This Auto Merger May Be an Exception to the Rule

| About: Fiat Chrysler (FCAU)

Interesting Economist article regarding Fiat's (FIATY.PK) CEO Sergio Marchionne and his audacious attempt to take advantage of US automakers' troubles and create a cross-border automotive powerhouse, Fiat-Chrysler-Opel. Why? After turning around Fiat, his main concern is that in the future, he believes, any high volume automaker will need to be selling 5.5m or more vehicles per year. Thus while Fiat is in good shape, going forward it's a question of either growing fast or being eaten.

Mr Marchionne thinks that even if what he is trying to do appears risky, it beats the alternatives. The corporate troubleshooter, who, since 2004, has been responsible for a highly successful turnaround at Fiat, has reached the conclusion that volume carmakers will in future need to sell at least 5.5m vehicles a year to be viable. He reckons that only those firms, such as Volkswagen (OTCPK:VLKAY) and Toyota (NYSE:TM), which can extract sales of around a million a year from each of a handful of expensively-developed platforms (these are a car’s architectural underpinnings, on which a variety of models can be based) can hope to be consistently profitable. With just over 2m sales last year, Fiat is too small to get there on its own. The choice, he believes, is a stark one: Fiat must be either a nimble hunter or wait to be gobbled up by someone else.

Unfortunately, as the article highlights, history is not on Mr. Marchione's side, given that most large cross-border auto mergers have been disastrous. Nevertheless, while surely something to remember, I bet Mr. Marchione is probably well aware of history. Perhaps it really is different this time. In a sense, if ever there was a firesale for automotive manufacturing assets, it is now. And if you believe you need to grow substantially and quickly in order to survive, then M&A is the only way to go. He appears to be getting a good deal on Chrysler at least.

Under a deal reached a fortnight ago with the American Treasury Department, when Chrysler emerges, as expected, from a quick “in-out” bankruptcy process towards the end of June, Fiat will get a 20% stake (with scope to raise it to 49%) and management control of the company, in exchange for providing the American firm with small-car platforms and fuel-efficient powertrains. With Chrysler’s recovery plan effectively underwritten by loans from the taxpayer, Fiat will only have to put up cash of its own if it wants to increase its stake after Chrysler has paid back the government its money—in other words, when the deal is a proven success.

History is against the idea, but the timing for such an endeavor could be exceptional. Combined with bold thinking from Mr. Marchione, hopefully it works out. My only concern is not so much history, since again Mr. Marchione is probably well aware of it, but more so his assumption that rapid growth in scale is needed. Perhaps there are other directions Fiat could take in order to stay competitive. But always loving an underdog, I think this will be interesting to watch.

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Tagged: , Auto Manufacturers - Major, Netherlands
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