THE RISE of the SUV over the past decade demonstrates that carmakers have done an excellent job of persuading customers that bigger is better. Renault and Fiat Chrysler Automobiles (whose chairman, John Elkann, sits on the board of The Economist’s parent company) are hoping to convince investors that the same is true of carmakers themselves. On May 27th the Italian-American FCA confirmed rumours that it was seeking a merger with its French counterpart, itself part of a close alliance with Japan’s Nissan and Mitsubishi. If a deal goes ahead it will create an automotive colossus.
Together, the two companies currently sell nearly 9m cars a year for €170bn ($190bn), generating an operating profit of around €10bn. That alone would put the combined firm in third place behind only Toyota and Volkswagen (VW), each of which produces around 10m cars annually. Add in Renault’s alliance partners, however, and the new group’s combined total of 15m cars would leave everyone else in the dust.
The putative deal can be seen as the legacy of two fallen giants of carmaking. Sergio Marchionne, FCA’s storied boss who died last year, had called for consolidation of the mass market, where slender profits are partly the result of duplicated investment in similar technologies such as engines that do little to differentiate brands. FCA has long displayed a “for sale” sign on its windscreen. The architect of the Renault-Nissan-Mitsubishi alliance, Carlos Ghosn, had his plans for world domination stymied by his arrest and detention in Japan on charges of financial wrongdoing at Nissan (he denies the charges). Mr Ghosn had previously invited FCA to join the alliance, to no avail. Both Marchionne and Mr Ghosn would no doubt have coveted the driver’s seat of the merged firm. Neither Mike Manley, FCA’s newish chief executive, nor Thierry Bolloré, his counterpart at Renault, seems to possess their predecessors’ rampant egos that may have prevented a deal in the past.
The combination of the two firms looks good on paper. The scale that Marchionne talked about and Mr Ghosn built through his Franco-Japanese alliance was a sensible reaction to the challenges of the industry. It helps firms ride out economic downturns and spread investments in electric vehicles (EVs), self-driving cars and mobility services (such as ride-hailing and car-sharing beloved of younger car users) across more vehicles. FCA estimates that joint development of engines, EVs and platforms on which all cars are built will save €5bn a year.
The two firms also plug gaps in each other’s businesses both geographically and in terms of products. FCA’s strength and profits come from America and Renault’s from Europe. The French firm’s cheap models and EV know-how will complement FCA’s pick-ups and premium brands such as Jeep, Alfa Romeo and Maserati.
Can the tie-up defy the patchy history of automotive megadeals? The list of failures is long: Daimler and Chrysler, BMW and Rover, GM and Fiat, anything to do with Ford. Both FCA and Renault-Nissan-Mitsubishi have succeeded in part thanks to those exceptional former bosses, and partly because they avoided full-blown integration. FCA has flourished because Fiat and Chrysler have remained largely apart. So have component parts of Renault-Nissan-Mitsubishi, a looser structure which falls short of a full merger but whose pace of cost savings has been sluggish.
FCA makes it clear that its deal is with Renault but also that it sees “significant expected benefits to all parties from the expanded partnership”. That partnership is looking creaky in the aftermath of Mr Ghosn’s arrest, which he claims was orchestrated by Nissan in order to prevent his plans for a full merger. Nissan denies this. Nissan may also be reluctant to continue collaborating with Renault once it merges with FCA, which competes with the Japanese firm in America’s lucrative pick-up market.
Running an alliance that makes 15m cars would also be hard. Mr Ghosn claimed, with some justification, that he alone had the skills to run an unwieldy entity that churned out 10m cars a year. After Marchionne’s death such boasts rang even truer. The difficulties of VW, with its garage-ful of brands, suggest that it does take a special talent. The deal, to be structured as a 50-50 partnership in proportion to existing stakes in either firm, would hand the largest single stake to Exor, the investment vehicle of Fiat’s founding Agnelli family which controls FCA through a 29% stake. The French state, which owns 15% of Renault, will apparently give up its double voting rights and accept a board made up mainly of independent directors (FCA has promised that no factories will close, in France or elsewhere).
Renault’s board, which was due to meet on May 27th, still has to sign off on the deal. So do competition authorities in Europe and America. And if scale at the top of the industry moves from 10m to 15m cars a year, will others seek to replicate it? Ford and VW are in a partnership that some say could tighten. PSA, which makes Peugeots and Citroëns, is open to offers. China’s government is perpetually rumoured to be planning a merger of its biggest state-run firms. Messrs Ghosn and Marchionne may be out of the running, but their dream rides on.
This post was originally posted at https://www.economist.com/business/2019/05/27/fiat-chrysler-seeks-a-merger-with-renault.