The late Sergio Marchionne put it best. In his 2015 Confessions of a Capital Junkie, the boss of Fiat Chrysler Automobiles argued that soaring development costs dictated industry consolidation. The message has struck home. Tie-up chatter is deafening. The latest proposal is for Renault and Nissan to revive merger talks and celebrate consummation with another deal, possibly with FCA. The FT report sent shares in both Renault and FCA up about 3 per cent on Wednesday.
The politics are problematic. Carlos Ghosn’s sojourn in a Tokyo jail was hardly an advertisement for a Franco-Japanese merger. Nissan feared — as the Japanese government apparently did — that a de facto takeover by Renault could bring plant closures. France would object just as strongly to a transaction that destroyed jobs there. Franco-Italian tensions would be an issue if it came to a deal with FCA. A tie-up between PSA and FCA, also mooted, might ruffle fewer feathers.
The cultural fit between Renault and Nissan looks poor. The precedent is the merger of Daimler and Chrysler two decades ago. Its failure is immortalised in the joke: “How do you pronounce DaimlerChrysler? Daimler — the Chrysler is silent”. The Renault-Nissan-Mitsubishi Alliance has its work cut out getting its own house in order. Adding FCA would be an additional challenge. Shares in the group fell last month, after a weak performance in China and persistently low European profitability.
But potential savings from tie-ups are too large to ignore. A merger between Renault and Nissan would unlock value tied up in its cross-shareholdings. Renault’s 43 per cent of Nissan is worth €13bn. But investors discount it, putting a market value of just €17bn on the French group.
Sharing development costs would save large sums. There would also be benefits from cross-selling opportunities and eliminating overheads. Combining FCA with another large carmaker might save €2.5bn-€4.5bn per year, Mr Marchionne reckoned. Taxed and capitalised, that is more than half the €21bn market value of the Italy-based group.
Mergers usually fail. Mr Marchionne’s 2009 combination of Fiat and Chrysler was a rare success. But the car industry — grappling with stagnating sales and huge technology investments — cannot afford to duplicate costs. Its value-destroying addiction to capital is unsustainable. Companies need scale to survive.
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