Marchionne on consolidation: 'Something needs to give'

Michael Wayland
The Detroit News

Fiat Chrysler Automobiles NV CEO Sergio Marchionne gave an impassioned defense Wednesday of his belief that the auto industry must consolidate to achieve long-term viability.

The maestro behind the merger to create Fiat Chrysler said increased consolidation and collaboration would save billions of dollars annually by shedding unnecessary duplications — producing the best results for the companies, investors and consumers.

"These were not hallucinations of somebody looking to grandstand in the industry," he said in a three-hour conference call with global industry analysts. "We have spent a lot of time trying to understand what makes this machine tick. And the machine can tick a lot better if certain things happened."

Executives with both Ford Motor Co. and General Motors Co. have dismissed the idea of a merger with Fiat Chrysler.

Marchionne said that if no other auto company is interested in a tieup, he wouldn't count out a partnership with a technology company such as Google.

"I've always been intrigued by the notion of having technology disruptors show up in the marketplace and change the paradigm," he said. "If they show up and they are truly successful, with their cash piles and know-how, they could fundamentally hurt this industry."

Major automotive industry mergers and joint ventures don't always result in long-term successes. Many fall apart before producing significant results. Marchionne, while outlining a number of unnamed industry tie-ups and mergers, said this is not the case with Fiat Chrysler.

"The reality of all this is the choice to do this or not to do this is a matter of leadership style and capability," he said. "The reason why others have failed is because those two elements were not available."

He said executives have "matured" and that should "not be an issue going forward."

Combinations of Fiat Chrysler with another large automaker would produce savings of 2.5 billion euros ($2.8 billion) to 4.5 billion euros ($5 billion) a year, according to the presentation.

"It's fundamentally immoral to allow for that waste to continue unchecked," Marchionne said. "We need to do something.

"Something needs to give. It cannot continue like this."

He stressed that 70 percent of the benefits are through capital investment costs related to technology and product development, and would not necessarily reduce plant employment or dealers. They would just eliminate "duplicate investments," which he said could be better spent guaranteeing a "competitive advantage" that a company needs to "stay in this business long-term."

'Pitch the problem'

Marchionne said top automakers spent more than 100 billion euros ($111 billion) for research and development of new cars and trucks in 2014.

"The capital consumption function of this industry is unsustainable," Marchionne said. "It really does not add any value to society or consumers."

His 25-page presentation released Wednesday ahead of the company's first-quarter earnings call was called "Confessions of a Capital Junkie: An insider perspective on the cure for the industry's value-destroying addiction to capital." Marchionne said the goal of it was to "pitch the problem."

Some of the investors and analysts listening to the conference call from Brazil commended Marchionne for the presentation. Others questioned the point of it, when those who have power to consolidate already know the purported advantages and haven't taken action.

"Does this road map have any airplay at all with the boardroom and management teams on their own or is it too soon to tell?" questioned Morgan Stanley analyst Adam Jonas. Marchionne said it might be too soon to tell, and the idea was to "provide a factual basis" for some of the comments about the need to consolidate.

Auto analyst Max Warburton of Bernstein Research noted that while most financial analysts probably agree with Marchionne, they're not the ones to make consolidation happen.

"The capital market isn't going to be able to do anything to influence this," Warburton said.

"I'm still scratching my head as to who this presentation is aimed at. There's probably five or 10 men who can make this stuff happen, you probably have them all on speed-dial."

Marchionne said it is the responsibility of industry analysts, who analyze the automakers for investors and executives, to direct the flow of capital in the proper way. He said he wants the capital market to engage and help propel the industry's change.

"Every time we wait for a better time, there will be 2 billion euros a week that will be gone out the door," said Marchionne, who has often said Wall Street undervalues the automotive industry.

Mainstream automakers, according to the presentation posted online in conjunction with the call, had a 7.8 percent return on investment cost in 2014. That compares to other sectors such as telecommunications at 11 percent; aerospace and defense at 16 percent; and consumer and retail at 22 percent.

Fiat Chrysler on Wednesday reported a profit of 92 million euros ($99 million based on March 31 exchange rate) for the first quarter on increased revenue of 19 percent to 26.4 billion euros ($28.4 billion).

FCA to increase margins

The company, during the call with auto industry experts, said it plans to increase its profit margin in North America to 5.5 to 6 percent by year's end, up from 4 percent in 2014 and at least a 0.5 percentage point increase from the first quarter of this year.

Fiat Chrysler Chief Financial Officer Richard Palmer said the automaker expects to achieve a 7 percent margin by the fourth quarter of 2015 — putting it more in line with Detroit crosstown rivals GM and Ford, which he said offered buyers better trim options, lower dealer discounts and better residual values.

GM reported a margin of 8.8 percent for the first quarter of 2015, with plans to achieve 10 percent by 2016. Ford reported a 6.7 percent margin for the first quarter.

Palmer said opportunities to increase FCA's profit margin include improvements in the pickup segment, better balanced fleet operations — and reduced overall incentive spending, including dealer discounts.

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