The EconomistJune 1st 2019 Business 61T
he riseof the suvshows that carmak-
ers have persuaded many customers
that bigger is better. Renault and Fiat
Chrysler Automobiles (whose chairman,
John Elkann, sits on the board of The Econo-
mist’s parent company) are hoping to con-
vince investors that the same is true of
carmakers. On May 27th fca, an Italian-
American firm, said it was seeking a merg-
er with its French counterpart, itself in a
close alliance with Japan’s Nissan and Mit-
subishi. If a deal goes ahead, it will create
an automotive colossus.
Together, the two companies sold near-
ly 9m cars last year and their combined rev-
enues totalled €170bn ($190bn), with €10bn
in operating profits. Only Toyota and
Volkswagen (vw), each making over 10m
cars a year, are bigger. Add Renault’s alli-
ance partners, and the grand total of 15m
cars would leave everyone in the dust.
The deal—still subject to approval by
Renault’s shareholders—can be seen as the
legacy of two fallen giants of carmaking.
Sergio Marchionne, fca’s charismatic boss
who died last year, had called for consoli-
dation of the mass market, where slender
profits are partly the result of duplicated
investment in similar technologies, such
as engines, that do little to differentiate
brands. Carlos Ghosn’s Napoleonic perso-
nality helped him build and run the Fran-
co-Japanese alliance. His plans for world
domination were exploded by his arrest in
Japan last year on charges of financial
wrongdoing at Nissan (which he denies).
Mr Ghosn had previously invited fcato
join his alliance. Both he and Marchionne
would doubtless have coveted the driving
seat of a merged firm. With their rampant
egos out of the picture, blunt negotiating
style has apparently given way to civilised
talks between Mr Elkann, scion of Fiat’s
founding Agnelli family, and Jean-Domi-
nique Senard, who took over from Mr
Ghosn as Renault’s chairman in January.
Messrs Elkann and Senard appear to
share Marchionne’s vision. If they are to
survive, incumbent carmakers will need to
get bigger to ride out the sort of economic
downturn that the industry now faces.
Consolidation allows firms to cut costs and
to spread inevitable and massive invest-
ments in electric vehicles (evs), self-driv-
ing cars and mobility services (such as
ride-hailing and car-sharing).
On paper, fca and Renault look like per-
fect partners (see chart). They plug gaps in
each other’s businesses both geographi-
cally and in terms of products. fca’s
strength and profits come from America;
Renault’s from Europe. The French firm’s
cheap models and evknow-how comple-
ment fca’s pickups and upmarket brands
such as Alfa Romeo and Maserati.
Can the tie-up defy the patchy history of
carmaking megadeals? The list of failures
is long: Daimler and Chrysler, bmwand
Rover, anything to do with Ford. Fiat and
Chrysler show that partnerships can work.
Renault-Nissan-Mitsubishi works, too.
Both groups had exceptional former
bosses, who adeptly managed component
firms’ disparate cultures. But today the
companies may be readier to overcome dif-
ferences, since their prospects look so un-
certain. And fcabelieves the union could
allow the combined firm to cut costs by
€5bn a year—equivalent to around 3% of
combined revenues and much more than
Marchionne thought he could wring from
the merger of Fiat and Chryler, which in
2010 he put at 1% of revenues by 2014.
The trouble is that obstacles remain.
Even if the firms can be engineered jointly,
the same is not automatically true of own-
ership structures. This one is to be struc-
tured as a 50-50 partnership. This would
hand the largest stake, of 14.5%, to Exor, the
Agnelli family’s investment vehicle, whichcontrols fcathrough a 29% stake (Exor is
also a shareholder in The Economist’s parent
company). It is unclear where the merger
would leave Nissan. The Japanese firm’s
partnership with Renault looks creaky with
Mr Ghosn out of the picture, and Nissan
may worry that its influence will fall even
further. But on the other hand its 15% non-
voting stake in Renault will at least convert
into a 7-8% voting share in the new firm.
And the marriage to fca may cool Renault’s
ardour for a full merger with Nissan, which
does not want one.
Then there are governments, which re-
gard carmakers as national champions.
Politicians fear plant closures, job losses
and the unpopular symbolism of industrial
decline. The French state, which owns 15%
of Renault, will apparently give up its dou-
ble voting rights and accept a board made
up mainly of independent directors. The
French and Italian governments may have
been reassured by fca’s guarantee that no
factories will close.
Lastly, running an alliance that makes
15m cars a year will be a feat. Even Mar-
chionne or Mr Ghosn may not have been up
to the task—not least because these super-
stars excelled in rescuing failing carmak-
ers. Mr Senard, who is likely to lead fca-
Renault, has a different task—to steer firms
that are already on the straight and narrow.
If size at the top of the industry moves
from 10m to 15m cars a year, will others seek
to follow? Ford and vware in a partnership
that could grow closer. psa, which makes
Peugeots and Citroëns, is open to offers.
China’s government is perpetually ru-
moured to be planning a merger of its state-
run firms. If they were still in charge,
Messrs Ghosn and Marchionne would have
cheered the consolidation frenzy on. 7Carlos Ghosn and Sergio Marchionne are no longer the kings of the car industry.
But their vision lives on
Renault and Fiat Chrysler
The ultimate tribute show
Dual carriagewaySources:DatastreamfromRefinitiv;JATO;companyreportsMarketcapitalisation,May28th2019,$bn Vehicleunitsalesbytype,2018,%Vehicle unitsales,2018,mShareprices,October13th2014=100,€termsFCA196.7 82.1 29.5 26.8 18.7 7.1
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MotorsNissan020406080100FCA RenaultSmall carsSaloonsMinivansSUVsPick-upsElectric&
hybridOthers2014 15 16 17 18 1901002003004005000 2 4 6 8 10 12
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FCA
Renault
Mitsubishi Motors