In June, short-lived merger discussions between Fiat Chrysler Automobiles (FCA) and Renault collapsed with FCA blaming French politics. Despite their abrupt ending, analysts had little doubt that discussions could be revived again in view of the strong mutual interest in such a merger. This was recently reaffirmed by FCA’s CEO, David Manley. As the car industry is rapidly transforming, renewed merger discussions between FCA and Renault could mark the beginning of a consolidation wave in the wider industry.
In an interview with the Financial Times, David Manley highlighted that the “the industrial logic that was present before, it is still present”, referring to a merger between FCA and Renault. He further added that such a combination, which would result in an annual volume of 8.7 million car sales, offers “significant synergies”. Industry experts broadly agree with this analysis, emphasising the much greater market coverage the combined carmaker could achieve. While Renault would gain access to the US market, the world’s second largest and where 50% of FCA’s sales are located, FCA could benefit from Renault and its partner Nissan-Mitsubishi’s strength on European and Asian markets.
In addition to Renault gaining an entry ticket to the US market, David Bailey, professor at the University of Birmingham’s business school, told 7Dnews that the French carmaker will also have an opportunity to develop into different model segments thanks to FCA’s portfolio of crossovers and SUVs, as well as premium and luxury brands like Alfa Romeo and Maserati.
Meanwhile, with “an aging model range and no electric vehicles in the pipeline”, FCA could benefit from Renault’s technological expertise, as it is a “world leader in electric vehicles”, according to Ferdinand Dudenhoeffer, professor at the University of Duisburg-Essen and director of the university’s Centre for Automotive Research (CAR).
Merger Technically Feasible
Aside from the potential strategic benefits for all parties involved, Dudenhoeffer voiced optimism that such a merger would be technically feasible, stressing both carmakers’ experience in previous mergers. “Renault’s management team has demonstrated in a series of mergers that it is capable of completing mergers,” he said.
According to Dudenhoeffer a particular success has been the revamping of Dacia without forcing the Renault culture on it, turning it into “a market leader for low-cost cars”. FCA is similarly experienced in corporate tie-ups, the most recent one being the merger between Fiat and Chrysler.
However, Dudenhoeffer also cautioned that Renault’s alliance with Nissan-Mitsubishi might not survive a merger with FCA. In this, the speculation is that if FCA’s merger with Renault does not work out, they could still be looking into a potential tie-up with Renault’s partner Nissan, or even Renault’s French rival PSA Group.
Rise in M&A Activity Across the Auto Industry
Considering the fundamental transformation which the car industry is currently undergoing, industry experts believe that a worldwide uptick in merger and acquisition (M&A) activity in the coming years is inevitable. “The auto industry will see more change in the next ten to fifteen years than in the previous 100 years,” said Bailey.
A study published by consultancy McKinsey argues that emerging market development, the accelerated rise of new technologies, sustainability policies and changing consumer preferences around ownership will give rise to “four disruptive technology-driven trends in the automotive sector: diverse mobility, autonomous driving, electrification, and connectivity”.
The huge investment required to keep up with such trends will in Dudenhoeffer’s view necessitate industry consolidation: “most of this will be in China. However, also Japanese and European carmaker have to concentrate, either by mergers or co-operations.”
Failed M&As such as BMW’s takeover of Rover in the 1990s and Daimler-Benz’s merger with Chrysler serve as a reminder that this approach to synergy has not always been successful in the car industry, prompting Bailey to warn that “whether such mega takeovers will actually work is another matter.”
Dudenhoeffer agrees that past experience with mergers has been mixed, but stresses that, overall, there have been more successful than unsuccessful mergers in recent years. Moreover, there have been prosperous alliances underpinned by cross-shareholdings between manufacturers, such as Toyota-Subaru and Renault-Nissan.
Consolidation in the Automotive Supplier Sector Already Underway
Such consolidation would come at a time when M&A activities in the automotive supplier sector are already well underway. A report by the consultancy PwC estimates that in 2019 alone an estimated $44 billion in mergers and acquisitions will close, which will exceed $50 billion if acquisitions of partial stakes in autonomous vehicle technology companies are included. In 2017 and 2018, M&As totalled $57 and $51 billion. On a global scale, “powertrain and electronics systems suppliers are in the forefront among global consolidators,” the report found.