Several people have asked me what I think about the merger of Fiat Chrylser Automobile (FCAU) and Groupe Renault (RNO-FR; RNSLY OTC). Full disclosure, I own shares in FCAU.
I will admit to being a bit surprised at first, not at the merger, but at the partner, FCA chose. I had thought that they would instead look to merge with PSA (Peugeot Citroen) becuase, in my view, PSA has stronger engineering and leadership. That said, I think there is quite a bit of industrial logic, although Renault, with its special relationship with Nissan, comes with some challenges that might be helped by an FCA tie up, or might not be.
I will give you my thesis and then talk about some of the logic and then take some of the analysis to the brand level, where I think things are always more difficult to analyze (although it tends to be where much of the analysis is done in - and of - the industry).
My thesis is that FCA and Renault are merging because they have the same basic view of the industry: that consolidation is necessary - and they have a similar approach to how to manage it. Moreover, both firms have demonstrated an ability to take industrial firms in adversity and resuscitate them and to manage complex tie ups across regions and product. Yes, the Renault Nissan alliance is showing strain. But it has worked with both firms far stronger as a result. Less well known in the US is the success that Renault has had in rebranding and reviving Romanian car manufacturer Dacia and Russian LADA. Both of these brands remain popular in Eastern Europe and needed careful stewardship by the sponsoring French firm.
Thus, my contention is that what management at both firms have decided is that the most important aspect of the industrial logic is to have managements that have the same objectives and focus and approach to managing industrial tie ups. There is also a basic industrial logic, of course. It wouldn't make sense to merge with a restaurant roll up no matter how much alignment there is at the managerial level. Automotive firms, though are tricky. The brands are sticky and powerful. The ecosystems that sustain them are complex and job rich, therefore tie ups are popular political events as much as they are economic ones. Given the set of pressures, it is important to avoid DaimlerChrysler style managerial conflict. You need to have teams that work together and which are not going to raise too many sacred cows protecting jobs, plants, systems or products in any one market or market area.
Both Fiat and Renault have proven themselves capable of this.
One more thing - a solid tie up of this type creates further incentive for an outsider, like Marchionne and Ghosn, to step in to lead the combination of the entity without legacy allegiance to either side.
In short, this seems a continuation of the strategy that both firms have pursued independently and successfully. The meeting of the minds at the managerial level was likely too good to pass up even if another firm might have made more sense on paper. Firms don't exist on paper. They are people and the people need to be able to work together.
Since the rise of Marchionne to the chief executive role of Fiat, the strategy has been one of consolidation and scaling. Fiat deftly pursued several incredibly shrewd recapitalizations, starting with forcing GM to pay it $2bn to invalidate the put option that Fiat had with GM. That provided just enough money to invest in a small vehicle platform (that became the Panda and several other small vehicles), two small engines and an upgrade at Maserati. Those programs all worked stupendously and with some other smart restructuring, Fiat was able to buy Chrysler out of bankruptcy.
Again, capital allocation was masterful. Chrysler had, as part of its divorce from Daimler, several solid platforms including the old M-Class (164 chassis) and the old E-Class platform (211 Chassis), on which it had planned to build the Dodge Caravan, and the 300. These two platforms were well engineered and well designed and by 2009 had all of the "bugs" worked out. There were a few issues to mate those chassis with the different bodies that FCA wanted, but most importantly, what FCA realized was that it platforms that, for its customers, could go for years with little capex, allowing for that money to instead be invested in RAM and in Jeep, brands that could earn significant premia and very good contribution margins.
Along with some "slimming" of Fiat Industrial and a spin of Ferrari, both of which raised significant cash, FCA, which had started with a terrible product plan and no money, found itself with strong product and brands, decent operating margins and net industrial cash. (Recent performance woes at Maserati suggest that there might not have been enough investment there as the company got really focused on building the Alfa Romeo product - incredibly compelling product, it must be said, but the Quattroporte was allowed to age, even though I think it still looks great).
