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Ever since 2015, when Sergio Marchionne proclaimed the need for more car mergers, the global automotive industry has been poised for a series of takeovers that never arrived.
The late Fiat Chrysler chief executive’s demand for more deals has been met with only one major merger: Peugeot owner PSA’s buyout of Opel from General Motors, a transaction initiated by GM’s loss-cutting withdrawal from Europe.
Now there are rumblings of a long-anticipated wave of consolidation, as carmakers eye tie-ups to help spread the vast investment costs of a range of new technologies, from electric cars to self-driving systems.
In Italy, John Elkann, the chairman of Fiat Chrysler Automobiles, is renewing the company’s hunt for partners.
In France, PSA is once again seeking to expand, preferably to branch out beyond Europe, while Renault is planning its own acquisition prowl once it has firmed up its relationship with alliance partner Nissan.
Mike Manley, who took over as FCA chief executive last year after Mr Marchionne’s death, remains a “firm believer” in his former boss’s thesis that carmakers need to combine.
“How you get scale is a challenge that everyone is facing,” he told the Financial Times at the Geneva Motor Show earlier this month. “That’s why you’re seeing so much interest in partnerships and mergers.”
Yet, in the car sector in particular, executives and investment bankers have a habit of drafting imaginative designs that fail to work out when the rubber meets the road.
“The idea that Renault and Nissan could merge and then add FCA too looks wildly ambitious,” wrote automotive analyst Max Warburton at Bernstein. “It ignores national sensitivities, human motivations and the poor history of M&A and scale in the auto industry.”
The search for scale
History is on Mr Warburton’s side: the industry is strewn with wrecked tie-ups even though the logic that underpinned Mr Marchionne’s now-famous presentation remains compelling: carmakers need scale to survive.
The industry is capital intensive, fiercely competitive and deeply cyclical — greater size gives protection against regional sales volatility, and helps to spread investments across a larger number of vehicles.
Yet after eight years of growth, global car sales fell last year and the industry is seeing weakness in some of its largest and most profitable markets: the US, China and Europe.
At the same time, costs are rising, not only in raw materials but also because of the need to invest vast sums into developing electric vehicles to meet new emissions rules.
A year ago, the industry collectively had committed $90bn to developing battery cars. Today the figure has passed $300bn. Volkswagen alone expects to spend $50bn on the transition — on top of the costs of renewing its current line of petrol and diesel vehicles. Daimler, which is a quarter of its size, has pledged €20bn towards electrification.
“The period from now until 2030 is going to be chaos,” PSA chief executive Carlos Tavares said in Geneva this month. “Not all the companies are going to be able to master the new technologies . . . That creates opportunities for deals.”
The core argument of Mr Marchionne’s “Capital Junkie” presentation in 2015 was that carmakers should pool resources into new technology rather than duplicating spending. He noted that the industry spent a lot on research and development but received limited returns in profits or share prices.
In this spirit, Volkswagen has tied up with Ford in a global alliance to work on joint projects, while Toyota is expanding its partnership with Suzuki. That is apart from the large Renault-Nissan-Mitsubishi Alliance.
The culture-clash problem
Deep within the heart of almost every carmaking enterprise is a culture, often decades old and steeped in racing heritage, that proves stubbornly difficult to shift.
Two years ago Ford poured millions into developing its £420,000 GT supercar, reviving memories of its Le Mans victories over Ferrari 50 years earlier. Privately, some executives thought the money should have been spent on electric cars, an area where the company lags behind rivals.
The same top-down culture also influenced the way the company ran a suite of upmarket brands it owned, from Jaguar Land Rover and Volvo to Aston Martin.
All were sold between 2007 and 2010 as Ford sought to stave off bankruptcy; they have since thrived under new ownership.
Aston Martin, sold for $925m in 2007, is currently worth £2.3bn, even though its shares have fallen 40 per cent since last year’s stock market listing, while Volvo’s value has grown from $1.8bn at its 2010 sale to Geely to an estimated $8bn last year.
