It’s probably safe to assume there is not a line forming outside Fiat Chrysler Automobiles (FCA) headquarters of big automakers seeking a merger, or to talk about saving the industry from itself.
That could be because since the amalgamation of Fiat and Chrysler, nobody knows where its HQ is anymore. After all, FCA is domiciled for tax purposes in Britain, is registered in Holland, Fiat is based in Turin, Italy, Chrysler in Auburn Hills, Mich., and the stock is quoted in New York and Milan.
Of course anyone following up CEO Sergio Marchionne’s plea for capital markets to step in and persuade the global automotive industry to rationalize and spend its investments more effectively, or wondering about getting together with FCA, will know that HQ is where his corporate jet is today.
Marchionne has let it be known that FCA is open to a merger so that it can reach production of six million vehicles a year. The trouble is it appears that there are no obvious candidates left for FCA to merge with, while his plea for capital markets to impose discipline on the industry and force it to consolidate, didn’t go down well with investors and experts.
Bernstein Research analyst Max Warburton said automakers, often family owned, propped up by politicians and unions and deemed too big to fail, are not in the business of producing value for shareholders. Capital markets barely get a look in.
The call for rationalization of the auto industry has echoed down the decades in an industry known as a value destroyer. Normal industries are ruthless. The weak are allowed to die, allowing the survivors to prosper. In the auto business, the weak are propped up by government subsidy and political pressure. They survive, but make it impossible for the rest to make decent profits.
The worry now is that the day of reckoning might finally be looming because the revolution in technology with commoditized self-driving cars, shared and hired, will mean brand value counts for little and might present an opening for the newcomers like Apple and Google.
“Marchionne is going to remain a lone voice on this subject. No other (manufacturer) wants a merger and the capital markets can’t force one – so FCA is going to need to plough on alone. But if Marchionne thinks our role is to allocate capital, then here’s a suggestion: shouldn’t we be starving Fiat of capital? I would strongly advise investors to take capital away from Fiat and give it to a (manufacturer) with a more certain future. Or perhaps even more sensibly, to deploy it in a different industry,” Warburton said.
Garel Rhys, emeritus professor of Motor Industry Economics and director for Automotive Industry Research at the Cardiff Business School, thinks FCA’s future looks cloudy. There are no obvious candidates for a merger and a “functional” merger is about the only realistic option left.
This means backing off from mergers, but cooperating in areas like design, engine, component and module production, and perhaps marketing and distribution too to save previous capital. This is becoming crucially important for smaller players, as they struggle to meet government mandates for frugal engines which spew out less carbon dioxide (CO2).
Any risk takers?
“Is there anybody out there who needs to take the risk (of a merger with FCA),” Rhys said.
FCA sold 4.6 million Jeeps, Chryslers, Dodges, Maseratis, Ferraris, Fiats, Alfa Romeos and Lancias last year. The company has been linked with most of the world’s mass car makers, including Volkswagen of Germany and Peugeot of France. Fiat had an alliance agreement with General Motors which some thought might blossom, but that was wound up. Chrysler joined with Mercedes-Benz for a while. Renault has Nissan. That leaves medium sized companies like Mazda, which is now close to Toyota, Subaru, owned by Fuji Heavy Industries, and family owned Suzuki. Tata of India owned British based luxury car maker Jaguar Land Rover is independent still; Mitsubishi Motors too.
“Fiat and Chrysler have both tried to merge in the past but were never able to make one stick. If they try functional mergers, that could possibly give benefits. Maybe Subaru and Suzuki would be candidates. That would allow them to open up new markets and shave costs. But the trouble is (FCA) is a marginal company and they are very vulnerable. They could disappear as a separate entity and a major force in the next decade, so they’ve got to get things right,” Rhys said.
John Wormald, analyst with British automotive consultancy Autopolis, also thinks FCA has missed its chance for a merger, and might pay a heavy price.
“They may have missed the boat and might just get squeezed out. Is anybody out there going to say I need Fiat and Chrysler to meet my global targets? I thought not. FCA is just struggling along and I can’t in the end see a favorable outcome. I wish I could,” Wormald said.
Wormald agreed with Marchionne’s contention that the auto business produced “rotten” returns, but wasn’t convinced the global industry was vulnerable to new entrants like Apple and Google.
“Putting a car together is a difficult business. It takes a formidable amount of industrial organization, with very long supply chains and it’s not going to be easy to get in. Barring some crisis like there not being enough fuel to go around and a big scare about pollutants, I can’t see what Google and Apple bring to the party. It would take a major upset, big environmental pressure, but if it does, all bets are off,” Wormald sad.
Karel Williams, Professor of Accounting and Political Economy at the Manchester Business School, also shrugs off the threat from Google and Apple, and wasn’t too impressed with Marchionne’s notion that the auto industry could be rescued by capital market action.
“Expecting the capital market to discipline the volume car industry is crushingly naive because investors are good at disciplining the single firm that disappoints but useless at disciplining an industry that underperforms. Investors can make money by anticipating cyclical movements in share prices, even if the (return on capital) over the cycle is feeble,” he said.
Williams conceded that the auto industry was about to be shaken up by the increasing electronic content, the high cost of which would also hurt FCA. The industry can breathe easy though about the possibility of interlopers.
“Will Apple and Google inherit? I doubt it. Innovators with cash from one product line are always blowing it on revolutionizing another. Think Ford and the Trimotor aeroplane,” Williams said.
Cardiff Business School’s Rhys takes up Warburton of Bernstein’s notion that if times get hard for the global auto industry, investors, even family ones, may decide they’ve had enough, withdraw their money and put it in an industry which performs for shareholders.
Barrier to exit
“At the moment what have is really a barrier to exit, with the influence of governments and unions. That will change in a world where there is an avalanche of new entrants with financial power and it is quite possible that even companies that look safe now won’t be because the controlling interest will bail out, sell up. Who knows what might come out of left field in the next 15 years,” Rhys said.
But Autopolis’s Wormald sees the formula persisting for a while yet, barring catastrophes.
“The global industry is chuntering along. Now it’s living off the growth in China which is slowing down and will go back into a stable state which could last for quite a long time and carry on as it has for the foreseeable future,” he said.
Neil Winton, European columnist for Autos Insider, is based in Sussex, England. E-mail him at email@example.com