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Sergio Marchionne's Merger Idea Remains a Long Shot

Motor City Blogman

The automotive world has changed in the three months since The New York Times first revealed that Sergio Marchionne had asked Mary Barra to meet for a date to discuss a merger. Marchionne raised the issue again this week, telling Automotive News that though a combined Fiat Chrysler-General Motors could generate $25 billion to $30 billion in cash in a 17-million unit U.S. sales year, Barra and company have not returned his calls.

Fiat Chrysler CEO Marchionne insists that if his company were to consummate some sort of marriage with CEO Barra's GM, it would not amount to a hostile takeover. What he didn't say is that such a merger/takeover would potentially repeat Fiat's 2009 takeover of Chrysler, which resulted in Chrysler contributing the bulk of profits that have bailed out Fiat while placing the new company in the position of having to cut brands the way GM did during the last decade.

The difference between late summer and late spring is that China has lost its status as the auto industry's eternal panacea. China's Association of Automobile Manufacturers this year downgraded its predicted growth for the auto industry from 7 percent to 3 percent, though analysts looking at that market from the outside in have long been dubious of such official economic statistics, anyway.

What we know for sure is that even with a population of 1.4 billion people, China's state-run capitalism can't produce unlimited numbers of millionaires who will run out to buy every new luxury brand that comes along. In the short term, this will hurt newcomers such as Lincoln, which is trying to duplicate Buick's success there 25 years too late. It will hurt Jeep, which got into China early but withdrew and is now trying to get back in, despite all sorts of homegrown competitors. Meanwhile, Volvo is going to be OK because it is owned by Geely.

We can't count on China as we did in the past to cover for the global industry when North America or Western Europe is having problems. It probably won't compensate for whatever cultural and economic conditions serve up next for the business, whether it's reduced automobile access to congested urban areas, car-sharing replacing car-buying, less interest in owning a car that drives itself, or all of these factors.

Perhaps Marchionne buys Merrill Lynch's annual "Car Wars" survey from June, which predicts Americans will purchase 20 million new vehicles in 2018 and thus break the sales record from calendar year 2000 by more than 2 million units.

Marchionne told AN, "I've obviously made some arbitrary assumption about which architectures survive, which engines survive" in an FCA-GM merger, "and the only deal that offers them [GM] the same benefits as we potentially get … is us."

So there's no reason for FCA to look at Mazda, Mitsubishi, or Suzuki as potential partners. The path to cut capital expenditures is to build as many compact and midsize front-wheel-drive Chevrolets, Dodges, Fiats, Chryslers, Jeeps, and Buicks as possible off the same platform.

You've heard this before, but to outsiders, the one reason to buy or merge with Fiat Chrysler is to get your hands on Jeep. Beside its status as a global brand, Jeep is perhaps uniquely positioned as a nonpremium brand that makes premium profit margins, a position no doubt as enviable to Mercedes-Benz, BMW, and Audi as they add downmarket "entry-level luxury" models as to Hyundai, Ford, and Chevrolet as they try to sell premium models at luxury car prices.

If Chinese officials tighten their market when economic growth slows, Occidental automakers will be back where they were in 2008 -- with too much capacity. Imagine a FiatGMChrysler in this dystopian automotive world. Will there be room for Fiat, which now is little more than the regional brand that Lancia already has become? What about Dodge and Chrysler if you already have Chevrolet and the Chinese-buoyed Buick? Would you sell Ram or GMC or both to Volkswagen or Toyota or Nissan? Will the market forces rear their ugly heads before or after Alfa Romeo has a sustainable product lineup in place?

Marchionne might have a computer tablet full of charts and graphs proving the cost savings in buying one set of components and parts for GM, Fiat, and Chrysler, but what this really proves is that we still have too many brands and dealers and too much capacity.