Fiat Chrysler on the March

Fiat Chrysler on the March

by Pininvest Analysis

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Pin-insights

Looking back on the past 11 months to the day following the wholly unexpected death of its CEO, Sergio Marchionne, the efforts made by Fiat Chrysler (FCA) to partner or to merge with a competing car manufacturer leave outsiders with a glimpse of insider outlook on the company's future

Relying on a mid-range line-up, at the lower end of the industry’s margin bracket, Fiat Chrysler had made tough decisions over the past 10 years to prepare for the industry’s looming challenges

Expected to upend the terms of competition on a global scale, hybrid motoring, electrification, new consumer expectations and new transportation solutions are raising the bar for brand identity of all the car makers

They are  also  going to  conjure up the specter of commoditization

Fiat has its strong points but time may be short to put it all together

It will not be easy for the company – nor will the ride be smooth for its competitors

 

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Fiat has been in the news for a potential tie-up with either of the French companies, Peugeot  or Renault 

With Renault, merger plans went from secretive discussions all the way to formal announcements before being called off abruptly by Fiat which had been the suitor in the first place

None of the episodes made much sense

 

Words, just words… and hard facts

Excess capacity of the European car industry is well-known, making a merger of ‘equals’ between the two mid-tier car manufacturers, with commitments to maintain the existing assembly plants in both Italy and France, and presumably the industrial jobs as well to soothe their respective governments, a recipe for disaster

…unless of course such promises should not be taken literally as the storms battering the car industry become overwhelming – an assumption we prefer to leave aside

  • Fiat, if recent reports are to be believed, had a strong incentive in the merger to become privy to Renault’s electrical vehicle R&D. This may be a motive driving Fiat’s interest, but makes short shrift of the decade-old partnership of Renault with Nissan, which covers R&D sharing agreements, and presumably, advanced research on hybrids, electrical vehicles and – potentially – fuel cells
  • Nissan , if the reports following the Fiat break-up are credible, was not involved in the confidential stages of the merger plans and could hardly be expected to accept sharing its R&D with its US competitor Chrysler, a Fiat subsidiary

Further publicly stated causes of Fiat’s withdrawal, interference by the French State (holder of a 15% stake with double voting rights in Renault) and disagreements about valuation of either partner, had undoubtedly been discussed formally ahead of the public announcements….

  • Misleading public opinion somewhat awkwardly, these smoke screens are reason enough to study the real challenges confronting the car industry, and the options open to mid-tier and low-margin manufacturers such as Fiat (n°7 in the world ranking)

Though every car maker has distinctive strengths (and weaknesses), all of them are, to various degrees, experiencing the squeeze weakening Fiat

  • between regulatory compliance and consumer expectations weighing on R&D costs on the one hand
  • and risks of commoditization pressuring already weak margins on the other....

With survival at stake, the industry is casting about for answers which put mergers front and center

 

Could capital junkies mend their ways…

The demise of Sergio Marchionne, in July ’18, certainly has complicated any merger plans the firm may have had under consideration

On the strength of his success in setting Fiat back on track and of his second act at Chrysler, the former CEO could rely on an army of true believers, in the industry and in the financial sector

The key tenets of a strategy Sergio Marchionne had expressed loudly over the years remain as true as ever, if not more so

Fiat today may have to reorder priorities but the general thrust of the strategy– and its urgency – will remain unchallenged

 

Mergers

Mergers are a requisite as Mr. Marchionne stated forcefully in his scalding 'Confessions of a Capital Junkie', back in 2015

The  (original) Confessions - JJ  Rousseau
  • In a nutshell, car manufacturers must consolidate because they cannot keep consuming capital with a free hand on largely duplicative investments, earning a 7.8% return on capital compared with 10% for the oil and gas, 16% for aerospace and defense, and 19% for pharmaceutical industries (2014 statistics)

 

R&D

New power solutions – hybrid, EVs and fuel cells – are deeply transformative of the entire manufacturing process but to aim for new transport solution at a reasonable cost, R&D could be shared – or acquired from a third-party technological source – and not necessarily developed independently

by Sergio Marchionne - April 2015
  • In his ‘Confessions’, Mr. Marchionne estimated R&D costs of new vehicle development expense at 40% (page 10) and highlighted the fact that most of these development costs (excluding the upper body exterior car model and its interiors to preserve brand differentiation) could be shared
  • Although the calculations lacked specifics, it was suggested that by sharing platforms, vehicle and powertrain development, putting more than 70% of the expenses in common, savings of 30% on average can be attained for new vehicle platforms and new engines (pages 17 & 20)

 

Brands

With new technology adding momentum to Mr. Marchionne’s argument by reinforcing the long term trend towards commoditization of the mid-tier car segment, the nurturing of brand recognition is the true foundation securing the future of a car manufacturer

Therein resides the paradox of Mr. Marchionne’s indispensable ‘commonality’ of shared R&D over as large an industrial base as conceivable ‘in terms of leadership style and capability’ (page 24)

  • An impressive part of total development costs of a new vehicle may not be ‘discernible to customers’, in the words of Mr. Marchionne, earmarking these components for sharing, but the strategy shortens the odds of brand distinctiveness ever more
  • Car brands however have always been a matter of intimate customer identity, attached to features seen and often unseen

Subjective brand perception will be core in the age of technological revolution, more so than ever, and car makers, protective of brand value at any cost

 

None of these guidelines – mergers, new power solutions and brands – state anything but the obvious

  • The tug-of-war between merger plans, on the drawing board for a decade (if not longer), and brand identity has left many manufacturers skittish and tempted by half-hearted patch-ups
  • The distinction of Fiat, under the guidance of Mr. Marchionne, has been the company’s dogged pursuit across the Atlantic, from Italy to the US

Fiat's challenge today might be to rearrange these priorities in a mutually supportive sequence, leaving the identity of the company, its brands and its distribution networks untouched

Our follow-up note, published shortly, is an ‘Open Letter to John Elkann’, Chairman of Exor (majority shareholder of Fiat Chrysler) and representative of the founding Agnelli family, covering

  • Mr. Marchionne’s strategy as a ‘work-in-progress’
  • the all-important time-line, implied by car emissions regulations
  • strategies – playing on the strengths of the company – as seen by an outsider…

Options do exist