Merger Image Credit: Gulf News

Fiat Chrysler Automobiles is playing up its proposed merger with Renault as a chance to create a European-US carmaker with the financial and industrial brawn to survive a turbulent age.

The new company “would have the scale, expertise and resources to navigate the rapidly changing automotive industry,” Fiat said in a statement. That rapid change includes huge shifts to electric and autonomous cars as well as threats to car ownership posed by the likes of Uber and Lyft. Fiat, furthermore, promised to deliver those benefits without closing a single factory.

But how realistic is that assertion? Here is a closer look at some reasons the merger might succeed — and why it might flop.

Fiat Chrysler has a strong position in the United States with its Jeep and Ram brands but has lacked the money to properly market the SUVs and pickups in promising new markets like the Middle East and Africa, says Michelle Krebs, a senior analyst at AutoTrader.

Jeep has already demonstrated its potential in Europe since Fiat and Chrysler merged in 2014. Sales of Jeeps in the European Union rose 37 per cent last year, to 12,200 vehicles. With help from Renault, Jeep could push into more overseas markets.

“Jeep and Ram have great potential globally, but they haven’t had the means to do it,” Krebs said. “There is strong potential if done right. Jeep is known globally.”

Renault lacks a deep portfolio of SUVs, one of the most profitable, and fastest-growing, segments of the industry, which Jeep could provide. Renault is also all but absent from the high-end of the market, another profit engine, while Fiat Chrysler has Alfa Romeo and Maserati — although neither brand has excelled lately. Maserati sales fell 20 per cent last year, and while Alfa Romeo sales rose about 10 per cent to 120,000 cars, that was only a tiny fraction of the market dominated by BMW, Mercedes-Benz and Audi.

Fiat Chrysler, the fourth-largest carmaker, offers Renault a US beachhead. Renault’s stylish small cars would be a tough sell in the US, where drivers are hungry for SUVs. But there might be a niche for electric models like the Renault ZOE subcompact.

In addition, a merger with Fiat Chrysler would allow Renault shareholders to profit from the region, even if no Renault brand cars were exported to America. In return, the French can supply electric cars that Fiat needs to meet quotas in the EU and avoid regulatory fines. Fiat also desperately needs new models of all kinds in Europe, where it is heavily dependent on the ageing Fiat 500.

Renault’s line-up is getting on in years, too. The two companies could share the cost of designing new models, which can easily cost billions of euros.

Renault and Nissan, partners for two decades who added Mitsubishi in 2016, are already in the same league as Volkswagen and Toyota in global car sales. If Jean-Dominique Senard, the chairman of Renault, can hold together the alliance while also merging with Fiat Chrysler, the combined entity would dominate the planet.

The carmakers could dictate terms to suppliers, carpet the globe with dealerships and outspend everyone else on new technologies. But there is also a less rosy scenario. Which brings us to why the merger might be a bad idea.

Renault’s relations with Nissan have been prickly, to say the least, since November after the Japanese authorities arrested Carlos Ghosn, the long-time chairman of the alliance, on suspicion of financial wrongdoing. He has denied all charges.

Since then, Hiroto Saikawa, Nissan’s chief executive, has agitated for more autonomy from Renault. He reacted warily to the proposed merger with Fiat Chrysler, which he learned about only days before it was announced.

The group issued a brief statement that the carmakers had “an open and transparent discussion” on the merger proposal as well as other matters.

Saikawa said that the merger could ultimately be beneficial but that he needed “to closely examine it from Nissan’s perspective”.

Nissan may be forced to swallow its resentments and cooperate with Fiat Chrysler and Renault. Nissan’s sales and profit are declining, and the company is struggling to overhaul its operations in the United States, its largest market.

The challenges would spiral for Nissan if its partnership with Renault comes undone. Despite the friction, the companies save billions by manufacturing cars in the same factories and using common engines, transmissions and other components. The last thing Nissan needs is to unscramble that relationship while overall auto sales are declining in every major market.

Automotive history is littered with failed alliances. No company knows that better than Chrysler, whose marriage to Daimler from 1998 to 2007 was a legendary failure. General Motors had alliances with Isuzu, Fiat and Daewoo that amounted to little.

Swedish carmaker Saab languished under GM’s ownership and eventually went out of business. Ford once owned Volvo and Jaguar and tried to link them with Lincoln in the “Premier Automotive Group”. It flopped.

But one merger has worked pretty well: Fiat Chrysler. In 2018, Fiat Chrysler’s sales in the US increased 9 per cent, largely because it focused on better-selling SUVs and trucks.

Fiat Chrysler said the merger would save 5 billion euros ($5.6 billion) from buying supplies and parts together and sharing the cost of developing new products and technology. But Fiat Chrysler also said it would take six years to achieve those savings. Analysts are sceptical about such “synergies”, especially since Fiat Chrysler said it wouldn’t close any factories.

In practice, attempts to cut costs often get bogged down in squabbling about whose engine or transmission is better, or whose employees should bear the pain of job losses.

It is an article of faith in the auto industry that manufacturers need to gird themselves for an uncertain future by becoming big. Only through so-called economies of scale can they hope to survive, goes the argument. One of the most fervent evangelists of this was Sergio Marchionne, the Fiat chief executive who engineered the merger with Chrysler.

But often the carmakers that make the most money are not the biggest. They make the most appealing products and can charge the most money. German luxury carmaker BMW earned almost as much as GM last year, about $8 billion, even though GM sold more than three times as many cars.

The arguments in favour of bigness may have less to do with profits than sheer survival.