How Fiat Chrysler Plans to Shake Up Detroit
Between 1886 and 1930, it’s believed that over 1,800 auto manufacturers came and went in the United States alone. Today, there are just four big ones – and that’s if you want to count Tesla. But if Fiat Chrysler chairman Sergio Marchionne gets his way, there’s going to be fewer. For the past few months, Marchionne has been like the desperate belle with an empty dance card, frantically looking to partner up with anybody willing to hear him out. Unfortunately (for FCA), he’s found no takers, but he’s been so persistent that Ford and Toyota preempted his advances by issuing “thanks but no thanks” statements before Marchionne could even ask. It’s a strange – and up until a few months ago – unexpected move for the world’s seventh largest automaker. But Marchionne shows no sign of giving up, and if he is ultimately successful, it could have a monumental effect on the auto industry.
Since Fiat became the controlling partner of Chrysler during the darkest days of the financial crisis in 2009, the company has been enjoying one of the most impressive turnarounds in the industry. Dodge is fielding one of the most competitive lineups in the U.S., Jeep is enjoying record sales, and the uninspired Chrysler lineup from less than a decade ago is quickly receding into memory. Worldwide, Fiat Chrysler can attribute much of its success to Marchionne, the brash, perpetually candid FCA chief who has helmed Fiat since 2004.
So in the midst of this impressive company-wide resurgence, and while the auto industry continues to enjoy record-setting profits, the sudden and committed talk of a merger has left more than a few people scratching their heads. At the North American International Auto Show in January, as other automakers were unveiling a host of blockbuster new models, Marchionne gave a grim assessment on the state of things in Detroit, saying “…I am more convinced than I have ever been that this industry needs to move toward consolidation.” In March, after months of a rumored FCA-Mazda merger fell through (Mazda has since partnered with Toyota), Marchionne sent an email to General Motors CEO Marry Barra personally proposing the merger. She rejected the proposal outright.
But the story doesn’t end there. In April, Marchionne guided Wall Street investors through a powerpoint presentation called “Confessions of a Capital Junkie” that laid out his argument for an automotive future with fewer players. In the presentation, Marchionne put his argument in monumental terms, saying that consolidation is the sole choice “between mediocrity or fundamentally changing the paradigm for the industry.” He assured investors that the plan didn’t mean that FCA was in trouble, that it was for sale, or to increase its market share, it was simply to make the industry more efficient.
According to Marchionne, the auto industry isn’t nearly as profitable as it should be (despite the Big Three earning a combined $16.7 billion in 2014), and puts the blame on the rising costs of product development. By consolidating the industry, Marchionne argues that development costs would drop dramatically, and profits would increase even further.
Despite these altruistic aims, there are some very real benefits for FCA if it can find a willing partner. Contract negotiations between the Big Three and the United Auto Workers are set to begin in July, and the specter of an uncertain future would put the UAW’s negotiators at a serious disadvantage. While FCA’s merger probably isn’t just a tactic to gain leverage against the unions, Marchionne is no stranger to dramatic stunts. Last year, he publicly mused about pulling Jeep Wrangler production from its Toledo, Ohio, plant, leading to an incredibly lucrative state and local incentive package to keep FCA there.
And despite claims otherwise, any merger would likely make FCA the benefitting partner. Despite impressive growth, the company is lagging in several key segments, and is virtually nonexistent in hybrid and EV segments. By merging with a company that already has these platforms, FCA would be able to keep development costs down for itself.
After several months of collective eyeball-rolling at Marchionne’s quixotic posturing, he may finally be preparing to start tilting at windmills. Earlier this month, FCA hired financial advisors UBS to throughly analyze the prospect of an FCA-GM merger. In response, GM hired Goldman Sachs to investigate the potential threat of a hostile takeover bid. There’s some credence to this – GM isn’t completely healed from its bankruptcy proceedings, and recalls and lawsuits from the ignition switch and airbag scandals have put the world’s third largest automaker in a vulnerable position.
In January, Greenlight Capital, a hedge fund firm, purchased 9.5 million shares of GM stock, becoming one of its largest shareholders. If FCA can earn Greenlight’s support, a hostile takeover bid is a very real possibility. In Italy, Marchionne and FCA chairman John Elkann are already entrenched in another hostile takeover bid. Through Elkann’s Exor investment fund (where Marchionne serves as vice-chairman), the two are close to taking over reinsurance company PartnerRe. With FCA management already in war mode, it wouldn’t be much of a stretch to see the battle cross over into the automotive world.
In the 1968, 17 British brands merged to form British Leyland, a move that consolidated 40% of the automotive industry. It was an unmitigated disaster. After 18 years of corporate disfunction, engineering malaise, and a lack of competition and managerial oversight, BL collapsed, taking most of its marques with it. Would the American automotive industry benefit from joint development of certain technologies? Absolutely. As advances in safety, emissions, and fuel economy grow by the year (and legislation gets increasingly strict), it makes sense for manufacturers to partner or create open source patent programs like Toyota, Ford, and Tesla. But a FCA-GM merger, or any FCA-led charge for that matter only seems like to benefit one party: Fiat Chrysler Automobiles.