The Fiat Chrysler/Renault Merger Is Almost Certainly Only the First of Many

The automakers are preparing for a shrinking auto market.

General Motors CEO Mary Barra famously rejected "Capital Junkie" Sergio Marchionne's merger advances in 2015, but that didn't stop the Fiat Chrysler CEO's search for a partner even after his death. As Americans enjoyed the leisure of this year's long Memorial Day weekend, Fiat Chrysler chairman John Elkann spoke to business press in Italy about the advantages of a merger with Nissan's dance partner of two decades, Groupe Renault.

Mainstream media are concentrating on the multinational aspects of this automotive Peyton Place—look it up, kids—perhaps because of the contrasts between this industry and nationalist movements striking governments from the United States to the United Kingdom, France, Italy, Hungary, Poland, and elsewhere. Merger talks, to which Renault has agreed early this week, will commence in the Netherlands, where Fiat Chrysler is incorporated for tax advantages. Fiat Chrysler is run by Elkann, the great-great grandson of Fabbrica Italiana Automobili Torino founder Giovanni Agnelli and Canadian-Italian Marchionne's replacement, Englishman Mike Manley, who had spent most of the decade building quintessentially American brand Jeep into a global powerhouse.

The French government has partial interest in Renault, whose CEO is Thierry Bolloré, formerly an executive of Michelin, which sold its controlling interest in Citroën to Peugeot in the 1970s. PSA Citroën Peugeot is run by Carlos Tavares, who was Renault chief operating officer under Carlos Ghosn. Figuring that Ghosn would not step down as Renault CEO any time soon, Tavares left Renault to become Peugeot Citroën CEO in 2013. Late last year, Ghosn was arrested in Japan on charges of financial mismanagement at Nissan, charges he vehemently denies.

Follow all of this, so far?

After Barra's GM rebuff, Marchionne started courting other global automakers, and there were rumors of at least one Chinese company kicking the tires at Fiat Chrysler. "For some time, Fiat Chrysler had entertained a partnership with . . . the maker of Peugeot and Citroen cars," Bloomberg reports. FCA-PSA talks fell apart over fears that such a deal would cause too many French plant closings and layoffs, and that politicians whose support would be necessary for approval would block such an alliance.

At Renault-Nissan, the alliance has begun to teeter. Renault named longtime Michelin chief (there's that influential global tire company again) Jean-Dominique Senard in January as its new chairman, replacing Ghosn. Senard soon began talks with Elkann for a tie-up, according to Bloomberg. Nissan, apparently, has no interest in any of this.

As has been widely reported, negotiations between Fiat Chrysler and Renault are not for an alliance, but for a full-on "merger of equals," which would dilute France's share of the French automaker.

Conversely, the tie-up between Volkswagen Group and Ford Motor Company is an alliance, specifically to share development and platforms for new trucks and commercial vans and the like. It's hard to imagine the Ford family giving up control of the company it has owned in one form or another since 1903, including its 40-percent Class B stock holdings for the past 63 years, to a competing automaker.

But we should expect more mergers and more alliances in just the next few years. GM, Ford, and Fiat Chrysler have relied on pickup trucks and heavily optioned SUVs and crossover since after the Great Recession (and for many years before it), but now they have to sink billions of dollars of profits into electric- and autonomous-vehicle development. Coming off the high of two 17.5-million-unit U.S. sales years in 2016 and 2017, even a slight downward trend is almost considered catastrophic to the business. Attitudes toward car and truck ownership are changing and no one—neither the automakers nor Waymo, Uber, or Lyft—quite understand how it's going to play out.

More and more, analytics and forecasting are leading to the conclusion that no model of car-sharing or autonomous driving will do anything to alleviate the traffic congestion that's choking cities and suburbs. The theory that we'll need fewer automotive brands and models, selling fewer vehicles in the near future seems more resonant.

Smaller automakers will have to combine or probably go out of business. Francophiles can dream of how Renault might follow Peugeot back into the U.S. market, but considering Fiat Chrysler's experience with Fiat in North America, that's highly unlikely.

Ironically, enthusiasts might be in for better times, though, if you follow Automobile founder David E. Davis's postulate that the absolute number of car enthusiasts, and not the percentage of drivers, is the same today (pick any year) as it was 100 years ago. We'll have the same numbers but be a larger percentage of drivers. Maybe more of the cars sold to individuals will be "driver's cars."

Fiat Chrysler, if it enters a merger of equals with Renault, will be the world's third-largest automaker, after number one VW Group and number two Toyota (which threatened to take first place from GM in 2009). It will push GM to fourth-largest worldwide. Automaker size, by global volume, is key in the ability to purchase parts and components at lower prices, and after selling off Opel-Vauxhall to Peugeot Citroën, GM is looking for the sweet spot between supplier cost and avoiding European regulations.

While China's myriad homegrown automakers remain wild cards, it seems obvious that the Chinese central government's ability to stoke demand has its limits. Hyundai, which owns a minority but controlling interest in Kia, is relatively strong when you consider its connections to steel production and shipping, though demand for Hyundai and Kia vehicles has slowed in the U.S. and elsewhere in recent years.

Smaller Japanese automakers may be on the bubble, although Subaru seems fairly safe with its constant growth in the U.S. market, and Mazda at least has its joint-venture assembly plant with Toyota under construction in Alabama. Of the Japanese "Big Three," Honda has its electric-vehicle/hydrogen-fuel-cell development alliance with GM, but Nissan, which is reluctant to strengthen its ties with Renault, let alone a potential Fiat Chrysler/Renault, may have the most questionable future. In the end, whichever direction Fiat Chrysler heads, at least it owns Jeep.

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