Future Dims for Fiat Chrysler, Renault Fiat Chrysler, Renault Are Weakened -- WSJ
June 07 2019 - 3:02AM
Dow Jones News
By William Boston and Mike Colias
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (June 7, 2019).
The abandoned merger talks between Fiat Chrysler Automobiles NV
and France's Renault SA renew questions about how both car
companies will fare in a rapidly-transforming industry that favors
manufacturers with deep pockets and technical expertise.
The proposed merger deal that fell apart this week amid
opposition from the French government already faced high regulatory
and political hurdles. But investors were encouraged by the deal's
prospects, believing a tie-up of these two smaller car firms would
give them the global heft and financial means to compete in an
industry dominated by Toyota Motor Corp., Volkswagen AG and other
auto-making giants.
Car companies are already struggling to adjust to the changes
taking place in the industry, from the rise of self-driving
vehicles to shifts in the way people buy cars -- if they even
choose to own one at all.
A 10-year boom in the global auto industry is coming to a close
with new-car sales in China falling after decades of growth and the
European car market weakening for the first time in six years.
Declining sales can put car companies in a bind, hurting
profitability and leaving manufacturers with unused factory
space.
Auto makers also are under pressure in China, Europe and the
U.S. to lower tailpipe emissions, which means investing billions of
dollars in electric and hybrid-car technology. The stiffer
emissions regulations are denting profits and forcing more
collaboration among car companies.
Moody's Investors Service in March revised its outlook for the
global auto industry to negative from stable, citing slowing
new-vehicle demand, political risks, as well as technological and
regulatory pressures.
Fiat Chrysler, the result of its own merger involving Italy's
Fiat SpA and the U.S.'s Chrysler Group LLC, continues to confront
challenges on several fronts. It has a weak presence in China and
its fuel-efficiency ratings lag behind many major competitors -- a
costly problem to fix. The company's debt load tops many
competitors, and its European business remains troubled, leaving it
reliant on North America to drive profits as U.S. sales are
slowing.
The deal with Renault would have created one massive car
manufacturer that would rank third world-wide in sales and have a
combined value of $40 billion. It also would have given each car
company more scale in Europe, a highly competitive market where
mass-market brands struggle with low to negative profit margins and
excess factory space.
Now, Fiat Chrysler "is at risk of looking rather desperate,"
said Max Warburton, an analyst at Sanford C. Bernstein.
Renault can still rely on its alliance with Nissan Motor Co. and
Mitsubishi Motors Corp., a three-way partnership that has helped it
build scale globally and save on costs by sharing parts and
engineering. But the Nissan-Renault alliance has been fraying since
the arrest late last year of former Chairman Carlos Ghosn, and some
analysts are calling on Renault to dissolve the collaboration.
Many competitors of Renault and Fiat Chrysler are better funded
and moving faster to adjust to the regulatory and technological
changes on the horizon.
General Motors Co., for instance, has attracted about $6 billion
in outside investment over the past year to help fund
autonomous-car development.
Volkswagen announced this week that it would invest more than $4
billion to digitize its business. BMW AG and Daimler AG have agreed
to combine efforts to develop self-driving car technology and new
mobility-service businesses to lessen the capital burden.
As stand-alone entities, Fiat Chrysler and Renault "do not
generate sufficient free-cash flow in order to be seen as strong
players in a global context," said Arndt Ellinghorst, an auto
analyst at brokerage Evercore ISI.
Fiat Chrysler Chief Executive Mike Manley has repeatedly said
the company can thrive as a stand-alone manufacturer. However, his
predecessor, Sergio Marchionne, had been a vocal advocate of
industry consolidation, arguing car makers were wasting money on
parts and technology that could be shared because they aren't seen
by the customer and don't differentiate the brand.
"We have failed, I think, collectively as an industry to deliver
value," Mr. Marchionne said during a 2015 conference call with
analysts. In 2015, Mr. Marchionne led an awkward and ultimately
unsuccessful campaign to initiate merger talks with GM.
The failed Renault deal could revive discussion about whether
Fiat Chrysler would be better off being broken up or sold off in
parts, rather than merged with another major car company. Fiat
Chrysler sells nine brands globally, but analysts estimate only two
-- Jeep and Ram -- generate the bulk of the company's profits.
Morgan Stanley analyst Adam Jonas has said those two brands
combined are worth more than Fiat Chrysler as a whole. In a
research note last year, he estimated Ram and Jeep combined
generate annual revenue of more than $80 billion and an operating
profit of around $12 billion, on par with Boeing Co.
"There's long been this idea for investors that a spinoff of
Jeep and Ram...could unlock some hidden value," Mr. Jonas said in a
recent interview.
Adrienne Roberts contributed to this article.
Write to William Boston at william.boston@wsj.com and Mike
Colias at Mike.Colias@wsj.com
(END) Dow Jones Newswires
June 07, 2019 02:47 ET (06:47 GMT)
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