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MarketScreener Homepage  >  Equities  >  Italian Stock Exchange  >  Fiat Chrysler Automobiles    FCA   NL0010877643


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Mergers Offer Auto Industry an Old Lifeline -- WSJ

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11/02/2019 | 01:48am EDT

By William Boston

The proposed merger of Fiat Chrysler and Peugeot applies an old auto-industry recipe to new challenges: Use size to boost profit amid changing consumer habits and the most-expensive technology transition in years.

The tie-up would be the biggest car combination since Daimler acquired Chrysler two decades ago. Smaller deals followed, some of which have worked -- notably Fiat's acquisition of Chrysler. But DaimlerChrysler's messy divorce in 2007 triggered an industrywide 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 competition around the world, putting others under pressure to consolidate or take other measures to stay in the race.

General Motors Co., Ford Motor Co. and Chrysler once ruled the auto world, but have been retreating from or struggling in foreign markets for years as Toyota Motor Corp. and Volkswagen AG extended their reach.

A new challenge is coming from upstarts like Tesla Inc. and Uber Technologies Inc., along with regulatory requirements to limit greenhouse gas emission. The old guard is now committed to spending hundreds of billions of dollars to build electric cars with no certainty that battery-powered vehicles can become the new mass-market ride.

Meanwhile, a new global giant is emerging in China. In 2010, Geely Automobile Holdings Ltd. acquired Volvo Cars from Ford for $1.8 billion. Since then, it has also gained 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.

All this is happening as demand for cars is slumping 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, which sold almost 96 million cars world-wide in 2018, is losing momentum. New-car sales were off slightly last year and are expected to decline around 4% this year. The slump, exacerbated by the U.S.-China trade war and Brexit, is likely to last for five years or more, Continental AG , a big global auto supplier, said last week.

After the DaimlerChrysler debacle, the industry settled for looser alliances, such as the cooperation between Renault SA, Nissan Motor Co. and Mitsubishi Corp.

But Sergio Marchionne, the legendary Fiat Chrysler chief who died last year, was a persistent advocate for deeper ties. 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 of the separate spending by auto makers.

The current crisis of overcapacity has buttressed Mr. Marchionne's argument posthumously. As car sales flat-line, 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. 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 that was before this year's accelerated 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 last year's 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 argument that a more thorough shakeout of the industry is needed to bolster profit and lessen waste by creating fewer but stronger manufacturers.

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. In the case of Fiat, Mr. Tavares would have wage those battles himself.

Volkswagen finance chief Frank Witter said the announced deal was "no surprise." The German auto maker, which has extensive sharing of technology and components across its 12 automotive brands, doesn't need a merger to navigate the industry turbulence, he said.

"We believe that with our strong portfolio and multibrand group we have the scale to successfully master the transformation," he said.

The proposed merger would give Peugeot a foothold in the U.S., where Volkswagen has entered into a 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 robotaxis.

Mr. Witter said the merger of Fiat Chrysler and Peugeot wouldn't put Volkswagen and Ford under pressure to consider more far-reaching cooperation in the U.S. or Europe.

Lower-cost Asian manufacturers could feel a more direct impact, 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 historically have shied away from equity tie-ups. But they are now beginning to draw closer to 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

Stocks mentioned in the article
ChangeLast1st jan.
CONTINENTAL AG -5.92% 64.7 Delayed Quote.-43.87%
DAIMLER AG -8.06% 27.2 Delayed Quote.-44.91%
DOW JONES AFRICA TITANS 50 INDEX -2.41% 356.59 Delayed Quote.-33.53%
EURO / BRITISH POUND (EUR/GBP) 0.02% 0.89455 Delayed Quote.7.16%
EXOR N.V. -0.62% 47.82 Delayed Quote.-30.34%
FERRARI N.V. -4.55% 150.03 Delayed Quote.-9.37%
FIAT CHRYSLER AUTOMOBILES -5.99% 6.478 Delayed Quote.-47.77%
FORD MOTOR COMPANY -1.14% 5.19 Delayed Quote.-44.19%
GARTNER INC -0.31% 104.79 Delayed Quote.-32.00%
GEELY AUTOMOBILE HOLDINGS LIMITED 10.71% 11.16 End-of-day quote.6.29%
GENERAL MOTORS COMPANY -5.23% 21.38 Delayed Quote.-41.58%
HONDA MOTOR CO., LTD. 5.77% 2345 End-of-day quote.2.00%
KUBOTA CORPORATION 0.57% 1230.5 End-of-day quote.-1.83%
MAZDA MOTOR CORPORATION 6.02% 616 End-of-day quote.3.01%
MITSUBISHI CORPORATION 3.09% 2349.5 End-of-day quote.0.88%
MITSUBISHI MOTORS CORPORATION 7.64% 310 End-of-day quote.4.73%
NISSAN MOTOR CO., LTD. 0.38% 366.8 End-of-day quote.-2.68%
PEUGEOT -4.17% 12.065 Real-time Quote.-43.36%
PORSCHE AUTOMOBIL HOLDING SE -7.04% 37.92 Delayed Quote.-43.10%
RENAULT -7.45% 17.926 Real-time Quote.-57.50%
S&P AFRICA 40 INDEX -5.34% 104.6 Delayed Quote.-36.04%
SUBARU CORPORATION 7.98% 2077.5 End-of-day quote.6.92%
SUZUKI CO.,LTD. 6.74% 618 End-of-day quote.5.10%
SUZUKI MOTOR CORPORATION 4.78% 2619.5 End-of-day quote.2.73%
TESLA, INC. -2.61% 514.36 Delayed Quote.22.96%
TOHO CO., LTD. -2.32% 3375 End-of-day quote.-4.26%
TOYOTA INDUSTRIES CORPORATION 5.80% 4835 End-of-day quote.2.65%
TOYOTA MOTOR CORPORATION 1.31% 6253 End-of-day quote.-0.19%
UBER TECHNOLOGIES, INC. -2.99% 27.28 Delayed Quote.-8.27%
UNITED PARCEL SERVICE -2.27% 97.52 Delayed Quote.-16.69%
VOLKSWAGEN AG -7.28% 105.42 Delayed Quote.-40.18%
VOLVO -3.74% 113.4 Delayed Quote.-24.92%
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Financials (EUR)
Sales 2020 105 B
EBIT 2020 6 235 M
Net income 2020 3 753 M
Finance 2020 4 334 M
Yield 2020 10,2%
P/E ratio 2020 2,71x
P/E ratio 2021 2,43x
EV / Sales2020 0,06x
EV / Sales2021 0,05x
Capitalization 10 159 M
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Average target price 13,54  €
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Michael Mark Manley President, Chief Executive Officer & Director
John Jacob Philip Elkann Chairman
Richard Keith Palmer Chief Financial Officer & Executive Director
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