The merger between PSA and FCA, or Fiat, is not a new story. Fiat almost acquired Citroën from Michelin in the 1970s, then in 2008, PSA et Fiat talked about becoming a $50bn giant before the Italian got a deal with Chrysler. The new development is the achievement of over 20 years of frequent talks and family issues. This time, Peugeot and Agnelli families found common grounds and moved on. The complete terms remain to be known, especially since there has never been anything like a merger of equals. If I refer to the financial markets on the day following the announcement (FCA up, PSA down) the Italian American group seems to be considered the strongest of the two. However, history taught us that only time will tell who becomes the most influential and take over the control of any new organization in such situation.
They can’t bet it all on an industrial strategy
A leopard can’t change its spots. As an automotive analyst, a merger without a strong industrial and marketing strategy seems difficult to understand at first glance.
On a market perspective, the new group would be focusing on three major regions covering about half of the global market. PSA is well established and profitable in Europe, where Fiat is not as strong as it used to be. FCA holds a strong position in North America and remains quite dominant in Latin America. But the two carmakers are both weak in China and Southeast Asia, two major volume and growth drivers.
FCA’s product line is about passion and strong brand identities (Ram trucks, Jeep crossovers and SUVs, Dodge Scat Packs and Hellcats producing up to 797hp). PSA benefits from an attractive product portfolio yet more rational with a more clinical approach of the market. PSA’s CMP and EMP2 platforms could help FCA for its next generations subcompact, compact and midsize models. In the meantime, PSA could use FCA’s 2.0L four-cylinder gasoline, the typical powerplant necessary to succeed outside Europe. The brands of both carmakers are complementary, and Carlos Tavares explained to the French Media that none would be dropped in the merger process. But one can think there are too many labels to survive in the midterm. The merger could either speed up the termination of some badges or limit them to niche models like Chrysler and the minivans (Pacifica and soon Voyager), which is not a bad strategy at all.
Last but not least, the future group could suffer from emission standards and possible fines depending on the evolution of the regulations both in Europe and North America. Beyond a few hybrid models FCA resorted to buy CO2 credits from Tesla, and PSA is preparing to launch several electrified models, also feeding them to mobility solutions, in order to meet fleet average standards. Both groups are profitable as they terminated all unprofitable models and they limit R&D investments to the minimum. Both based innovations on partnerships such as FCA with Waymo for ADAS and autonomous driving or PSA with Nidec for electric motors. Some may see them as laggard in terms of electric vehicles and other features, but I would be careful with that kind of narrative as EV demand remains weak while model offering keep increasing to help ramping up the market.
Of course, synergies exist but their potential is not the most obvious (executives are talking about a $4.1bn annually saved withoout closing any plant). As consolidations continue, the decision to merge can be explained by the necessity to find a partner and grow before one becomes a prey for another giant. A situation any of the remaining automotive family still in business is willing to avoid.
Russian dolls
As this merger is not the most obvious on market perspectives, another reasonable explanation must be found. The right question is: what do they see that we don’t? My advice would be simple: take a step back and consider the path is now set by stock markets. Over the past decade, new mobility technologies have overwhelmed financial markets and received more than $40 billion in investment. Overenthusiastic storylines highlighted millennial’s lack of interest for the automobile, leading cars into an inexorable sales decline that would kill carmakers on the way. Lately, economic and demographic considerations came back in the discussions. Younger generations seem to postpone the purchase of vehicles more than anything else. New technologies are making their way with numerous financial challenges and carmakers are closing the gap now looking for their share of financial markets investments.
Then, FCA and PSA merger strategy becomes obvious. Growing by size is the most practical and efficient strategy to attract stock market investors. Once PSA’s turnaround started to show success, the group took over Opel before the positive restructuring started to ease. PSA’s strategy is based on this consecutive sequence of M&A and restructuring on and on. Carlos Tavares has based his strategy on 4 major principles:
- Rationalizing product lines, focusing solely on the profitable products and segments
- Shifting financial calendars to protect the cash flow and
- Transferring one third of engineers from operational expenses to engineering firms
- Minimizing R&D and rely on joint ventures and partnerships to lead innovation
This is a short-term to mid-term strategy, but it is both relevant and efficient to build a new giant in a limited amount of time. So far, this ratio-based management strategy receives a positive response from financial analysts. It allows the creation of larger groups, at least one that seduced both Peugeot and Agnelli families.
A growth strategy to become more attractive to investors
In October 2019, Frank Witter, Chief Financial Officer of Volkswagen, announced the goal of achieving a market capitalization of $220 billion (double its current capitalization). As illustrated by the late Sergio Marchionne in his famous exposé “Confessions of a capital junkie” the automotive industry can’t really reduce its capital expenditures without jeopardizing its future. If we put a complex concept in simple words, keeping a steady level of CapEx while growing the market capitalization is a very efficient way to provide nicer books to investors. PSA seems to follow such rational growth strategy and FCA agreed to move along with that growth model. A merger between PSA and GM would have probably created larger synergies but GM seems to follow a unique path focusing on organic growth. Honda is another large carmaker walking alone, although it has ties with GM in Cruise. Toyota could be following the same path as the carmaker is strengthening ties with Subaru, Suzuki and Mazda. Renault-Nissan-Mitsubishi Alliance is trying to find new paths after all the moves within the organization. Ford and Volkswagen continue their negotiations as confirmed by Jim Farley at the Car of the Future conference.
Although choices made are not always the most obvious, the automotive industry is consolidating before our eyes.