Commentary

Fiat Chrysler Wants To Create No. 3 Automaker In Merger With Renault

Fiat Chrysler Automobiles has proposed a 50-50 merger with Groupe Renault that would create the world’s third largest automobile company behind Volkswagen AG and Toyota Motor, and ahead of General Motors, while bolstering each automaker in markets and segments where they are lagging. 

If approved by each company’s boards, the new company will operate under a Dutch parent company, according to the non-binding proposal.  Its board initially will consist of 11 members, with the majority being independent, and four from each group as well as one nominee from Nissan, which formed a strategic alliance  with Renault and Mitsubishi in 2009. 

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FCA’s main headquarters are in the Netherlands; its financial headquarters are in London for tax purposes. Renault is based in Boulogne-Billancourt, France, in the suburbs of Paris.

“Do not underestimate the political and strategic dimensions of a combination that, based on 2018 financial results, would produce an industry behemoth generating $190 billion in revenue, $11.2 billion in operating profit and nearly $9 billion in net profit. It would boast a wide array of brands -- from Renault’s budget Dacia and Lada brands and its mainstream Renault, to Maserati, Alfa Romeo, Ram and Jeep, the world's hottest SUV brand -- and it would offer complementary footprints in most major markets,” Daniel Howes writes for the Detroit News.

“But the deal stems also from the void left last year by the exit of two of the industry’s most dominant and hard-driving figures. Fiat Chrysler’s former chief executive Sergio Marchionne and Renault’s longtime chairman Carlos Ghosn had circled each other for years and had informally discussed cooperation,” point out Eric Sylvers, Nick Kostov and Christina Rogers for the Wall Street Journal.

“Marchionne died last July in a clinic in Zurich from complications linked to an undisclosed condition. … A few months later, Mr. Ghosn was arrested in Japan for alleged financial misconduct, which he denies,” they add.

“Michelle Krebs, executive analyst with Cox Automotive’s Autotrader, noted the long focus at FCA on the benefits of consolidation. ‘This is something Sergio Marchionne talked about for a long time, that the industry needs to consolidate, that they’re wasting a tremendous amount of money’ on each company pursuing technology development,” writes the Detroit Free Press’ Eric D. Lawrence.

“Krebs noted that both companies have different footprints, and Renault no longer has a presence in the United States, where FCA makes the bulk of its profits from its Jeep and Ram truck brands,” Lawrence adds.

“Neither Fiat nor Renault are unprofitable or facing imminent collapse. But both face painful industry upheaval: car sales are slowing, just as the costs to develop electric vehicles and comply with ever-stricter emissions targets are surging,” writes Bloomberg’s Chris Bryant in Automotive News.

Fiat thinks the answer is to achieve huge scale and thereby share the financial burden in meeting those challenges. Is it?

“Due to its limited financial resources, Fiat is a laggard in EVs while Renault is an acknowledged leader,” Bryant continues. "But thanks to its acquired Jeep and Ram brands, Fiat has a very profitable truck and SUV business in North America. By contrast, Fiat’s European operations are hardly profitable, which may explain why it picked Renault as a potential merger partner over Peugeot SA, whose sales are more heavily skewed towards Europe.”

Notably, the release announcing the deal states that there would be “no plant closures as a result of the combination” while projecting $5.6 billion in annual savings -- a figure that Bryant, for one, is “skeptical” about.

The gazillion-dollar question is whether Renault is game.

“Will Renault agree to it? For now it says it’s just studying the plan, but expect the existing alliance with the Japanese automakers and Renault’s own partial ownership by the French government to make this more complicated than it would be otherwise,” suggests Patrick George for Jalopnik.

“But given slumping new car sales in China and the U.S., massive costs needed for future technologies and a possible economic downturn on the horizon, expect more merger proposals like this one in the future -- and ones that actually happen.”

Indeed, “proposing a full-blown merger illustrates the urgency that automakers feel as they stand on the brink of what may be the biggest period of transition since the early days of the automobile,” observe Jack Ewing, Liz Alderman, Andrew Ross Sorkin and Neal E. Boudette for the New York Times.

“There is a consensus among industry executives and analysts that carmakers must link up to share the cost of a transition from internal combustion engines to avoid being run over by fast-moving tech industry challengers like Tesla or Uber. A Fiat-Renault deal would put pressure on rivals to find partners or be left behind as competitors unite in new mega-alliances,” they add.

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