Fiat Chrysler and Renault Tie-Up Talks
Challenges in the automobile market has prompted the two giants Fiat Chrysler and Renault to seriously consider a tie-up arrangement to help them weather the economic storm. Talks are currently ongoing.
The Fiat Chrysler Group FCA (NYSE:FCAU, BIT:FCA) is a multinational automotive company based in Italy that designs, manufactures and retails cars and car parts worldwide. FCA operates over 100 manufacturing plants and 42 R&D facilities, and boasts a vast network of dealers and distributors worldwide. Some of the more notable brand names under FCA include Fiat, Chrysler, Alfa Romeo, Jeep and Maserati. Retail and dealer financing, leasing, and rental services are also provided by its network of subsidiaries, joint ventures and commercial arrangements with third party institutions. In 2018, FCA delivered a net profit of € 3.6 billion.
Renault (EPA:RNO) on the other hand is a French based firm in the same industry. As opposed to FCA, Renault puts a greater focus on electric vehicles in addition to manufacturing traditional cars. A strategic alliance back in 1999 with Nissan and Mitsubishi has vaulted it to the status of the leading light vehicle manufacturing group, having sold more than 10.6 million cars in 2017. One year later, the Alliance became the top electric vehicle manufacturer. The partnership has subsequently been joined by Daimler in Germany, Dongfeng in China, and AvtoVAZ in Russia. The alliance calls for cross-shareholding investments, and to increase economies of scale for the firms involved while keeping individual identities intact. While the arrangement has worked well thus far, the arrest of Alliance CEO Carlos Ghosn for financial wrongdoing has significantly increased the instability of the partnership.
Challenging conditions call for partnerships
Automakers are facing significant pressure as sales wane in the US, China and Europe. With the trade war looking like an increasingly long term prospect, wholesale passenger vehicle sales in China have dropped by 17.7% year-on-year following an economic slowdown.
The biggest challenge facing all players in the automotive industry comes from the intensifying trade war between the US and China, and the negative effects that come with increasingly harsh tariffs. Donald Trump is expected to set up tariffs up to 25% on foreign car parts. Enactment of tariffs will significantly increase the cost of manufacturing vehicles by more than $USD 3000. Consumers will likely delay the purchase of a new vehicle, or look to the second hand market if the costs are passed on.
Ride sharing and car pooling services also make car ownership less important. Service providers such as Uber and Lyft are popular enough that car makers have seen an erosion of demand in the UK. Another issue endemic to the European market are the tightening carbon dioxide emission regulations which car makers struggle to keep pace with.
Considering the challenging environment that car makers face, the prospect of a strategic partnership has become increasingly enticing for both parties involved. FCA and Renault have a total market cap approaching €33 billion and combined worldwide sales of up to 8.7 million vehicles. A partnership could help both firms achieve scale, as well as greater diversification across geography. FCA for example enjoys a stronger demand for its RAM trucks and Jeep branded vehicles in North America, yet struggles in Europe. Renault also stands to benefit; while it is a pioneer in electric vehicles technology, Renault still has no presence in the US. Both firms will additionally strengthen their foothold in China.
While the talks are in their advanced stages, no specific details have yet been revealed. One idea for the partnership could be to combine their operations in Europe, where they compete directly against each other. Economies of scale could be achieved if vehicles are jointly manufactured in each others factories. Indeed, some of FCA’s factories in Europe are currently operating at below 50% capacity. A possible rapprochement between the two firms is already in the works, with plans to collaborate on autonomous driving technology, electric vehicles and “new uses for vehicles”.
As the French state owns a 15% share in Renault, one potential issue could be the dilution of ownership. The government as of yet is not opposed to the deal as long as Renault continues to make commitments to maintain jobs in France. Such commitments are usually difficult to maintain in the long term.
Additionally, a partnership deal that includes Nissan and Mitsubishi would elevate them to the status of the global No.1 car maker ahead of Toyota and Volkswagen, with a combined sales figure of 13.8 million vehicles. However given the poor relationship between FCA and Nissan, it remains to be seen what role the Japanese car makers will play in the coming deal.
If a partnership can be formed, both firms involved stand to gain from the deal. Cost reduction, research sharing and an increased global presence would not only help FCA and Renault weather the difficulties in the current market, but also give them an edge in the development of electric vehicles.
By Oliver Ju
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