Peugeot-Citroen and Fiat-Chrysler agree to a merger
French carmaker PSA Groupe and troubled US-Italian FCA has made a strategic agreement to join forces 50:50, explains Iain Robertson, which will make the new combine the world’s 4th largest in volume terms but 3rd largest in revenue, but is it the right move?
In some quarters, the concept of ‘bigger is better’ is a valid reason for mutual back-patting. At this moment in the history of the motor industry, carmaker mergers can be perceived rightly as a means to warrant survival in increasingly tough trading conditions. The fact that the entire industry is undertaking major changes, some of which are being enforced by environmental pressures, suggests that strength might come from prescient collaboration. While there is much logic that can be applied to motor manufacturer mergers, the fall-out has been substantial over the years.
Around three decades ago, when Ford Motor Company believed that it was on top of the world, the US ‘giant’ went on an acquisition trek. It snaffled-up several members of the failed Austin-Rover Group, including Land-Rover and Jaguar Cars, to bolster its existing ownership of Mazda, Volvo and also Aston Martin. Mercedes-Benz had also embarked on the trail, first with smart, then in a partnership with the troublesome Chrysler-Jeep Corporation and also Mitsubishi Motors.
Toyota, the world’s largest car manufacturer, had already grappled with Daihatsu. However, the other US ‘giant’ that already owned Vauxhall-Opel, General Motors (GM), having acquired Isuzu, also bought into Saab, Fiat, Subaru and even Suzuki. They all seemed keen to follow the example set by Volkswagen, which already owned Audi, Seat and Skoda and was about to acquire the brand assets of Bentley, Lamborghini and Bugatti. Even BMW, albeit a little later, reinforced its brand activities with Rolls-Royce and Mini.
Within little more than a decade, very little remained of those intriguing deals. Ford is a shadow of its former greatness…GM has already been through the ‘junk bond’ stage and consolidated its North American model lines…Fiat Group (which consisted of Alfa Romeo, Innocenti, Iveco, Maserati and Ferrari) was placed in a shaky position. Yet, the VW Group model seemed to hold water, despite innumerable internal issues and the future ‘dieselgate’ problem, from which it appears to have emerged lightly dented but, amazingly, stronger than ever.
In the meantime, even though it serves its domestic market more thoroughly, the fledgling Chinese motor industry has been beavering away in the background. Understandably, practically every western and some oriental brands have established joint-production efforts in the massive Sino melting-pot, both sides keen to grapple with Chinese intentions. It is interesting that most of the Chinese brands remain largely unknown to outsiders, even though several of their models, albeit wearing western-familiar badging, are sold around the world.
China’s stance is a fascinating one. Slowly but surely, the Communist nation’s motor industry has been acquiring other world brands but seemingly allowing them to thrive with minimal apparent input, other than funding. Volvo, Lotus and London Taxis are entirely Chinese owned. However, thanks to one of the longer established relationships between both the French government and PSA, which owns Peugeot, Citroen and DS brands, the Chinese Dongfeng Motor has owned a substantial number of shares in the French carmaker, having rescued it from major losses incurred around five years ago. It still holds around 20% of PSA’s voting stake.
As a result of the rescue programme, PSA was able to acquire Vauxhall-Opel from GM shortly afterwards. Interestingly, both of the notional German and British brands had been enduring financial woes, which Sino-Gallic funding and management restructuring hoped to effect a turnaround. In the meantime, the Italian-American FCA combine was in a downwards spiral. Dependent on your view, this would be perfect for Dongfeng and its longer-term aspirations and PSA commenced talks into a possible joint venture. Ironically, Dongfeng-PSA business in its domestic market is down by over 55%.
It is not without an immense slice of irony that around the time of the failed British Rootes Group (Hillman, Humber, Singer, Sunbeam and Commer brands) being acquired by Peugeot-Citroen, it was under the guise of Chrysler and its ‘Pentastar’ branding. A number of French brands, including Simca, were casualties of the new grouping, which led ultimately to the formation of PSA.
While BMW is now settled comfortably into its own brand, alongside which are the success stories for both Rolls-Royce and Mini, Mercedes-Benz has also reinforced its innate brand strengths alone again, without dilution. Yet, PSA had scarcely a spare ‘centime’ to its name, prior to Dongfeng’s closer involvement, and it has been able to buy-out GM’s former European charges and now challenge mystically for future world domination with FCA on-board. Intriguingly, Dongfeng has been forced into reducing its stake in PSA, with the potential of exports into the highly protective US market, which simply will not tolerate the risk of Chinese stake holdings, for which I cannot blame it.
It is also interesting to note that PSA had knocked previously at the door of the Indian Tata Corporation owned Jaguar-Land-Rover (JLR), which has been enduring untenable losses, intriguingly in the Chinese market. JLR has been working ‘feverishly’ on its own rescue plan but is attempting to put a very brave face on things. It was never a truly viable takeover option, either from a French, or a Chinese perspective.
The new PSA/FCA deal equates to 8.7m unit sales and around Euros170bn revenue (46% of which will come from Europe, with 43% from North America), of which a projected operating margin of 6.6% and Euros11bn are anticipated (based on 2018 results). This is enough to provide significant financial flexibility and ample headroom to facilitate strategic plans and invest in future technologies. Needless to say, shared platforms and engineering synergies will enable major savings to be made. Existing PSA boss, Carlos Tavares will become CEO of the 50:50 venture, with existing FCA boss, John Elkann, assuming the Chairman’s role.
On the face of it, this ‘marriage of convenience’ could be regarded as either one made in heaven, or something more diabolical! Regardless, the subtle march of the Chinese is inherent to it and, to be quite frank, I do not believe that situation has a wise outcome, regardless of what Confucius might say.
