By William Boston
The proposed merger of Fiat Chrysler and Peugeot applies an old
auto-industry recipe to a new problem: use size to boost profits,
amid today's falling demand and the most expensive technology
transition in years.
The tie-up would be the biggest car combination since Daimler
and Chrysler two decades ago. Smaller deals followed, some of which
have worked, like Fiat's acquisition of Chrysler. But
DaimlerChrysler's messy divorce triggered an industry-wide
reevaluation of the merits of big, full-blown mergers.
Fiat Chrysler Automobiles NV and Peugeot-owner PSA Group of
France are now giving that tarnished strategy another try. If
successful, the combination would create the world's third-largest
auto manufacturer by sales and transform the competitive landscape
around the world, putting others under pressure to consolidate or
take other measures in an industry that sold 92 million cars
world-wide last year.
General Motors Co., Ford Motor Co. and Chrysler, which once
ruled the auto world, have been retreating from or struggling in
foreign markets for years, usurped by Toyota Motor Corp. and
Volkswagen AG.
Upstarts from Tesla Inc. to Uber Technologies Inc., coupled with
regulatory requirements to limit greenhouse gas emissions, are
forcing the old guard to spend hundreds of billions of dollars to
build electric cars with no certainty that the battery-powered
electric vehicle can emerge from its niche to become the new
mass-market ride.
All this is happening as demand for cars is cratering in a
cyclical swing some experts fear may have a structural dimension.
Surveys show millennials and younger consumers are increasingly
reluctant to buy cars for financial or environmental reasons.
The global auto industry is losing momentum. New car sales fell
slightly last year and are expected to decline around 4% this year.
The slump, exacerbated by political tensions from the U.S.-China
trade war to Brexit, is likely to last for five years or more,
Continental AG , a big global auto supplier, said last week.
And a new global giant has emerged: Chinese tycoon Li Shufu is
methodically building his Geely Automobile HoldingsLtd. into a
global powerhouse. In 2010, Geely acquired Volvo Cars from Ford for
$1.8 billion. Since then, it has also obtained a 10% stake in
Germany's Daimler, becoming its largest single investor, and stakes
in Swedish truck-and-bus maker Volvo AB, British sports-car brand
Lotus and Malaysia's Proton Holdings Bhd.
After the DaimlerChrysler debacle, the industry has settled for
looser alliances, such as the cooperation between Renault SA,
Nissan Motor Co. Ltd. and Mitsubishi Corp.
But Sergio Marchionne, the legendary Fiat Chrysler chief who
died last year, was a persistent advocate for deeper consolidation.
He drafted a 25-page manifesto in 2015 imploring the industry to
share the costs of developing parts most customers never notice,
such as engines in small cars.
"It's duplicative, does not deliver real value to consumers and
is pure economic waste," the report said.
The current crisis of overcapacity has posthumously buttressed
Mr. Marchionne's argument. As car sales flatline, there isn't
enough demand to keep all the world's car factories humming.
Volkswagen, for example, has been cutting output in its German
factories since the beginning of the year. And other manufacturers
such as Mercedes-Benz have eliminated some shifts to adjust to
weaker sales.
Fiat Chrysler's factories in Europe ran at about 52% capacity
last year, well below the European industry average of 73%,
according to LMC Automotive, and before this year's acceleration of
the decline in global auto demand.
John Elkann, the scion of the Agnelli family that controls Fiat
Chrysler, bought into Mr. Marchionne's vision. In the spring, he
tried to merge Fiat Chrysler with Renault. But the deal fell apart
amid troubles in the Renault-Nissan alliance after the arrest in
Japan of its chief Carlos Ghosn on allegations of financial
misconduct. Mr. Ghosn has denied all charges against him.
The planned merger with Peugeot could lend traction to the late
Mr. Marchionne's vision of a more thorough shakeout of the industry
to create fewer but stronger manufacturers with more profits and
less waste.
In Europe, Fiat Chrysler and Peugeot would have a combined 22.8%
market share, making it the second-largest auto maker by sales
after Volkswagen, which has 23.8% of the European Union auto
market, according to the Association of European Automobile
Manufacturers.
After its acquisition of GM's European business in 2017, Peugeot
revamped Opel, the German manufacturer, and Britain's Vauxhall,
more than doubling their European market share, and returning Opel
to profit through cost-cutting and sharing technology with Peugeot.
Adding Fiat Chrysler's Jeep brand to its arsenal could help Peugeot
chip away further at Volkswagen's dominance of the European
market.
Peugeot CEO Carlos Tavares, who is slated to take the reins of
the combined company, won't have the same advantage he had at Opel.
GM did the heavy lifting before the sale, shutting down an Opel
factory after a long battle with German politicians and unions. Mr.
Tavares will have to go through those battles with the Italian
government and unions himself.
Volkswagen Chief Financial Officer Frank Witter said the
announced merger was "no surprise." Volkswagen enjoys extensive
sharing of technology and components across its 12 automotive
brands.
"We believe that with our strong portfolio and multibrand group
we have the scale to successfully master the transformation," he
said.
The proposed merger also gives Peugeot a foothold in the U.S.,
where Volkswagen has entered into a cooperation deal with Ford to
develop self-driving car technology. Ford is also licensing
Volkswagen's electric-vehicle technology, and the two have plans
for self-driving robo taxis.
Mr. Witter said the merger of Fiat Chrysler and Peugeot wouldn't
put VW and Ford under pressure to consider more far-reaching
cooperation in the U.S. or Europe.
There could be a more direct impact on Peugeot's ability to
compete against lower-cost Asian manufacturers, said Pedro Pacheco,
a senior research director at Gartner Group, an industry and
technology consulting firm.
"Together Peugeot and Fiat Chrysler will cover much bigger
volumes and this will lead to more competitive prices in the
market," he said. "This could be a threat to some Asian
manufacturers, the smaller ones such as Hyundai, Kia and some Honda
models."
Japanese auto makers have been historically shy about getting
into equity tie-ups. But they are now beginning to consolidate
their ties with their partners to better compete with overseas
rivals in developing new technologies.
Toyota, for example, has been converting loose alliances with
smaller Japanese auto makers into stakes, bringing the companies
closer to achieve cost advantages.
In August, Toyota said it would buy a 4.9% stake in Suzuki Motor
Corp., its partner of three years, to help it expand in India and
Africa, markets where Toyota has struggled to compete against
low-price rivals.
And earlier this month, Toyota said it would raise its stake in
Subaru Corp. from 16.8% to over 20%.
Kiyoshi Fujiwara, executive vice president of Mazda Motor Corp.,
said his company's experience suggests looser cooperation is enough
to meet today's challenges, and that the sort of full merger Fiat
Chrysler and Peugeot are trying isn't necessary.
Still, he said, "we are extremely interested in seeing whether
it works or not."
--
Michael Colias
in Detroit,
Sean McLain
in Tokyo and
Yoko Kubota
in Beijing contributed to this article.
Write to William Boston at william.boston@wsj.com
(END) Dow Jones Newswires
November 01, 2019 06:30 ET (10:30 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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