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A $50 billion merger, that could create one of the biggest car makers


  • Overview of the global car market
  • Details of the merger between Fiat Chrysler and PSA Group
  • Challenges of the merger and the future outlook

 

The global car market is facing tough times with sales figures showing flat-to-falling trend across regions for current as well as the foreseeable future. In 2018 the global car sales fell by 0.6% to 95.1 million as compared to 2017 where it was reported a sale of 95.7 million units. There are multiple macro and micro level reasons for this fall with prominent ones being the U.S. sanctions on China which led to a huge fall in China’s sales, along with the added pressure on car makers due to harsher CO2 regulations, uncertainty regarding the Brexit issue and challenges in implementing the EV (electric vehicles) technology in different geographies. Amidst the broad tensions and uncertainties faced by the auto industry, comes in one of the biggest merger deals in the history of the automotive industry that could create a new giant in the industry. Fiat Chrysler and PSA Groupe, two very prominent players in the global automotive industry, have announced a merger that would leapfrog the carmakers into becoming the world’s fourth-largest automaker with a market value of approximately $50 billion. This is not the first time the two companies have used merger to bulk up or used merger as strategy to sustain during time of adversity. In 2017 PSA Groupe paid $2.3 billion for GM’s brands Opel and Vauxhall as GM exited its European business segment. GM lost multiple billions (~$22.4 billion) in Europe over 2 decades before PSA bought it out, making it profitable thereafter. While similarly for Fiat, it purchased its rival Chrysler out of bankruptcy about a decade ago.

As part of the deal, shareholders of both the companies will own 50% of the newly formed entity. In addition, Fiat Chryslers’ shareholders would also get a special one-time dividend worth over $6.1 billion. The new company after the merger would have a workforce of about 410,000, along with an annual revenue of $190 billion. Also, the combined auto sales for the two companies which stood at about 8.7 million in 2018, would place the new merged entity at the fourth place in terms of yearly cars sales, not far behind Volkswagen, Toyota, and Renault-Nissan-Mitsubishi Alliance: the three largest car companies in the world, which each sold over 10 million units in 2018. The combination of the two entities will also create an automotive giant with 15 brands under its umbrella.

The merger between the two car makers is expected to bring together their research & development efforts and consolidate their supply chains, which in effect would possibly result in annual savings of $5.6 bn in the newly formed company. Additionally, the merger would help the two companies in adapting and evolving into the changing automotive world where manufacturers are investing heavily in EVs; although both FCA & PSA have initiated some steps in recent years to embrace the shift, they still lag behind their rivals such as Volkswagen. In June 2019, FCA signed two agreements for new e-mobility solutions to support the production and distribution of the plug-in hybrid and full-electric models with Enel X and ENGIE. Following this in July 2019, the company also announced it would invest $788 million to build a production line for the new electric version of the 500 model. As for PSA, it had committed in January 2018 that would be unveiling at least 40 EVs by 2025. The merger would enable the two auto companies to pool in resources in the development of the EVs and catch up with rivals.

The downturn in car sales in the mature economies, the slowing growth in the world’s top new cars sales (in countries such as China) and the evolution of the EVs is not going to be the only obstacle for the two companies with the merger going forward. The barriers for the companies to be successful with the merger goes beyond that. Fiat might have reported profits in its latest financials but the majority of it was from the United States thanks to the demand for Jeep SUVs and Ram pick-ups, but the company continues to struggle in Europe where its only demand is from its lower-margin 500 and Panda city cars. Another big issue for Fiat will be optimizing its industrial base in Italy, where it has 27 manufacturing facilities for both the vehicles and parts. These facilities have been hit by underfunded factories which are operated far below capacity. Also, both the companies have struggled to make a foothold in China, the world’s largest car market for new cars. But if the merger is approved, it will give PSA access to the lucrative US market (where PSA has no presence) while strengthening FCA’s presence in Europe.

The merger between the two car companies is not a done deal yet, as it still has to go through some regulatory hurdles with the French government (which owns about ~13% stake in PSA Groupe) before finalizing, and these similar hurdles have dashed similar mergers in the past. Like in the case of the $35 billion merger between FCA and Renault in 2019 itself which fell-through after the French government, which owns 15% of Renault, got in the way causing delays which FCA deemed were unacceptable. However, given that FCA has already experienced such hurdles with the French regulators, the companies may be able to better navigate this time around and take steps which will more likely increase the chance for the merger to go through successfully.

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