Daimler and Chrysler, the poster child of failed auto mergers, never worked, in part, because the cultures never matched.
Arrangements that are often held up as successful “deals”, such as Renault and Nissan’s 20-year old alliance, are often shallow, with limited actual integration of core engineering functions.
In reality, Nissan’s engineers, with their focus on quality and durability, often struggled to work with Renault’s design-focused teams, according to former company executives.
The rare successful integrations are almost always driven by chameleon-like leaders who can bridge the cultural gaps between companies — and then narrow them.
Fiat’s takeover of bankrupt Chrysler under Mr Marchionne is a classic example, with the near-death experience of both groups helping them co-operate.
The same can be seen in PSA’s takeover of Opel. Carlos Tavares, the quadrilingual chief executive of PSA, has also pledged to maintain the identities of Opel (as German) and Vauxhall (as British) brands while also pushing the nameplates to work more closely with PSA’s existing businesses of Peugeot and Citroën.
But a strong leader is not always enough to root out cultural traits that run deep in the business.
Cultural clashes between Renault and Nissan were often suppressed by Mr Ghosn’s style of leadership but they began to re-emerge when he stepped down from being Nissan’s chief executive in 2017 and have risen to the surface since his arrest in November. Jean-Dominique Senard, Renault’s new chairman, is now attempting to knit them together again.
When politics intervenes
With some limited exceptions, car companies have deep links to their national identity.
Some groups, such as Renault and PSA, have state shareholders; others, such as the German and Japanese carmakers, enjoy close ties to their respective political establishments. Volkswagen’s supervisory board includes local politicians. This makes any merger deal that involves closing plants or losing jobs politically fraught.
During PSA’s takeover of Opel, governments in France, Germany and the UK all sought employment assurances.
When FCA moved Fiat production out of Italy, it allocated Jeep models to keep the plants open, while General Motors received heavy criticism from President Donald Trump for closing several US plants last year.
Other political concerns make cross-border deals more difficult.
China’s Geely has built an international portfolio of brands, from Volvo in Sweden to Lotus and taxi-maker LEVC in the UK, Proton in Malaysia and a stake in Daimler, as well as a 50 per cent stake in Daimler’s Smart brand. But a bid for FCA, for example, would almost certainly be ruled out by US regulators on national security grounds.
With carmakers needing to spread costs of electric vehicles to meet politically imposed emissions goals, pressure is building on politicians to allow deals through to improve their national champions’ prospects of long-term survival.
“Emissions regulations from governments are playing a big role in the future of the industry,” said Philippe Houchois, an analyst at Jefferies. “Now governments need to let them [car executives] make the changes that they think are needed.”
Families still dominate
Family ownership still dominates the sector, with inherited stakes in the likes of FCA, Ford, Volkswagen, PSA, Toyota and BMW acting as a deterrent to anything less than the friendliest merger approach.
As well as influencing a potentially larger buyer or seller, it also means family companies can, in theory, take a more long-term view.
Trust between the Porsche-Piech family, who control VW, and the Ford family was key to securing the two companies’ partnership that was announced earlier this year, according to people familiar with the deal.
The geographic complementarity, with VW’s strength in China and Ford’s hold on North America, has also caused analysts to wonder whether the two could ever engage in a full merger.
Mr Elkann, the head of the Agnelli family that is FCA’s largest shareholder, has taken a more central role since Mr Marchionne’s death last year.
As generations of automotive families pass on, a different group of owners will shape the way they see their heirlooms, said Arndt Ellinghorst, lead auto analyst at Evercore ISI. “They will not be as interested in brand or legacy. They are looking at these as investments — and they prefer liquid investments,” he said.
There will be sporadic deals, with speculation on a sale of Jaguar Land Rover, more acquisitions from Geely and, possibly one day the dream mega-merger of Volkswagen and FCA. But the grand consolidation of Mr Marchionne’s imagination remains hard to pull off.
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