July 24, 2014 7:07 pm

Fiat checks out Peugeot as marriage partner

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The new Peugeot 308 SW model car is displayd at the French carmaker's booth during the press day of the Geneva Motor Show in Geneva, on March 4, 2014©Getty

The new Peugeot 308 SW model

Fiat-Chrysler chief executive Sergio Marchionne has made something of a name for himself selling ambitious business plans to sceptical investors.

But even he cannot kid himself when it comes to the hard road ahead for his US-Italian car company.

“To delude ourselves that we can do everything by ourselves is nonsense,” Mr Marchionne said recently. “[And] there are some people who are looking for marriage partners.”

One of those may be PSA Peugeot Citroën, the French carmaker, which has held talks over the past year with Mr Marchionne’s Fiat-Chrysler, said four people with knowledge of the discussions.

The talks did not progress, but were aimed at finding a possible way to bring together two struggling, middle-ranking carmakers with ambitions of becoming a strong, global player, said the people briefed on the talks.

Fiat-Chrysler says it is not currently in talks with Peugeot, while the French carmaker denies it has held merger talks with the US-Italian company.

PSA’s deal with Dongfeng Motor earlier this year gave the French carmaker some respite from its problems but did not provide a long-term solution, proponents of a potential Fiat deal told the FT, while Fiat recognises that it needs to increase its business faster than organic growth would feasibly allow.

Mr Marchionne and Carlos Tavares, his counterpart at Peugeot, both need scale, greater efficiency in Europe, and ways to bring down their investment costs per car as they compete with far larger and richer rivals.

In addition, Mr Marchionne’s tired-looking Fiat and Chrysler product portfolios, some of the oldest in the industry, could benefit from ideas from PSA’s development labs, and Mr Tavares could be keen to leverage FCA’s strong presence in North and South America.

"Fiat still needs scale, especially in Europe, and it really needs some help with its product pipeline," one of the people with knowledge of the talks said. "FCA's turnround plan only works if you have more scale than today."

For China’s Dongfeng, which owns a stake in Peugeot, any tie-up with Fiat-Chrysler would further enhance its position as China’s most prominent carmaker in the global market, and chime with Beijing’s ambitions to create a more advanced and mature car industry.

The two companies have history. The Agnelli family, which controls Fiat, is close to the Peugeot dynasty, and Mr Marchionne has always seen PSA as a natural partner for Fiat.

Talks between the two would pit the demands and expectations of two of Europe’s most famous industrial families, who in the past have had concerns over what would happen to their shareholdings.

Peugeot and Fiat-Chrysler have a number of overlapping markets and product segments, which could concern antitrust bodies

But PSA’s deal with Dongfeng has reduced the stake of the Peugeot family, and its power over the carmaker, and some members of the Agnelli family are thought to be more open to a possible deal with any investor if it brightened the business prospects for their business, which has not generated significant returns recently.

Peugeot shareholders also include the French state, which could object to any shift in ownership after struggling so hard to keep the industrial champion under French ownership late last year.

Those briefed on the talks say that any potential deal is most likely to happen after Peugeot has pushed ahead with its restructuring following the Dongfeng deal, and Fiat-Chrysler has completed its own corporate reshaping, including shifting its incorporation outside of Italy and listing in New York.

Mr Marchionne is credited with the rough yardstick coined a few years ago that a global carmaker needs to build and sell 6m cars a year to stay globally competitive. FCA will sell less than 5m this year.

Adding in PSA would bring the total to close to 8m, based on their current sales and growth estimates, within touching distance of the Renault-Nissan alliance, and a couple of million cars behind Volkswagen, Toyota and General Motors.

But aside from the basic numbers, any form of combination of the two groups would raise large integration challenges.

Peugeot and Fiat-Chrysler have a number of overlapping markets and product segments, which could concern antitrust bodies.

Together, Fiat and Peugeot have a 17 per cent market share in Europe, second to Volkswagen with 25 per cent. While any possible deal could lead to synergies, especially in purchasing and distribution, it could force politically sensitive plant closures in Europe, where both companies are wrestling with inefficient and underused factories.

Moreover, while it could also give Fiat a stronger foothold in some Asian markets where PSA is growing, and give Peugeot access to the US market, thanks to Chrysler. Previous deals in the car industry, such as Daimler’s ill-fated merger with Chrysler, prove practice is far harder than theory.

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