But in spite of all of this focus on internal cash generation and recapitalization of the business, the fact remains, the strategy from the get go has been to scale up in car manufacturing. 15 years after Marchionne took the helm and a year after his death, nothing there has changed. Sure, Marchionne took $2bn to avoid a merger with GM. That seemed to run against the strategy. Except that it was already obvious that GM, particularly a Rick Waggoner-led GM, which kept promising that prosperity was right around the corner, just as soon as xyz problem (often pensions and postretirement costs) was behind them they could invest more in product and win in the market, was never going to be able to invest enough in Fiat for either firm to survive. GM was a dead man walking, and Marchionne didn't want that deal - at least not with Old GM.
Instead, he picked what seemed a weaker partner in Chrysler. But here, I think, Marchionne was smart. He knew that the organization had some good assets that needed proper deployment with proper capital allocation. He also knew that the organization was looking for leadership - it was not going to be able to put up much of a fight when Fiat started to make changes. GM was still far too ossified. Chrysler, after 10 years of German and PE occupation, was ready for leadership ready to cultivate its unique strengths.
Once he had FCA, though, Marchionne often went seemingly without shame, cap in hand to other manufacturers to try and get them to merge with him. His pandering to New GM and Mary Barra was particularly shameless, but his point was always the same. Even with six million units, FCA was not big enough for what is coming. Given the complexity, he needed a partner that saw things his way.
Renault, it must be said, was in a similar way. It was an early proponent of buying and upgrading weaker players and it was aggressive in the way it went into Eastern Europe to find scale for its systems. Ultimately, these investments, under Louis Schweitzer, proved sound. Moreover, snatching Nissan during a moment of weakness was a masterstroke. Here, like Chrysler, you had a company that had some strong product, but lacked the ability to really get it to market effectively. Renault raised the capital necessary to both control Nissan and to invest in the Pathfinder platform that revived the brand in the US. The price was low, which sticks in the craw of so many Japanese. It seems strange that 20 years on, they have never thought to complete the merger and become one integrated company. I suspect that after the FCA merger, there will be more pressure to do so. The larger value of a merged Groupe Renault FCA will reduce the logic for Nissan to try and acquire more of Renault (it is blocked from this anyway by Renault's control of Nissan's board). It will be easier to accept the unequal nature of the relationship when Groupe Renault FCA is the much larger entity.
On the platform front, this merger should enable significant reduction in duplicative investment in factories and in product. The auto industry faces a unqiue set of challenges in which the nature of the offering is set to change in some very fundamental ways. Once this happens, the competitive attributes are likely to change in ways that are possibly going to reduce the importance of brands and differentiation in the product and focus more on cost and convenience. Much of the value add may turn out to be post-sale / delivery and so investments in factories and large and complex product platforms may chagne. Of course, they may not. Cost is likely to become a bigger factor as is the ability to amortize investments in platform architectures for IT services and solutions over large unit volume is likely to be immensely important.
This is why consolidation is nearly certain. FCA and Renault compete for many of the same customers, albeit often in different markets. There should be opportunities to imrpove European operations and margins for both firms. FCA gives Renault a variety of routes back to the US and the means to tap into US supplier networks, particularly around connectivity, electrification and autonomy. It also opens LATAM more effectively for Renault Nissan.
The Nissan arrangement also allows for more collaboration in SUVs in the US market and in Asia. I Suspect that they are not done looking for tie ups. They still lack the premium brand like an Audi or Mercedes that can earn extra contribution for selling upgraded versions of the lower cars architecture. Maserati is not really fulfilling this role, though I expect Wester to be able to fix the problems. There will continue to be a tension, I think between Maserati and Alfa as both have product portfolios that are smaller than competitors.
There will be challenges straightening out the brand identities, I think, of Fiat, Renault, Dacia, LADA and possibly Lancia. Chrysler, which has been repositioned as the autonomy brand and is also likely to need some work, Dodge too. But these things can be evolved over time, or killed where they are found to be excessive.
In short, I think FCA has done well here. I think Renault also needed to change the dynamic with the friction in the partnership with Nissan and both firms have a deeply strategic and long term approach to the business.
