Analysis by Charles Riley, CNN Business
London (CNN Business)Sergio Marchionne, the executive who saved Fiat and then Chrysler, was a big fan of mergers. Now the company he forged needs to find another partner after its plan to join forces with Renault collapsed.
Fiat Chrysler (FCAU) walked away from its proposed merger with Renault on Wednesday, after the French company stalled on making a decision. Renault’s biggest shareholder — the French government — wasn’t ready to sign off on a deal.
Yet the logic behind the merger remains valid, as the French carmaker explained in a statement lamenting the deal’s demise.
“We view the opportunity as timely, having compelling industrial logic and great financial merit, and which would result in a European based global auto powerhouse,” said Renault (RNLSY).
Fiat Chrysler does not have time to mourn what might have been.
Marchionne, who led the Italian American carmaker until his death last year, believed that carmakers needed to get bigger in order to cut costs and stop wasting precious cash.
Combining Fiat Chrysler and Renault would have created the world’s third largest carmaker, relegating General Motors (GM) to fourth spot. On its own, Fiat Chrysler ranks eighth.
Marchionne wrote in a presentation in 2015 — “Confessions of a Capital Junkie” — that auto companies spend far too much money duplicating activity. It would be better, he thought, to join forces.
Former Renault boss Carlos Ghosn understood the need for scale, too. He forged a partnership with Nissan (NSANF), before adding Mitsubishi Motors to create the world’s biggest autos alliance.
The rest of the industry has since fallen in behind the pied pipers of consolidation, jolted into action by the high cost of developing the electric and autonomous vehicles of the future. A slump in the global car market this year has added to the pressure to save money.
Germany’s BMW (BMWYY) and Daimler (DDAIF) have formed a joint venture that will develop ride-sharing and charging services, while BMW has just agreed to work with Jaguar Land Rover on a new generation of electric engines. Ford (F) and Volkswagen (VLKAF) are developing some new vehicles together.
The trend toward cooperation has accelerated in recent months as carmakers come under increased pressure from upstarts such as Tesla (TSLA) and tech companies including Uber (UBER).
Fiat Chrysler said a merger with Renault would have saved more than €5 billion ($5.6 billion) a year — cash it can ill afford to leave on the table. Its first quarter operating profit dropped 29% to €1.1 billion ($1.2 billion), a performance that highlighted its dependence on truck sales in North America.
“Both feel they really need scale to generate profits to put into investment,” David Bailey, a professor at Birmingham Business School, said of Fiat Chrysler and Renault.
Fiat Chrysler is considered a laggard in developing electric vehicles and it will have to come up with a Plan B fast. One option is to pursue a deal with Peugeot, which saw its shares rise on Thursday on speculation it may be the next in line to get a proposal.
Like Renault, however, Peugeot (PUGOY) also counts the French state among its largest shareholders via a sovereign wealth fund. If French politics doomed one deal, they could do so again.
Bailey suggested that Fiat Chrysler may instead find its answer in Asia rather than Europe.
“Fiat may well look to China,” he said, explaining that its Jeep brand is highly profitable and a coveted asset. Alfa Romeo, another brand in the Fiat Chrysler stable, has untapped luxury potential.
China is already the world’s largest car market, and aggressive government efforts to boost the development of electric cars make it a key proving ground for future tech.
Even while he advocated industry consolidation, Marchionne insisted that Fiat Chrysler could survive on its own if needed. Yet the consequences of being wrong on that question could be dire.
“If companies don’t adjust quickly to this industry reorientation, they risk being wiped out,” warned Bailey. “That means much more is ahead in terms of collaboration and consolidation.”