Do Fiat Chrysler and Renault make a good fit? | Business| Economy and finance news from a German perspective | DW | 27.05.2019
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Do Fiat Chrysler and Renault make a good fit?

Fiat Chrysler says it wants to merge with Renault to create an auto behemoth and better face the stark challenges confronting the auto industry. Despite the synergies, the road to the tie-up is paved with obstacles.

In a move that could reshape the global automotive industry, Italian-US car giant Fiat Chrysler Automobiles (FCA) on Monday sent a proposal to its French rival Renault suggesting a tie-up between the two firms. The combined group would forge the world's third-biggest automaker, making some 8.7 million vehicles a year and trailing only Volkswagen and Toyota.

The plan foresees a merged business with 50% of stock owned by FCA shareholders, and the remaining 50% by Renault shareholders. The combined entity's "broad and complementary" brand portfolio would help it achieve "full market coverage, from luxury to mainstream," FCA said in a statement.

Read more: Shark in a sweater: Sergio Marchionne's legacy at Fiat Chrysler

It also noted that the merger would allow the firms to cut costs to the tune of around €5 billion ($5.6 billion) a year. The group would be listed in Paris, New York and Milan, it said, adding that the deal would involve no plant closures, although it didn't address potential job cuts. "If this merger goes ahead, the birth of the new company could take more than a year," FCA CEO Mike Manley wrote in a letter to employees.

Infografik Größte Autobauer EN

Studying 'with interest'

Renault's board on Monday welcomed the idea, saying it would study the proposal "with interest." The French government, which holds a 15% stake in Renault, also voiced its support. 

"The government is in favor... but the terms of this merger must be supportive of Renault's economic development, and obviously of Renault's employees," government spokeswoman Sibeth Ndiaye said Monday.

"We have very large companies, giants, that are being created outside of Europe, and today we need giants to be created in Europe," she told BFM  television, adding that Finance Minister Bruno Le Maire had been informed of the talks by Renault Board Chairman Jean-Dominique Senard last week.

Read more: How Volkswagen wants to drive e-mobility revolution

Auto industry experts point to potential synergies between the two firms. Fiat Chrysler is stronger in North America, with extensive US operations, and has expertise in trucks and SUVs.

And Renault has a strong presence in Europe and the Eurasia region, including countries like Russia and Turkey. But the company, which sells about 50% of its vehicles in Europe, is not present in major car markets like North America and China.

Fiat Chrysler, meanwhile, has lagged far behind its rivals when it comes to developing electric vehicles, and a merger with Renault would give it access to the French firm's electric car technologies.

Experts believe consolidation is necessary for car companies as they navigate a potentially disruptive decade for the auto industry. As new technologies — from electric vehicles to autonomous mobility — reshape how people use and drive vehicles, traditional automakers are increasingly facing competition from tech giants that are entering the sector.

Alliance troubles

Fiat Chrysler's offer comes at a key moment for both companies. FCA's ex-boss Sergio Marchionne, credited for rescuing Fiat and Chrysler from bankruptcy, died in July, while Renault's ex-chairman, Carlos Ghosn, quit in January amid corruption allegations and faces trial in Japan.

Carlos Ghosn (Reuters/R. Duvignau)

Since Ghosn's ignominious downfall, doubts have been cast about the survival of the Renault-Nissan-Mitsubishi alliance

Renault has been in an alliance with Japanese carmaker Nissan since 1999. It formally became the Renault-Nissan-Mitsubishi alliance in 2017, a year after Nissan bought a controlling stake in Mitsubishi and made it an equal partner in the alliance. Observers say Ghosn was instrumental in keeping the alliance together. But since his ignominious downfall, doubts have been cast about the survival of the alliance.

"Ghosn wanted to turn the Renault-Nissan alliance into a merger, which obviously met with little approval from the Japanese side because Nissan-Mitsubishi is now the stronger partner in the alliance," German auto industry expert Ferdinand Dudenhöffer from Duisburg-Essen University said in a research note.

While the alliance sold a total of 10.756 million vehicles worldwide last year, he pointed out, Renault accounted for just 36% of these sales, with the company managing to sell some 3.8 million new vehicles. "Given these numbers, the Japanese wouldn't want the French to be in the driving seat of the alliance," Dudenhöffer said.

"The relationship between Renault and its partner Nissan-Mitsubishi has visibly cooled after the fall of ex-CEO Carlos Ghosn. It therefore makes sense for the French to think about a hedging strategy," the expert added.

A deal with Fiat could give Renault more weight in any discussions with Nissan. But analysts say the road to a Renault-FCA merger would be tough, particularly if that involves Renault divorcing Nissan. Over the past two decades, the two sides have become deeply integrated, in terms of their shareholdings as well as operations.

Watch video 01:20

Nissan cuts profit outlook, and fate of alliance with Renault looms

'Costly for both sides'

Renault holds 43% in Nissan, which in turn owns 15% of its French partner. The alliance is also held together by a web of joint purchasing and car-platform agreements, with both companies sharing their production lines in a number of countries. 

"Renault currently has its hands full with its alliance partner Nissan; it's unthinkable that this partnership will be abandoned," Frank Schwope, an auto industry expert at German commercial bank NordLB, said in a research note.  "The integration of Renault and Nissan is already quite advanced, a separation would be very costly for both sides," he added.

For Nissan, Fiat Chrysler's proposal appears to have come as a surprise. "It's an ill-thought-out and badly conceived plan," the AFP news agency quoted a source close to Nissan, who did not wish to be identified.

Nissan CEO Hiroto Saikawa on Monday said he was "open to constructive discussions to strengthen the alliance" and the subject will surely be raised in a meeting on Wednesday with Renault boss Jean-Dominique Senard.

Although a Renault-FCA merger appears complementary, experts warn that corporate synergies aren't always positive. A merger between Daimler and Chrysler in the 1990s offers a case in point, as the tie-up collapsed nine years later.

Financial markets on Monday, however, cheered the prospect of a merger, pushing shares in Fiat Chrysler up 11% and Renault 14% in European trading.

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