Cars are getting bigger. For years motorists worldwide have been abandoning four-door sedans in favor of bulkier SUVs. Carmakers have become bigger, too. Four car companies now make around 10 million vehicles a year in order to reap economies of scale, particularly in the mass-market sector of the business, in which profit margins can be painfully thin. Many executives also believe that size is the only protection against the technological upheaval sweeping the industry.
Bulking up fast is easier said than done, though. Lots of different constituents have to be won over, and most car bosses still are reticent about taking the plunge on mergers because many have been catastrophes. Daimler’s 1998 acquisition of Chrysler, for example, was a notable disaster. The list of past crashes is lengthy. Indeed, one recent deal—General Motors’ sale of Opel, its European arm, to France’s PSA Group for $1.4 billion—seems to go directly against the imperative to bulk up.
In reality, though, that deal has had the effect of spurring more talk of consolidation. At first speculation centered on a possible mega-merger between GM and Fiat Chrysler Automobiles, itself the result of a deal in 2014. The Italian-owned company, which makes almost 5 million vehicles a year, is run by Sergio Marchionne, who has been eyeing a merger with GM for years. With the American company now discarding a money-losing European business, the theory goes, it could replace it with a profitable one—Fiat—and crunch together the two companies’ successful operations in America.
Mary Barra, GM’s CEO, repeatedly has rejected Marchionne’s overtures, and selling Opel is unlikely to have changed her mind. Some observers unkindly suggest that in any case GM is unable to handle three tasks at once, and that its aim in ridding itself of Opel was to concentrate on improving its operations in America and in China. Moreover, many of the synergies from a deal depended on combining Fiat and Opel in Europe.
Since then the rumor mill has moved to Volkswagen. The German company has long cast a covetous eye at parts of Fiat Chrysler. At an annual industry shindig in Geneva in March, which coincided with the final sale of Opel, Marchionne said that he had “no doubt that, at the relevant time, Volkswagen may show up and have a chat.” He also suggested that PSA Group’s acquisition of the GM unit, which puts the French company in second place in Europe, adds to the pressure on VW, the market leader, to bulk up further.
VW’s campaign to conquer America, where its diesel-emissions scandal has undermined its weak position, would be strengthened with Fiat Chrysler in tow. Chrysler’s Ram trucks are hugely profitable in America, and its Jeep brand is resurgent worldwide. The unrealized potential of Maserati and Alfa Romeo, alluring bywords for Italian style, also is attractive.
A deal would, however, bring little benefit in Europe, where VW already has a big slice of the market and plenty of small cars on the market. With Seat, a Spanish division, struggling and with its own brand said to be losing money in the region, VW could do without the trouble of integrating Fiat. Fiat Chrysler also is the only big car company that is encumbered with lots of debt—slightly less than $5.3 billion—making it a less-tempting target.
VW CEO Matthias Müller has not ruled out talks with Fiat Chrysler, and has indicated that the German group is more open to a merger than it used to be. Fiat Chrysler is not the only option, however. An acquisition of Ford, which recently suffered the humiliation of being overtaken in market capitalization by Tesla, an electric-car company founded in 2003, might also fit VW’s plans.
Still, if VW is intent on leading the next round of industry consolidation, it will need to put “dieselgate” behind it. Though the German company has paid $22 billion in fines and compensation, the issue of who knew what and when remains unresolved.
Whatever combination of companies might bring it about, the goal of creating a group that produces nearly 15 million vehicles a year makes sense. Marchionne’s oft-stated view is that the industry’s duplicated investment in equipment such as near-identical engines and gear boxes is a waste of resources, and that much of that money would be better returned to shareholders. Other car bosses reckon that the money should go to the technologies that will transform the industry: mobility services such as ride-sharing, electrification of the drivetrain and autonomous vehicles. Scale would allow car companies to spread the cost over more vehicles.
The arrival of new competitors such as Tesla, and of deep-pocketed tech giants intent on disrupting the transportation industry such as Apple, Google and Uber, make dealmaking an even more pressing need.
“Everyone agrees on the rationale for big mergers,” an industry adviser said, “even if execution of deals has been extremely difficult up to now.”
© 2017 Economist Newspaper Ltd., London (April 15). All rights reserved. Reprinted with permission.
Image credits: Doug Mills/The New York Times