Fiat Chrysler–PSA Merger: Should Peers Be Worried?

Today, Fiat Chrysler (FCAU) and France’s PSA agreed to proceed with their previously discussed merger. With annual revenues of almost $190 billion, the merged entity would be the world’s third-largest carmaker by revenues. Annual deliveries of 8.7 million cars would make the combined entity the fourth-largest automaker by volume. Fiat Chrysler and PSA shareholders would equally own the combined entity after the $50 billion merger deal.

PSA’s current CEO, Carlos Tavares, would be the first CEO of the combined entity. The board of the merged entity would have 11 members, out of which five would be nominated by Fiat Chrysler and five would be nominated by PSA. Tavares would assume the responsibilities of the 11th board member. Fiat Chrysler’s John Elkann would be the chairman of the new entity.

Fiat Chrysler shares were trading 0.88% lower today at 12:27 PM ET on the NYSE. On the other hand, Peugeot SA shares ended 1.36% higher today on the Paris Stock Exchange.

Why are Fiat Chrysler and PSA merging now?

The announcement of the Fiat Chrysler–PSA merger comes at a time when the global auto industry is in the doldrums. In November, Fiat Chrysler saw a 3.9% drop in car sales even as total US vehicle sales rose 1.9%. General Motors (GM), the biggest automaker in the US, saw its unit sales fall 1.4%, while Ford (F), the third-largest US automaker, saw a 3.3% drop in passenger vehicle sales. Respectively, General Motors, Fiat Chrysler, and Ford saw declines of 2.1%, 1.3%, and 3.3% in their unit sales in the first 11 months of 2019.

Across the Atlantic, PSA is also struggling. PSA’s November sales saw a 10.4% drop. During the first 11 months of 2019, PSA recorded a 7% drop in volumes.

Along with their home markets, both players are struggling in the world’s biggest auto market, China. Together, they hold just over 1% market share in China. Like most other auto markets, China’s market is experiencing a slowdown. China’s auto sales fell 3.6% in November, which marked a decline for the 17th consecutive month.

In our view, the Fiat Chrysler–PSA merger seems to be a marriage forced due to an industrywide slowdown and macroeconomic factors.

Should Tesla be worried about the Fiat Chrysler–PSA merger?

Another factor behind the Fiat Chrysler–PSA merger is the structural shift changes in the auto industry. First, consumer preferences are shifting toward trucks and SUVs from sedans. Second, the emergence of ride-sharing companies like Uber (UBER) and Lyft has changed the ownership structure for autos. However, the third factor is the most groundbreaking.

Technological innovation brought by Tesla and others has forced automakers to change. While some changed early, some are still trying to find their mojo. General Motors was perhaps the first among the major American legacy automakers to realize that it was falling behind in the electric vehicle race. Ford is flexing its electric muscles with the launch of Mach-E and the upcoming electric F-150. Ford is planning to invest $11.5 billion in EV development.

On the other hand, both Fiat Chrysler and PSA are laggards in the area of electric vehicles. Fiat’s former CEO, Sergio Marchionne, once said, “I hope you don’t buy it because every time I sell one it costs me $14,000.”

In October, Fiat Chrysler CEO Mike Manley said, “It would be wrong of me to say, no, I wouldn’t be interested in someone else’s skateboard.” Manley was referring to buying technology from Tesla (TSLA). The Fiat Chrysler–SA merger may also be a result of fear of missing out on the EV revolution.

The merger could actually help drive innovation if the new management sets its priorities straight. Fiat Chrysler–PSA could also benefit from the changes in the EV tax credit in the US. The EV tax credit system in the US gives the advantage to laggards like Fiat. These subsidies start decreasing as the number of EVs manufactured by a particular company increases. While that’s a disadvantage for Tesla, Tesla is already years ahead of others.

Final words

While the Fiat Chrysler–PSA merger creates a mammoth entity, in our view it could meet the fate of the now-extinct woolly mammoths if the combined entity doesn’t change fast. So, the success of the merger depends on how it aids innovation and not just on how much cost synergies it can derive.

In terms of where Fiat Chrysler and PSA currently stand, the merger won’t affect the frontrunners much, unless it leads to groundbreaking innovation. We will still hope that the merger could help the overall auto industry become more efficient and cleaner.