Howes: FCA-Renault merger is deja vu all over again
Twenty-one years after Chrysler Corp. succumbed to the misnamed "merger of equals" with Germany's Daimler-Benz AG, its successor is poised to do it again.
Fiat Chrysler Automobiles NV's proposed 50-50 merger with Renault SA of France, confirmed Monday, deliberately avoids the risible one-big-happy-family merger label later exposed as the big lie that Daimler peddled to get the transatlantic deal done. But the would-be combination raises many of the same questions that bedeviled the German-American fusion a generation ago.
Who would become CEO and CFO, arguably the beating heart of any global automaker? Where would the combined entity, to be incorporated in the Netherlands, be headquartered? Who would chair the board of directors, staff critical roles in the management team? And just exactly how would the French government, holder of a 15% stake in Renault, wield its power in the new company?
Expect answers to unspool over the coming year. FCA CEO Mike Manley has signaled to employees that it would take roughly 12 months to complete a combination creating the world's No. 3 automaker behind Volkswagen AG and Toyota Motor Corp. The first clue appears in the statement issued by FCA:
"The benefits of the proposed transaction are not predicated on plant closures, but would be achieved through more capital-efficient investment in common global vehicle platforms, architectures, powertrains and technologies. FCA has a history of successfully combining" automakers "with disparate cultures to create strong leadership teams and organizations dedicated to a single purpose."
Translation: FCA, its controlling shareholders rooted in Italy, are keenly aware that preserving employment (even in plants operating substantially under capacity in Europe) is a political imperative to the French government specifically and governments across Europe in general. Failure to account for politics and make such an explicit commitment otherwise would hobble any proposed transaction.
Do not underestimate the political and strategic dimensions of a combination that, based on 2018 financial results, would produce an industry behemoth generating $190 billion in revenue, $11.2 billion in operating profit and nearly $9 billion in net profit. It would boast a wide array of brands — from Renault's budget Dacia and Lada brands and its mainstream Renault, to Maserati, Alfa Romeo, Ram and Jeep, the world's hottest SUV brand — and it would offer complementary footprints in most major markets.
The exception is China, a deficit the proposed tie-up proposes to address "with increased resources necessary to grow its footprint" in the Asia-Pacific, generally the fastest growing market in the world. China and its regulators, determined to improve emissions and write a new chapter for the global auto industry, also are major drivers behind the push into electrification and self-driving cars.
A combined FCA-Renault effectively would pair Renault's strength in electric cars with FCA's partnerships in self-driving vehicles. Its partners include BMW AG, Aptiv PLC and Google parent Alphabet Inc.'s Waymo LLC autonomous-vehicle unit, the widely acknowledged leader in developing self-driving technology.
"In Groupe Renault we found a like-minded partner who sees the future as we do," Manley wrote in a letter to employees. "What started as operational conversations around greater collaboration evolved into discussions about a merger, as we recognized the enormous potential benefits for both companies that would result from bringing these businesses together.
"We’ve worked well to get this far, and this would truly be a merger of like-minded businesses, on an equal footing to create a world-leading company," he added. "While there is no certainty of a deal, we aim to move as quickly as possible to secure a final agreement with Groupe Renault."
They arguably should, because the pressure to play profitably in major markets around the world — and compete in the race for competitive advantage in the Auto 2.0 spaces of mobility, autonomy and electrification — is unrelenting. And the price to play is growing, demanding new investment in next-generation technology and less spending on redundant hardware like internal-combustion engines, vehicle architectures and other components that customers do not see.
FCA's proposed merger is a bid for much greater scale to manage the greatest technological change the auto industry has seen since Henry Ford's moving assembly line made mass production possible and vehicles accessible to more average folks. The biggest question: will it actually happen, and if so, how will it account for Renault's alliance partners Nissan Motor Co. and Mitsubishi Motors Corp.?
The merger proposes a combination of FCA and Renault — not Nissan or Mitsubishi, though the "additional synergies stemming from the merger" are "expected to accrue" to both Japanese automakers as members of the alliance. Additionally, a formalized FCA tie-up with Nissan could be especially problematic in the United States, where FCA brands compete directly with Nissan and where FCA operates unionized plants and Nissan operates emphatically non-union ones.
Still, there should be no question who is the philosophical parent of the proposed merger. It's Sergio Marchionne, the legendary FCA CEO who died unexpectedly last July, just days after Manley was tapped to succeed him. His "Confessions of a Capital Junkie," presented in 2015 to analysts, argued that the global auto industry incinerated capital at an alarming rate — mostly by producing redundant technologies.
"Capital consumption rate by OEMs is unacceptable — it is duplicative, does not deliver real value to consumers and is pure economic waste," Marchionne wrote in his presentation on April 29, 2015. "Historical returns have been broadly below cost of capital, even after the restructuring of the U.S. auto industry and NAFTA volumes at peak. Consolidation carries executional risks BUT benefits are too large to ignore."
That appears to be the conclusion reached by Manley and John Elkann, chairman of FCA's board and the automaker's controlling shareholder, Exor SpA. In talks with Renault, rival Groupe PSA SA and others, they have applied Marchionne's framework and rationale when assessing would-be combinations.
In Renault, Manley says they've found what they're looking for. Good for them. But given the past 20-some years — the last 10 under Italian control — experienced Chrysler hands have reason to be skeptical. They've seen this movie before.
Daniel Howes’ column runs Tuesdays, Thursdays and Fridays. Follow him on Twitter @DanielHowes_TDN, listen to his Saturday podcasts, or catch him at 3 p.m. and 10 p.m. Thursdays on Michigan Radio’s “Stateside,” 91.7 FM