The Prons and Cons of the Merger between FCA and Renault

The recent information that saw the spotlight on the merger between two major European groups of the global automobile industry, namely between the FCA (Fiat Chrysler Automobiles) and Renault, created euphoria in the global automobile community.

Given that such a merger would create a global leader group in the automobile sector, solving some of the chronic weaknesses faced by these two groups separately each on its own.

But is this euphoria justified? Or the disadvantages that usually occur in such large mergers of industries operating on the same product outweigh any advantages?

But before we analyze this merger it would be better to see the positions of the two companies in the industry that are active and whether this merger would be complementary and of course beneficial to both participants.

by Thanos S. Chonthrogiannis-https://www.liberalglobe.com

The FCA (Fiat Chrysler Automobiles)

In recent years, sales of FCA products in the major markets of the US, China and Europe have been falling (mainly Europe and China) and present problems in relation to competition. In some of these large markets its sales have almost disappeared (China).

These findings forced the administration of FCA to invest massively in the Brazilian market to achieve an increase in its sales and of course its profits by balancing the large sales decrease in other major markets on the planet.

Due to the historic presence of Fiat in Brazil with its first factory opening there in 1976, the Brazilian market is one of the few markets in the world outside the European market where the name Fiat has gained great popularity.

The FCA has almost disappeared from China’s huge market and the US market is dropping its sales compared to its competitors, where consumers choose SUVs and trucks. For this reason, FCA bets on the Brazilian market and generally in all emerging markets of the world to survive.

On the other hand, FCA’s sales in Europe are not attributed the expected and its factories in Europe are under operated. The FCA has a strong presence in the U.S. market and especially in the SUV (Sport Utility Vehicle) market.

How to influence the course of this type of investment

The fact that $ US is appreciated in relation to the remaining currencies and since the trade war mainly between the US and China will continue, the conditions are created for a significant reduction in consumption in countries such as Brazil, China, India, Russia and other emerging markets.

This is because countries like Brazil have public and private debt in US dollars and any appreciation of $ US, increases and the service size of the country’s public debt.  As a result, it is drastically reducing the amount of disposable income available to citizens. In such cases, citizens try to cover basic living needs first and then turn to other types of needs such as cars which are considered the most consumer commodity.

This is the main reason why other automakers who have made multi-billion-dollar investments continue to receive negative returns from their investments and to worry when their investments in Brazil and in other emerging markets will at some point yield the expected.

Renault and its partners

Both Renault and FCA on their own built about 8.7 million passenger cars (2018). Both companies themselves are located, as regards the constructed number of vehicles at the same annual levels as the Hyundai Motor Group and General Motors.  But all these companies are at a lower level in terms of the annual number of manufactured vehicles compared to the large groups in the industry, namely Volkswagen and Toyota.

But Renault alone together with its partners, Nissan, Mitsubishi, and AvtoVaz are approaching the numbers of their annual manufactured vehicles of the two major groups in the automobile industry.  

Renault is stronger in terms of market shares in the European market, especially in electric cars.

The needs that lead to a merger between Renault and FCA

The timeless and historically fierce competition in the most developing, in terms of innovation, industry of the world (automobile) has forced all groups of automakers to continually seek solutions to remain competitive.

The electrification, the introduction of stricter gas emissions regulations by all countries, the continued development of costly research to develop new technologies for both internet-connected vehicles and autonomous vehicles, the application of artificial intelligence technologies in vehicles, the most effective internet connectivity, are constantly demanding huge amounts of costs from the automobile industries.

Other main reasons for mergers between groups of car manufacturers are, of course, economies of scale (as in any type of merger between companies) to save costs.

Furthermore, and given that the French government has a 15% stake in Renault and wants the creation of gigantic companies in Europe and which will successfully respond to global competition in their business sector, it is another reason why companies like Renault push to enter into such a merger agreement.

The advantages of a merger of the type between Renault and FCA

Complete market coverage is achieved for each type of vehicle, from luxurious to mass-produced vehicles.

Such a merger should create savings of huge capital size (economies of scale) which can then be redirected to R&D (Research &Development). For this merger and what has been seen in the light of publicity, it is estimated that funds will be saved in the order of €5 billion.

The combined market value of Renault & FCA was €32.6 billion (24/5/2019).

Renault together with its partners Nissan, Mitsubishi and AvtoVAZ produce about 10 million vehicles annually. With the addition of FCA, all together will produce 15 million vehicles annually with almost most market brands being under the umbrella of the same group.

Renault gains access through FCA to the share of profits held by FCA in the world’s strongest market. In the US market. The FCA, due to its inability to costly R&D, through this merger it will be able to acquire advanced technology, access to rights in electrical powertrains. This sector would have cost FCA, under other circumstances of enormous size for the development of the corresponding R&D.

Renault does not have access to the US market except through the profits of Nissan. Through FCA, Renault acquires this much-needed access.

They gain a common corporate culture (European) as to how competition will be tackled.

The disadvantages of merging between Renault and FCA

Renault so far has no access to the US market, except through the sales share of Nissan.

Nissan in the event of a merger between Renault & FCA may in future have to spend more capital on the new Renault & FCA Group for the Renault platforms and engines. That is why Nissan is correctly reacting negatively to this merger.

In this type of merger and for the above reasons Nissan may be forced to leave as a Renault partner, seeking another partner or developing its own engines. In any case, Nissan with FCA and Mitsubishi will react highly competitively to the US market, with only Renault won.

Economiess of scale achieved by mergers between companies to save resources must include closures of factories and in general production chains and, in any case, a drastic reduction in jobs.

The reduction of number of jobs does not only take place because of the merger but also from the implementation of the 4th industrial revolution which in industries such as automakers is one of the first to be implemented in practice.

This means that this merger between FCA & Renault will face obstacles from:

1. Politicians – Every job lost means political costs for them. This drastically restricts the movements of the company’s management.

2. Workers ‘ unions – particularly in Europe (Italy, France) where trade unions are very strong.

3. Existing partners – e.g. Nissan.

4. Governments – Governments holding a share in the merging companies e.g. the French government owns 15% of Renault and the Italian government is also asking for a share in the new group.

What is the best solution for FCA, Renault and its partners?

The process of an unbridled expansion made by all the companies regardless the business sector, should be avoided in general and any qualifying extensions should be made in moderation and absolute long-term planning.

In cases of global economic recession and generally significant reduction of global demand, the first companies that will be hardest hit are those that manufacture the most consumer products (e.g. cars) given that they face simultaneously a large exhibition on borrowing. If this situation that the company will experience is combined with a fierce competition, these businesses increase the likelihood of collapsing/bankrupt leaving behind ‘debris”.

It is preferable for a company to limit its costs, even with factory closures and drastic reductions in productive jobs (productive in relation to their matched profitability), in order to save capital and dispose of them for R&D that will give it a technological lead, even if it means smaller size as a company. In this case, the goal posed is to make it more effective and attractive, in terms of its profitability, the company.

The involvement of governments in companies (due to ownership of shares) “cement” the movements of companies’ management because all kinds of cuts, e.g. factories, jobs, etc., when these are necessary from the prevailing conditions, they should be done without delay.

Renault and its existing partners are not so complementary in the event of a merger with FCA. The FCA should focus on markets that have a comparative advantage and drastically increase its available resources for R&D, even if it means brave internal cuts in expenditure. In this case it will be more protected in the non-desirable macroeconomic situations globally.

Thanos Chonthrogiannis

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