Howes: For FCA scion, merger fever spikes again

Daniel Howes
The Detroit News

Did John Elkann, the throne behind the power of Fiat Chrysler Automobiles NV, just strike a vaguely audible note of desperation?

“If you look at doing something with the ‘Big Guys,’ our internal analysis indicates that you could end up with annual savings close to $10 billion,” the FCA chairman wrote in his letter to shareholders of Exor SpA, the Italian holding company that controls FCA (and a whole lot else). “But you need two to tango and most of our competitors are busy with the great opportunities that technological disruption has to offer.

“Some of FCA’s competitors are convinced that they should ... embrace disruption with new technologies and business models that address the ‘mobility’ market,” he wrote in advance of FCA’s annual meeting Friday in Amsterdam, “which is twice as big as the one just selling new vehicles.”

Exactly, pinpointing the conundrum facing FCA and CEO Sergio Marchionne. Even as the likes of General Motors Co. and Ford Motor Co. invest heavily in their traditional car and truck lines — and show exactly zero interest in any tie-ups — FCA’s cross-town rivals also are busy placing big bets in the mobility space lest Silicon Valley heavies and startups beat them to the punch.

FCA mostly can’t, financially speaking. Its core car and truck business, heavily dependent on the Jeep and Ram brands, is less evenly profitable; its luxury strategy, pinned to Maserati and Alfa Romeo, remains in the slow lane; its global footprint is less strategically placed in higher-growth markets.

And FCA’s overt presence in the emerging three buckets of so-called “mobility” — ride- and car-sharing, connectivity and autonomous cars — is considered far behind GM and Ford. Add Toyota Motor Corp. and Germany’s Big Three, and the gap widens further.

A deal with one of those “Big Guys” would enable Exor to exit a capital-intensive business expected to become even more so in coming years. But seeking such a transaction, even actively campaigning again for one, does not guarantee getting one. Especially not in a post-consolidation era that eyes such deals warily because almost all of them fail to deliver as promised.

If you need evidence that a hierarchy of “Haves and Have Nots” is emerging in the global auto industry, Elkann’s Exor letter stands as Exhibit 1A. Joining it as Exhibit 1B would be ol’ Sergio’s classic “Confessions of a Capital Junkie,” his argument a year ago that consolidation is the only cure to the industry’s addiction to capital incineration and comparatively low returns on invested capital.

Maybe for such a Have Not as FCA. The Haves? Not so much. With its returns on invested capital exceeding the industry average, and its North American cash-generating break-even point way below catastrophic recession levels, a company like GM (or Ford) cannot afford not to play in the mobility space.

Ford estimates “transportation services” to be a $5.4 trillion business opportunity, nearly twice the size of the $2.4 trillion global auto industry churning out traditional cars and trucks. Savvy shareholders would rightly consider management derelict if it stuck to the business it knows and ceded mobility opportunities to techies with lots of cash and a bigger appetite for risk.

Elkann evidently knows this, which explains his readiness to tout the findings of McKinsey & Co.’s “Automotive 2030” report to Exor shareholders. His overarching point: “Even in a high-disruption scenario, shared vehicles will account for only 9 percent of new vehicles sales. So 90 percent of vehicles will still be sold to private owners — just as they are today!”

He continues: “Ultimately even in a high-disruption scenario, new car sales will increase from $2.75 trillion in 2015 to $4 trillion in 2030, which is still a massive industry! Boring old car makers need to figure out how to make this profitable and guard against falling into the 1990(s) trap of ignoring that business while chasing profits in other parts of the value chain.”

True. FCA might want to heed his advice. Look, Elkann arguably could have headed that section of his letter “What, me worry?” No one who thinks deeply about these issues would dispute that the vast number of vehicles sold over the next 15 years is likely to be private buyers who intend to drive their vehicles.

But connected and visual technologies enabling driverless cars inevitably will claim a piece of that business, most likely rewarding the players with higher multiples (and, thus, higher market capitalization) while punishing those on the sidelines.

The whole point driving GM and Ford into the space is to persuade investors that they’re more than “boring old car makers” and should be valued that way. If he could, Elkann would be making the same point to his shareholders.

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Daniel Howes’ column runs Tuesdays, Thursdays and Fridays. Follow him on Twitter @DanielHowes_TDN, or catch him 3 and 10 p.m. Thursdays on Michigan Radio’s “Stateside,” 91.7 FM.