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PSA-Opel union leaves Fiat Chrysler’s Marchionne out in the cold – for now

The logo of German car maker Opel is pictured at the company's headquarter in Ruesselsheim, Germany, March 6, 2017.

DANIEL ROLAND/AFP/Getty Images

After a long lull, the auto industry's merger game is back. On Monday in Paris, France's PSA Group announced the purchase of Opel, the long-suffering European division of General Motors, for €2.2-billion ($3.2-billion). The takeover reshapes the European car market overnight, thrusting PSA, owner of the Peugeot and Citroen brands, into second spot, behind Volkswagen.

Who's next? In Europe, at least, probably no one, and that's not great news for Sergio Marchionne, the Italian-Canadian CEO of Fiat Chrysler Automobiles (FCA). He once made a pitch for Opel and, lately, has sought a merger with mighty GM itself.

But Opel, which had been part of GM for nine decades and has lost €9-billion since 2009, is now gone and GM seems to have no interest in FCA, in spite of Mr. Marchionne's famously persuasive ways. This is the man who convinced the U.S. government at the height of the financial crisis to give him a shot at running Chrysler. He took the bankrupt American company, and a perennial Italian automotive laggard, Fiat, bolted them together and made a transatlantic success of it.

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He wanted to do the same with all of GM, but no luck. Having just left Europe through the sale of Opel, why would GM leap back into Europe through a deal with FCA? It wouldn't, all the more so since GM has a deal with PSA to develop some cars and technology together.

While FCA is profitable, thanks to hot-selling American SUVs and Fiat's revival, there is no doubt that the PSA-Opel deal presents a problem for Mr. Marchionne, 64, who is also CEO of Ferrari and executive chairman of agricultural and commercial vehicles maker CNH Industrial. That's because size matters for Mr. Marchionne. He has long argued that only the biggest auto makers will have the muscle to fund the next generation of tech-laden, clean cars, some of which will be driverless.

The PSA-Opel merger will widen the gap between the biggest and smallest auto makers in Europe. Based on 2016 data, PSA has 9.7 per cent of the European auto market, while Opel (which includes Vauxhall, GM's British brand), had 6.6 per cent, identical to the European market share of Fiat, whose collection includes Alfa Romeo, Jeep and Maserati. Together, PSA and Opel will have just over 16 per cent of the market, well behind Volkswagen's 24.1 per cent, but well ahead of Renault, which slides into the No. 3 market position. Ford, BMW, Daimler (owner of Mercedes), and FCA will be left with market shares ranging from 6 to 7 per cent.

In time, the PSA-Opel merger has the potential to give the enlarged group the market and financial clout that each of the two companies lacked on their own. PSA suffered deep losses in the early part of the decade and was forced into a bailout by the French state and China's Dongfeng Motor in 2014. Under CEO Carlos Tavares, PSA has come back from a near-death experience and is returning to growth mode.

At the press conference, Mr. Tavares said "We want to create a new European automotive champion."

Putting PSA and Opel together will lead to savings of €1.7-billion a year by 2026, PSA said, by combining operations and development costs. Details were scant, but it seem inevitable that a few of the new company's 19 factories will have to close, though PSA insisted on Monday that existing labour contracts would be respected, meaning massive job losses are unlikely in the next few years. Since closing auto factories in Europe is notoriously difficult, PSA's savings estimate may prove ambitious.

While putting PSA and Opel together may create a European automotive powerhouse, it does not guarantee global success. Under GM's ownership, Opel was not allowed to compete with Chevy, Buick and other GM brands beyond Europe, which is why Opel is a non-entity in China and North America. PSA's Peugeot and Citroen brands are also weak outside of Europe.

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PSA will no doubt push Opel onto the global market, BUT the effort could take years, decades even, given the scant awareness of Opel products overseas. FCA's big advantage over PSA is global sales. The Jeep brand is ubiquitous and Fiat is a top seller in Latin America.

Still, there is no doubt the PSA-Opel deal will put pressure on FCA in Europe. FCA's Italian factories come with high costs and the company is behind the curve in the development of hybrid and all-electric cars. It must also spend fortunes cleaning up its fleet. In the United States, FCA faces a diesel emissions problem, albeit one that seems much less serious than Volkswagen's epic diesel scandal.

The PSA-Opel deal proves Mr. Marchionne's theory that consolidation is both necessary and inevitable in the global auto industry. He has long argued that auto makers are blowing vast amounts of capital simply replicating each other's products. Far better to compete less to free up more investment capital for new products, such as self-driving cars.

With GM out of the picture, who might Mr. Marchionne go after next? A deal with Renault, which has had a global partnership with Japan's Nissan since 1999, seems highly unlikely. Ditto BMW and Daimler. They would never sacrifice the high profit margins earned on luxury cars for Fiat's pedestrian returns.

But Mr. Marchionne is a deal maker and will not retire from FCA until 2019 (he is staying at Ferrari until 2021). That gives him enough time for one more biggie. The logical candidate is PSA itself, once it has absorbed Opel and cleaned up Opel's German pension plans (Most of Opel's pension liabilities will stay with GM). While it seem like a long shot, remember that Mr. Marchionne has said that only the biggest car companies will survive and, as of Monday, one of his main competitors just got a whole lot bigger.

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