Fiat Chrysler chief backs off lobbying of GM execs

Michael Wayland, and Melissa Burden

Fiat Chrysler Automobiles NV CEO Sergio Marchionne has backed off his efforts to convince General Motors Co. executives that a merger is in both companies’ best interests, though he remains committed to the industry’s need to consolidate for its long-term viability.

“To put it bluntly, I was rebuffed once, I didn’t go back and get my nose bloodied a second time,” Marchionne said Tuesday on the sidelines of a bargaining kick-off event with the United Auto Workers in Detroit. “No, I haven’t had any other conversations.”

This spring, Marchionne sent a letter to GM CEO Mary Barra about a potential merger, which Barra said in June was vetted by management and the board and ultimately turned down to focus on GM’s own improvement plan.

GM is the third-largest automaker globally and has lots of scale, while FCA is the seventh-largest automaker. It lags other automakers in alternative powertrain development such as electrified and hybrid vehicles that are needed to meet upcoming strict federal fuel economy regulations. The company also is behind others in its sales efforts in China, the world’s largest market.

FCA spent about $3 billion last year on research and development compared to $7.4 billion spent by GM.

For months, the 63-year-old Marchionne has been touting the need for the industry to consolidate to save billions on research and development of new vehicles and powertrain technologies. Most infamously, he spent a majority of a three-hour first-quarter earnings call discussing his consolidation manifesto, “Confessions of a Capital Junkie.”

FCA chairman John Elkann told The Wall Street Journal in an interview earlier this month that he wasn’t giving up on forging a partnership with the Detroit automaker.

Mark Reuss, GM’s head of global product development, purchasing and supply chain, said GM remains uninterested in a merger with FCA now, though it does partner with other companies where it makes sense such as with Ford Motor Co. on transmissions.

“But I think it’s a huge compliment that they want to partner with us and particularly in electrification. I think they went on the record today and said they want to get at our electrification,” Reuss told The Detroit News on June 24. “Well, guess what? We’ve invested a lot and you’re seeing it here. And technologically, we’ve got our guns loaded on this and we spend a lot of time and money doing that looking at the future. And I take it as a compliment they want to partner with us to do that. But we won’t do that.”

Reuss said GM would not at this time sell electrification technology to a company such as Fiat Chrysler. He said GM has not been presented a request like that. He said it’s possible that once GM creates a new set of technology that it might be willing to sell FCA or another company something.

Billions in savings

Combinations of FCA with another large automaker like GM could produce savings of 2.5 billion euros ($2.8 billion) to 4.5 billion euros ($5 billion) a year. Bernstein Research analyst Max Warburton in a recent note to investors argues it could be more in the range of $10 billion or more with GM.

“This number could be expanded vastly with promises of North American production network sharing and distribution savings, European integration (Fiat-Opel) and LatAm overlap,” he wrote in a recent note to investors.

On Tuesday, Marchionne reiterated that a full merger, not collaboration, is the best way to achieve the best results.

Warburton argues there are various moves that Marchionne could make to ramp up the pressure. Marchionne reportedly reached out to activist investors to push GM into a merger (Barra in late June would not say if GM has heard from any of its large investors or hedge funds on the merger issue.) He could buy a small stake in the Detroit automaker, demanding a proxy vote on entering merger talks. He even could push for a hostile takeover.

Warburton says Fiat Chrysler, which has massive debt and little to no cash to offer, could make an all-equity offer to GM holders, offering a premium and promising a dramatic improvement in future profitability. Not to mention, himself.

“Were Marchionne to make an offer for GM, he can’t offer anything immediate and valuable like cash,” according to Warburton. “But he can offer big promises — and credibility as someone who has made a big automotive deal work.”

Speculation by analysts for other merger partners for FCA have included German automaker, Volkswagen AG, and France-based, PSA Peugeot Citroën.

Employee morale

As Marchionne seeks a tie-up to push his auto company into the top-five echelon, he believes is necessary for its long-term survival, many of the employees in Auburn Hills and throughout the Midwest are saying “not again.” The automaker has had a series of owners, including the U.S. government, in the past decade.

But Marchionne and other executives deny merger talks have had any impact on business operations and said employees should not be concerned.

“Nothing is going to happen with this company which is not good for our people,” Marchionne said Tuesday. He reiterated that his plan would not impact distribution, brands or the ranks of blue-collar workers. He has not addressed the impact on white-collar, or salaried, employees.

Jeep CEO Mike Manley told reporters at Fiat Chrysler’s Chelsea Proving Grounds last month that Jeep is not pushing back any products because of merger talks. He said he has not been distracted by talks of a potential merger or consolidation.

“If you look the entire portfolio of FCA and really the growth of Jeep brand since 2009, I think anybody would say it’s an incredibly important part of the portfolio,” he said. “The brand is so unique that regardless of what may or may not happen in the future, it’s a brand that will live and survive.”

His comments echo those of Fiat Chrysler Head of Group Purchasing Scott Garberding, who started with Chrysler in 1993 and is now based in Italy.

“I think there’s history behind this, our leadership, our board, our owners have been extremely responsible in dealing with people in the company over the years, and I think people would expect that that wouldn’t change,” he said recently in Turin. “People know if things get bad they can lose their jobs. If we have to take steps to avoid things getting bad, then that's the right thing to do.”

The United Auto Workers union also has little concern about FCA mergers or industry consolidation. “Sergio (Marchionne) and I often talk,” UAW President Dennis Williams said Tuesday. “I’m not concerned about it, nor do I believe that it will be any part of this bargaining.”

Marchionne said whatever happens in terms of consolidation “would never, ever be done without the consent and support of the UAW.”

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