The Marchionne Prophecy Is Nearly Upon Us

Back in April 2015, then-CEO of Fiat Chrysler Automobiles (FCA) stated that the future of the automotive industry depended upon the consolidation of OEMs. At the time, the likes of GM dismissed this as an attempt to find a merger partner for FCA.

Nearly 4 years later, after his tragic passing in 2018, what I am calling the “Marchionne Prophecy” (published as “Confessions of a Capital Junkie”) is becoming closer and closer to reality.

Merge In Turn

At the time, GM and their European subsidiary, Opel, were quick to rule out a deal, and even highlighted the desire to strengthen within GM rather than to look outside. Automotive News reported:

“It was a big mistake for Opel to search for scale with PSA and not within GM,” Neumann said, referring to an alliance with French carmaker PSA Peugeot Citroen.

Oh, for the clarity of hindsight.

Opel was sold by GM to PSA 2 years later. Another year later in July 2018, Opel turned a €502m operating profit for the first six months of the year, projecting the first profitable year for Opel in nearly 20 years. The reason for this upturn in fortunes? A 30% cut in fixed costs in part through leveraging PSA scale and part re-use.

Also, key to the success of this merger has been the regional strengths of each brand – Opel/Vauxhall significantly improves the Group’s presence in the UK and Germany – which will be significant in any mergers in the future, in my opinion.

You Need To Want It To Work

Renault-Nissan(-Mitsubishi) had been, up until December 2018, been a shining example of a “cross-shareholdings-enabled co-operation”, one rung down on the ladder of integration in the eyes of Marchionne. The control of the Alliance was 50:50, but the shareholding was 43:15 in favour of Renault, which may have been a source of tension that has contributed to recent events.

Credit: group.renault.com

Despite the current upheaval, the financial health of the members of the alliance has been very healthy. Renault, Nissan, Daimler and most recently Mitsubishi have benefitted from the alliance.

But looking at the cultural differences between French and Japanese manufacturers, and the bias in control of Renault over Nissan, the relationship appears to have boiled over. Therein lies the biggest challenge of co-operation vs merger – the companies remain at arm’s length and hold their own ideals close to their hearts.

Softly, Softly Catchy Monkey

The greatest challenge to mergers is cultural compatibility. Whether it is linked to nationality, heritage, the attitudes of the leader. The automotive industry is also one of high-investment, leading to a protectionist attitude towards their own facilities, history and technology.

On the face of it, mergers are too big a step for major OEMs to take, as no-one wants to be seen as the lesser party.

Enter the Alliance that’s not an alliance, the one-off partnership that might cover 3 or 4 projects.

GM and Honda have gotten together, with Honda taking a stake in GM’s autonomous arm, Cruise Holdings.

Ford and VW have signed up to collaborate on commercial vehicles.

And now, VW is willing to license their EV platform to all who are interested in a bid to make EV technology affordable to the masses.

I think that it will be difficult for any of the larger OEMs, who have already consolidated smaller brands under their umbrella, to merge with another – typically this needs the threat of bankruptcy (FCA, we’re looking at you) to manifest.

But Marchionne’s point on capital consumption ring true for high-investment technologies such as electrification and automation. These technologies remain prohibitively expensive and rely in some part on collaboration with others, at least on standardisation of protocols and required infrastructure.

Does a major joint partnership open the door to a future merger? In some cases, Yes. However, amongst the management of these industrial giants, I feel “merger” is a bad word, seemingly giving away your identity, so I think there will be very few in future.

Will there be more industrial collaborations? Yes. The whole industry is in a state of flux, and manufacturing is the most rigid of fixed costs. Without consolidation in this area, the whole automotive sector will be dragged down, with only the largest in each region likely to survive. Marchionne was optimistic is expecting no impact on employees or distribution, but with that already in progress in many places, it becomes less of an “executional risk”.

What’s Next For Automotive?

So, for the sake of variety, there must be commonality. No matter how much people say that they don’t want it…

Marchionne must be saying “I told you so”…

How far will consolidation in the industry go? Will Evs and autonomous vehicles bring about more mergers and partnerships, or will the opportunity of a new segment bring more competition? Will we see more Chinese influence, foreshadowed by the Geely/Li Shufu stake in Daimler?

What do you think? Have your say in the comments below…

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