FCA-Renault Merger: Could This Start a Wave of Consolidation?

Fiat Chrysler Automobiles (FCA) was busy over the long Memorial Day weekend, proposing an industry-shifting merger with Renault SA.

The deal, which would combine the two companies into a single business, is now being carefully considered by Renault’s board. The proposal is complicated by the fact Renault is currently the central piece of the Renault-Nissan-Mitsubishi Alliance, which is already among the biggest automotive partnerships in the world. Nissan has indicated that it does not oppose an FCA-Renault merger.

This nearly $40 billion merger would create the third largest automaker in the world behind Toyota and Volkswagen. Add in Renault’s relationship with both Nissan and Mitsubishi, and the new mega company would be the world’s largest by far. Could it spark a wave of further consolidation? Are mega mergers as proposed by FCA the way of the future? Or will auto companies pursue loose alliances, where research and development cost can be shared?

Analysts from Cox Automotive share some of their insights on what a merger of this magnitude entails, some of the challenges that it could face, and what it might mean to the global automotive business.

Michelle Krebs, executive analyst, Autotrader, offers her take on the proposed merger and the potential savings that are being pursued through consolidation:

The proposed FCA-Renault merger comes at a time when the global auto industry is coming off peak vehicle sales and is on the verge of transformation. Automakers are reckoning with how EVs, AVs and mobility will change how people acquire transportation. The research and development of these efforts is immensely expensive and there is little indication of when or how the investments will pay dividends. With that reality as a backdrop, mergers, strategic partnerships, and alliances are likely to become the norm in our industry, as automakers look for ways to find efficiencies and share costs.

FCA’s late CEO Sergio Marchionne often talked about the benefits of consolidation, as he believed in the value of consolidation and felt that multiple companies pursuing similar technology development is a waste of a tremendous amount of money.

On one level, the proposed merger makes sense. The companies have different footprints with Renault no longer having a presence in the United States, where FCA makes the bulk of its profits from its Jeep and Ram truck brands.

However, FCA and Renault have to tread very carefully here. While things may look good on paper, including complementary operations and footprints, it often comes down to merging cultures, and that’s a challenging task that is not always successful. Both of these companies have stumbled on that front before.

I’m always skeptical of the potential savings cited by the merging parties because they typically don’t materialize. Additionally, we have to consider the various unions that have a stake in the merger. When we think of cost savings, we usually think of ways to become more efficient, which is often derived from having less plant equipment and fewer workers. We are already seeing unions balk at the idea of fewer workers. Every union involved wants to protect all of their jobs, which is understandable but not feasible. The goal is to create efficiencies that lead to not just a larger company, but a profitable combined company. It’s inevitable: Changes will have to occur to achieve that.

Karl Brauer, executive publisher for Autotrader and Kelley Blue Book, offers his insights, questioning if this type of merger will be successful as the automotive industry struggles to keep pace with fast-moving autonomous tech development.

As the costs of R&D goes up and the demand to keep pace with breaking technology increases, the rationale behind large scale mergers and far-flung alliances has shifted from compelling to critical. The automotive industry is facing more upheaval in the next 10 years than it faced in the past 100. Every major player is looking for increased financial and competitive security.

Of course, the devil’s in the details, as the last time there was a “merger of equals” involving Chrysler clearly illustrated. An FCA-Renault merger will be even more challenging to manage because it involves the U.S. and multiple European countries. Add in the eroding alliance between Renault, Nissan and Mitsubishi and you’ve got three continents and four nations involved. It’s a powerful combination, in theory, but aiming for a single, aligned automotive entity, with everyone rowing in the same direction, might not be realistic.

Automakers are struggling to keep up with fast-moving autonomous tech development while tech companies like Waymo and Baidu pour massive resources into advancing driverless cars. Yet automakers will always have the upper hand in vehicle (hardware) production. In 2019, merging two global automakers simply creates a larger entity that’s still trying to solve the autonomous tech challenge. That’s why I remain skeptical. On the other hand, merging an automaker with a tech company? Now that’s an alliance with real potential to change the nature of personal transportation.

If you would like to speak with one of the expert analysts from Autotrader, Kelley Blue Book or any member of the Cox Automotive Industry Insights team, please contact us.

Source: Cox Automotive

Cox Automotive