Fiat Chrysler: Booming Sales Mask Lack Of EV Options

| About: Fiat Chrysler (FCAU)

Summary

Fiat Chrysler has limited options in EVs going forward.

Booming sales of conventional vehicles in North America and Europe, but Europeans will turn increasingly to EVs.

FCAA has limited and only long-term hybrid program which may not be enough to catch the new disruptive technology.

FCAU's debt position may make cooperation with other companies on EV their best option as new joint venture rumors surface.

Under the charismatic leadership of CEO Sergio Marchionne, Fiat Chrysler (NYSE:FCAU) has been enjoying remarkable success in both North America and Europe. As I detailed in an article in March, sales growth in both continents has been nothing less than stunning, and further figures released since then reinforce this trend.

However one worrying long-term issue is the seeming lack of commitment to EV's and a facing up to the new disruptive technology. Recent Government announcements illustrate how strong the drive towards EV's is becoming in Europe. One has to ask how well-prepared FCA is for this "brave new world".

The company did have the recent much-heralded announcement about Google (NASDAQ:GOOGL) and autonomous vehicles, but this looks quite limited. The internal combustion engine may last a bit longer in North America, but its days are inevitably numbered there as well. There are real doubts about how well prepared FCA is for the long term.

Europe

FCA's sales continue to boom and its market share increase. Sales in April rose 13.6% with market share rising to 6.8% from 5.9% a year ago. Year-to-date registrations for FCA were up 15.6% which represents the strongest growth of any manufacturer. Much of this has been achieved at the expense of Volkswagen (OTCPK:VLKAY) following the diesel emissions scandal. Their market share has fallen from 24.4% to 23.4%. FCA has seized market share from their German rivals in the small car market in which it is particularly strong. The Fiat "Panda" and the Fiat 500 are the best-selling cars in the so-called "A" segment with 30% of the market. They are gaining further at the expense of the tainted Volkswagen "Golf" and "Polo" models. The new Fiat "Tipo" has started very well with booming early sales.

The diesel emissions scandal is one factor that has led to even stronger calls in Europe for EV incentives. Consumers are questioning how it is that diesel autos are permitted to emit 30% higher levels of nitrous oxide than are gasoline engines. Increased incentives for EV's now seems inevitable and inexorable.

A total of 17.7 million autos were sold in Europe last year. EV sales in 2015 rose 80% to 184,500. This is a small proportion but the trend is clear and is only going to continue rapidly.

The Netherlands, Denmark and Norway have targeted for auto sales to be entirely electric by 2025. As I pointed out in a recent article, it is forecast that the U.K. will have 6 million EV's on the road by 2030 and 23 million by 2050. The German Government has set a target of 1 million EV's on the road by 2020. The French Government is aiming for 2 million EV's on the road by 2020. The Irish Government is targeting 10% of all vehicles (about 250,000) to be EV's by 2020. And so it goes on from country to country.

A recent study paper by the Austrian Government emphasized the estimate by the OECD that outdoor air pollution costs US$1.57 trillion a year in illness and premature deaths amongst OECD member countries. Of this, 50% is caused by road transport. The study paper concluded that Governments throughout Europe would inevitably respond to this.

FCA stands to take a double hit here. As things stand at the moment, these vehicles are not going to be supplied by FCA. At the same time, the total number of gasoline or diesel vehicles sold will fall proportionately.

Figures released for the first 3 months of the year make interesting reading. They showed a 29% increase in sales of EV's and plug-in hybrids. The top three were the Nissan "Volt", the Renault "Zoe" and the Tesla "Model S". Next came the Volkswagen "e-Golf" and the BMW "i3". The Mitsubishi "Outlander" was the clear winner in the plug-in hybrid category. Tesla was the only U.S. connected manufacturer in the top ten, a sign that the Europeans and Japanese are further advanced down the EV route than U.S. manufacturers.

Apart from the rise of EV's, there are other societal changes which will have a negative impact on traditional auto companies such as FCA. There will be less actual car ownership in future, and this trend is already clear. More young people are living in big cities, where cars are less necessary because of public transport options. Self-driving cars are not many years away, and ride-sharing services will increasingly replace actual ownership of vehicles.

The European car market at present is having a boom year for sales. However it's a fairly simple calculation that FCA will in the long run be fighting for a portion of an ever-decreasing pie until it gets EV's into its range.

North America

As in Europe, sales continue to boom and FCA's market share increase. The company enjoyed its best April for 11 years with an increase in sales of 6%. Once again this was based around a boom in sales of SUV's and pick-ups. Jeep enjoyed a 17% increase in sales and Ram was up 12%. The company has been having trouble keeping up with demand in particular for the Jeep "Cherokee" compact SUV and the Ram 1500 pick-up.

Year-to-date FCA sales in the USA are up 8% to 750,734 units. It has a startling 71 consecutive months of sales growth in the USA.

