GM’s recent sale of Opel has revived talk of mega-mergers
CARS are getting bigger. Motorists worldwide have for years been abandoning four-door saloons in favour of bulkier SUVs. Carmakers have become bigger, too. Four car firms now make around 10m vehicles a year in order to reap economies of scale, particularly in the mass-market bit of the business where profit margins can be painfully thin.
Many executives also believe that size is the only protection against the technological upheaval sweeping the industry. But bulking up fast is easier said than done. Lots of different constituents have to be won over. And most car bosses are still reticent about taking the plunge on mergers because many have been catastrophes. Daimler’s acquisition of Chrysler in 1998, 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 €1.3bn ($1.4bn)—seems to go directly against the imperative to bulk up.
In fact, that deal has had the effect of spurring more talk of consolidation. Speculation centred at first on a possible mega-merger between GM and Fiat Chrysler Automobiles (FCA), itself the result of a deal in 2014 (FCA’s chairman, John Elkann, sits on the board of The Economist’s parent company). The Italian-owned firm, which makes just under 5m vehicles a year, is run by Sergio Marchionne, who has been eyeing a merger with GM for years. With the American firm now discarding a loss-making European business, the theory goes, it could replace it with a profitable one—Fiat—and crunch together the two firms’ successful operations in America.
Mary Barra, GM’s boss, has repeatedly rejected Mr Marchionne’s overtures; selling Opel is unlikely to have changed her mind. Some observers unkindly suggest that GM is in any case 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, a lot of the synergies from a deal depended on combining Fiat and Opel in Europe.
The rumour mill has since moved to Volkswagen. The German firm has long cast a covetous eye over bits of FCA. At an annual industry shindig in Geneva in March that coincided with the final sale of Opel, Mr Marchionne said 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 firm 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 FCA in tow. FCA’s Ram trucks are hugely profitable in America and the Jeep brand is resurgent worldwide. The unrealised potential of Maserati and Alfa Romeo, alluring bywords for Italian style, is also 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 offer. With Seat, a Spanish division, struggling and its own brand said to be loss-making in the region, VW could well do without the trouble of integrating Fiat. FCA is also the only big car company that is lumbered with lots of debt (of just under €5bn), making it a less tempting target.
Matthias Müller, VW’s chief executive, has not ruled out talks with FCA, and has indicated that the German group is more open to a merger than it used to be. But FCA is not the only option. An acquisition of Ford (which just suffered the humiliation of being overtaken in market capitalisation by Tesla, an electric-car firm 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 firm has paid $22bn in fines and compensation, the issue of who knew what and when is still unresolved.
Whatever combination of firms might bring it about, the goal of creating a group that produces nearly 15m vehicles a year makes sense. Mr Marchionne’s oft-stated view is that the industry’s duplicated investment in kit such as near-identical engines and gear boxes is a waste of resources, and that much of the money would be better returned to shareholders. Other car bosses reckon the money should go on the technologies that will transform the industry: mobility services such as ride-sharing, electrification of the drivetrain and autonomous vehicles. Scale would allow car firms to spread the cost over more vehicles.
One argument against full-scale mergers has been that loose alliances, such as that between Renault, a French car manufacturer, and Japan’s Nissan, can do the job by helping to pool development costs. The Renault-Nissan alliance has succeeded. After taking a controlling stake in Mitsubishi, a smaller Japanese carmaker, last year, the firm makes nearly 10m cars a year.
An alliance works well for components and for individual platforms, the basic structure underpinning a car, where the aim is clear and specifications can be agreed on. An engine that might cost $1bn to develop, for example, can be easily split two or more ways. Yet alliances work far less well for broader technologies such as connectivity and autonomous vehicles. It is harder to specify a common goal for a product that could find its way into every vehicle the companies make. And it makes less sense to share futuristic technologies that may prove to be the differentiating factor for buyers of cars in the future.
The arrival of new competitors such as Tesla, and deep-pocketed tech giants intent on disrupting the transport industry such as Google, Apple and Uber, make dealmaking an even more pressing need. “Everyone agrees on the rationale for big mergers, even if execution of deals has been extremely difficult up to now,” says an adviser to the industry.
If car mega-mergers are to go ahead, however, and stand a better chance of success than past attempts, two conditions apply. First, the big stakeholders—governments, families and unions—will need to be convinced. Many carmakers, such as BMW, Fiat, Ford, Toyota, VW and others, have ties to families, which in some cases have blocking shareholdings. VW’s unions or France’s government, which has stakes in Renault and PSA, would oppose deals that could result in big domestic job losses.
Second, transactions will need to do more than simply chase volume. A welcome new trend in the industry is to put greater emphasis on profitability. One of GM’s reasons for getting rid of Opel was to concentrate on profits rather than solely on how many cars it turns out, a decision that Tim Urquhart of IHS Markit, a research firm, calls “groundbreaking and brave”.
A mega-merger would take similar courage, and car bosses tend to be conservative and risk-averse. But after over 100 years of selling cars powered by internal-combustion engines, the industry faces the huge wrench of adapting to a future of electrification and self-driving cars. Software and electronics are displacing mechanical parts as the most important components of a car. A business focused on selling objects will have to start offering ever more transport services. If carmakers do not take the plunge, an alternative is that one of the technology giants with big ambitions in mobility could try to buy, say, Ford, Tesla or PSA Group. For cash-rich firms like Apple or Google, the cost of such an acquisition would be pocket change.