Fiat Chrysler Automobiles is reportedly in talks to merge with France's PSA Group, owner of the Peugeot brand.
If you've been keeping track, this is just the latest dealmaking rumor around the Italo-American carmaker; a proposed merger of FCA and Renault fell apart earlier this year, and in 2015, FCA's then-CEO, the late Sergio Marchionne, loudly courted GM and its CEO Mary Barra for a tie-up.
Prior to that failed effort, Marchionne had produced a presentation that was widely shared in the auto industry. Titled "Confessions of a Capital Junkie," it argued that global automakers fritter away their profits and degrade their already slim margins by developing expensive, redundant platforms and technologies. These offer little in the way of product differentiation, demand that automakers maintain excessive manufacturing capacity, and end up being commodities in the marketplace, priced down by ferocious competition.
All excellent points, feeding into a narrative that now looks at FCA's various merger forays and partnership between companies such as VW and Ford, and GM and Honda, concluding that automakers are trying to share costs in devising new propulsion technologies, such as electric powertrains, and compete with tech firms on ride-hailing services, connected cars, and autonomous vehicles.
Sounds great, but it's flat wrong.
Carlos Tavares is the right empire-builder for the job
FCA is constantly talking to other automakers not because the company has any grand visions about the future of mobility but because the family that controls Fiat wants out of the car business and has for years. Ultimately, an FCA-PSA merger would be about PSA taking over, with CEO Carlos Tavares running the show.
Tavares is a disciple of Carlos Ghosn, the disgraced former architect of the Renault-Nissan-Mitsubishi alliance (he's been awaiting trial in Japan since last year on allegations of financial malfeasance). Renault-Nissan was ridiculed when Ghosn first engineered the partnership, but it now looks like a prescient model for what the car business needs. In particular, the VW-Ford cooperation resembles a sort of less-desperate version of Renault-Nissan, although both VW and Ford have stressed the independence of the respective companies.
Tavares acquired GM's former European division, Opel-Vauxhall, several years ago, and a merger with FCA has long been speculated on. What PSA would get from effectively taking over FCA is the Jeep brand and access to the North American market, with its lucrative pickup truck and SUV sales. The cashflow could help PSA-FCA to attack China's growth market.
FCA has essentially no electric or autonomous technology of significance (although it is supplying Waymo with vehicles), so the merger would certainly not be about competing for those entirely gestational opportunities but rather about solving assorted embedded problems with the existing, traditional auto businesses.
The Angelli family's stake, overseen by John Elkann, grandson of Gianni Agnelli, amounts to about a third of FCA. Elkann is CEO of Exor, the family's holding company and investment entity. With Marchionne, Elkann rescued Fiat and then proceeded to concoct FCA, a bundle of brands. The idea was to improve the value of everything, then spin off the pieces.
Thus far, this has been a masterpiece of global financial engineering. Marchionne picked up Chrysler essentially for free when the US government decided to give the bankrupt and bailed-out basketcase number-three US carmaker a new lease on life.
Marchionne then converted a federal equity stake into a 2014 IPO of FCA, followed by an IPO of Ferrari, unlocking what has become a $30 billion market cap for the Italian supercar manufacturer. FCA is valued at $22 billion, and spinoffs or outright sales of other brands, such as Maserati and Jeep, have continually been discussed in the industry.
Through all of this, Exor has made out great. But the auto industry hasn't faced a downturn since the financial crisis. When it does, FCA would encounter the same staggering capital demands as everyone else to keep the business running. Elkann perhaps thinks that his family's fortunes would be better deployed on investments that structurally require less cash and promise richer returns.
Beyond FCA, there hasn't been much talk about consolidation. The Renault-Nissan-Mitsubishi alliance, held together by the force of Ghosn's will, is collapsing. Ford and VW have been scrupulous about not allowing any merger speculation (which isn't to say that they aren't thinking about it). GM is a much smaller company than it was before the financial crisis and is focused on shedding the problematic aspects of its operations. The logical region for mergers is Europe, but enmeshed state ownership of automakers and labor politics prevents a Marchionnian elimination of redundancy from gaining traction.
The tricky aspect of all this is that we have three things happening at the same time — and they aren't related.
Keep your eye on the money
First, the traditional auto industry has been printing money in the big markets for years now, but it wants to get ahead of the inevitable down cycle. That's guiding much of the thinking about how to manage the old-line business.
Second, mounting regulatory pressures around the world have automakers scrambling to make investment decisions today that should enable them to comply with more stringent future emissions and fuel-economy requirements. Tesla's success has distorted the interpretations of their motives because a lot of observers outside their industry believe, erroneously, that there's going to be a competitive electric-vehicle market in the coming decade. There isn't; EV sales are meager and aren't going to live up to expectations, and regardless, it's unclear whether EVs can yield sustainable profits.
Third, alternative-transportation enterprises have attracted an alarming amount of mindshare and encouraged the notion that personal-vehicle ownership is on the way out. That those businesses aren't good businesses — witness Uber and Lyft's post-IPO struggles — doesn't seem to be registering. Analysts and pundits consistently overlook that more than 40 million new vehicles could be sold in the US and China in 2019. Even the allegedly troubled European market should see 2019 sales roughly in line with 2018 at about 15 million units.
For FCA, only the first thing is relevant. In order for the company to maximize its merger value, it needs to get the deal done before the world's auto market go into serious retreat.
So what are the odds that the PSA-FCA merger is going to happen?
Pretty good. The Renault-FCA deal looked done until it was scuppered by pressures from the French government. In PSA and Tavares, Elkann has probably a better opportunity, given that Tavares wants to create a global mega-automaker, to challenge VW and Toyota. The deal also presents Elkann with a neat way to conclude his and Marchionne's work without having to undertake additional IPOs and brand sales.
So in the end, this merger wouldn't be about any grand or futuristic ideas, and in any case, I think the romantic period of Fiat ended many years ago. This is about a large financial transaction that draws to a close a story that started in 2009, when a banker from Italy saved an badly damaged American icon that nobody else wanted.