There has been much discussion about FCA's tie-up with Google in the realm of self-driving autos. Actually though this is very limited. It involves 100 self-driving cars (using the Chrysler "Pacifica" minivan) but is not an exclusive deal. Technology developed could possibly be shared by either party with other outside companies. No volume manufacturing is understood to be on the horizon as yet.

It is the first such deal between a traditional auto company and an IT company and may of course lead to greater things. The advantage for FCA may well be that costs can be defrayed with a partner, given the company's quite high but manageable debt load of approximately 6.6 billion euros. It might also be seen as FCA stealing a march on Detroit rivals Ford (NYSE:F) and General Motors (NYSE:GM). GM does of course have the Chevrolet "Bolt" coming on stream. Given their past performance in ignoring or suppressing new car technology, only time will tell how committed are GM. They have announced that the Cadillac ELR plug-in will be discontinued. The only other auto tie-up Google has at present is some testing on the Toyota "Lexus" brand.

On a promising note, FCA did unveil its first plug-in electric model, the Chrysler Pacifica hybrid minivan, at the Detroit Auto Show. its powertrain is likely to be used also in the Maserati "Levante" luxury crossover which was unveiled at the Geneva Motor Show. This hybrid is targeted to reach production in late 2017 or early 2018. Hybrids seem to be the way that FCA want to go, with Marchionne stating last year that he expects most of the company's models to have hybrid versions by 2025. The big question is whether this commitment is sufficient or early enough to allow FCA to catch the wind.

South America & Asia

FCA has a strong base in South America. It is the market leader in Brazil and stands to gain substantially if and when the Brazilian economy finally emerges from its meltdown. In April it announced it was investing US$500 million in its Cordoba plant in Argentina. From there a new model will be launched by 2017. It is planned that 80% of the 100,000 vehicle production will be earmarked for export to other countries in Latin America.

The company has invested heavily in its state-of-the art Pernambuco plant in Brazil. It has a 250,000 vehicle capacity and the Fiat "Toro" pick-up is now being manufactured there.

A recent report by S & P Capital (subscription required) foresees the company having positive EBIT in South America and Asia in 2016. This is posited on the back of new models there and greater cost efficiencies. Part of the official company strategy is for joint ventures in China and India, allied to building its brand equity in those regions. This is especially so for the "Jeep" brand.

The Jeep "Cherokee" is now being manufactured at the company's factory in Changsa in China. The S & P report sees luxury brands such as Maserati and a revamped Alfa Romeo having a strong potential in China. Luxury vehicle sales are expected to be strong in China this year and next.

However, China is pressing ahead with strong EV policies. Sales of EV's were 180,000 in 2015, up 300% on the previous year. Local manufacturer BYD, in which Warren Buffett wisely bought a stake, rolled out 58,000 EV's in 2015. In March this year alone BYD sold 17,500 EV's so at that rate they would sell 210,000 this year. Their earlier target for the year had been 150,000 vehicles. Interestingly Tesla (NASDAQ:TSLA) sold 1,304 vehicles in China in March, a sign that it may finally be gaining traction in the Chinese market

As with Europe, fast-rising EV sales are sales on which FCA as currently constituted has nothing to offer.

However,there is no doubting the success of Marchionne's brand strategy for conventional autos. The world-wide figures for Jeep sales are instructive. In 2009 the company sold 340,000 vehicles. In 2018 they target sales of 2 million and this looks very achievable on current growth rates.

Conclusion

Disruptive technology disrupts and that is just what Tesla and others are achieving right now. For FCA the answer might be an alliance with a company more advanced down the road of EV's. Marchionne is well-known for his advocacy of industry tie-ups. This is particularly so as the advent of EV's is ramping up R & D costs even more than usual for auto companies.

Marchionne recently stated that the possible merger candidates for FCA were Toyota (NYSE:TM), Volkswagen and Ford. Most observers consider any of these mergers to be quite unlikely. Reports have been surfacing recently that FCA's joint venture partner in China, Guangzhou Automobile Group Co Ltd, might be looking to take a stake in FCA, perhaps even a majority stake. This is a state-controlled operation. It manufactures over 1 million vehicles annually and of course has access to huge financing. However, such a move would make a radical change in FCA corporate control and culture.

Short and medium term the picture for FCA is bright. The recent report by S&P Capital forecast positive EBIT in all the main regions. However the limited plans on the Chrysler Pacifica and hybrids in general, and its tie-up with Google, seem to be symptomatic of dipping one's toes cautiously in the water.

FCA's position in conventional autos looks very strong for the next couple of years. The share price should continue to reflect this accordingly up to 2018. The forward P/E is favourable at just 3.83.The company pays a dividend of 1.28% which looks likely to increase.

Marchionne seems to be a believer in "old autos" versus the new dynamic and has been very successful in this with FCA. He is due to step down as CEO in 2018 and will I think continue to drive the company forward until then. Whether this strength he builds up will be enough for FCA in the longer term is another question.

Disclosure: I am/we are long FCAU.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.