Whoever buys JLR would have to get it cheap and justify the purchase with ample synergies, which may prove elusive.
During his reign, Mr. Marchionne merged Fiat and Chrysler, sparing both from certain death, and went after Opel, the European division of General Motors. When that didn’t work – Opel ultimately went to PSA – he tried to convince GM boss Mary Barra to buy or merge with FCA. She wouldn’t even discuss the idea with him.
Shortly thereafter Renault, under Carlos Ghosn, made a messy and ultimately disastrous play for full ownership of Nissan, which was part of his Renault-Nissan-Mitsubishi global alliance. (Mr. Ghosn was ousted from those companies after his arrest and imprisonment a year ago in Japan on charges of false accounting and misuse of company assets, none of which has been proven in court.)
Jaguar Land rover automotive results
Retail volumes
Revenues
Profit/loss
(000s of units)
(Million pounds)
(Million pounds*)
- £264
-£383
145.5
£5,222
£5,074
128.6
Q1 FY
2019
Q1 FY
2020
Q1 FY
2019
Q1 FY
2020
Q1 FY
2019
Q1 FY
2020
*Before tax and exceptional items
Q1 FY20 represents the 3 month period from 1 April 2019 to 30 June 2019
Q1 FY19 represents the 3 month period from 1 April 2018 to 30 June 2018
Retail volumes by region
Percentage change, year over year
Jaguar Land Rover
Industry
+2.6
-0.6
-1.2
-1.9
-4.6
-4.2
-9.3
-14.3
-19.6
-29.2
North
America
Britain
Europe
China
Overseas**
**Excludes data from South Korea
JOHN SOPINSKI/THE GLOBE AND MAIL
SOURCE: TATA MOTORS GROUP
Jaguar Land rover automotive results
Retail volumes
Revenues
Profit/loss
(000s of units)
(Million pounds)
(Million pounds*)
- £264
-£383
145.5
£5,222
£5,074
128.6
Q1 FY
2019
Q1 FY
2020
Q1 FY
2019
Q1 FY
2020
Q1 FY
2019
Q1 FY
2020
*Before tax and exceptional items
Q1 FY20 represents the 3 month period from 1 April 2019 to 30 June 2019
Q1 FY19 represents the 3 month period from 1 April 2018 to 30 June 2018
Retail volumes by region
Percentage change, year over year
Jaguar Land Rover
Industry
+2.6
-0.6
-1.2
-1.9
-4.6
-4.2
-9.3
-14.3
-19.6
-29.2
North
America
Britain
Europe
China
Overseas**
**Excludes data from South Korea
JOHN SOPINSKI/THE GLOBE AND MAIL
SOURCE: TATA MOTORS GROUP
Jaguar Land rover automotive results
Retail volumes
Revenues
Profit/loss
(000s of units)
(Million pounds)
(Million pounds*)
- £264
-£383
145.5
£5,222
£5,074
128.6
Q1 FY
2019
Q1 FY
2020
Q1 FY
2019
Q1 FY
2020
Q1 FY
2019
Q1 FY
2020
*Before tax and exceptional items
Q1 FY20 represents the 3 month period from 1 April 2019 to 30 June 2019
Q1 FY19 represents the 3 month period from 1 April 2018 to 30 June 2018
Retail volumes by region
Jaguar Land Rover
Industry
Percentage change, year over year
+2.6
-0.6
-1.2
-1.9
-4.6
-4.2
-9.3
-14.3
-19.6
-29.2
North
America
Britain
Europe
China
Overseas**
**Excludes data from South Korea
JOHN SOPINSKI/THE GLOBE AND MAIL SOURCE: TATA MOTORS GROUP
Mr. Marchionne believed the industry is doomed unless car companies stop blowing their brains out developing cars that are more or less identical to those of their competitors. In his “Confessions of a Capital Junkie” presentation in 2015, he called car companies value destroyers. The cost of meeting tighter and tighter emissions standards, building new drivetrains (not necessarily electric), developing autonomous cars and creating safety technologies was, by the middle of this decade, consuming more than US$100-billion a year. Today, that figure is probably much higher. Car makers were spending, on average, the equivalent of their enterprise value (equity and debt) in a mere four years; other industries, such as chemicals and aerospace, were spending that value over about 20 years.
And the spending produced shabby returns, he noted. The return on invested capital, at less than 8 per cent, was the worst of any industry, as was the ratio of enterprise value to operating earnings. In essence, he argued that making cars was a slow-motion suicide; to thrive, you have to make more than your cost of capital.
The solution? Stop duplicating platforms, powertrains, transmissions and other components and share them with one another instead. Doing so might mean more joint ventures, or it might mean mergers to produce synergies, combine R&D budgets and ditch surplus capacity.
Easier said than done, of course. In some countries, such as France, the auto industry is considered a strategic national asset. Unions fight layoffs and plant closings. Cross-border deals are politically strained, often impossible. Politics sunk the FCA-Renault deal. Where would the company be based, France or Italy? Whose factories would be sent to the guillotine? Would the French government’s 15-per-cent stake in Renault make the merged company beholden to the Élysée Palace?
Which brings us to JLR. Merging it with FCA would be a lot easier than merging it with a company overseen by the French Industry Minister. JLR’s deep losses and debt make the company unsustainable over the long run unless it undergoes a radical shakeup, such as selling it to a bigger player. The politics of selling it may even work in its favour. Britain’s auto industry is disappearing at an alarming rate – Ford and Honda recently announced plant closings there. Brexit-bound Britain would presumably welcome any owner that would keep JLR’s operations, which employ 40,000, intact (a cost-savings program will see the departure of 4,500 factory workers in Britain).
FCA isn’t commenting on the speculation that it is sizing up JLR, and analysts are focusing on cash-rich BMW as the leading potential suitor. The problem with that scenario is massive product overlap. Both are makers of luxury SUVs and sedans, and BMW has its own electrification strategy – it doesn’t need to import one from JLR. FCA lacks luxury SUVs, although the high-end Jeeps come close. Mr. Marchionne pumped little money into electric cars. Owning JLR would help FCA fill that gaping hole.
What is certain is his consolidation vision. As it is, JLR is unsustainable, but so is the entire auto industry. More mergers will happen and FCA seems happy to be the catalyst.