BUSINESS
05/27/2019 08:34 EDT | Updated 05/27/2019 12:28 EDT

Fiat Chrysler Wants To Form Global Giant By Merging With Renault

The alliance would create the third-largest automaker in the world and potentially save billions of dollars in costs.

Mohamed Abd El Ghany/Reuters
Fiat Chrysler has offered to merge with France's Renault in a move that would make the alliance one of the biggest automakers in the world.

PARIS — Fiat Chrysler proposed on Monday to merge with France’s Renault to create the world’s third-biggest automaker and combine their investments in the race to make new electric and autonomous vehicles.

The merged company would reshape the global industry: it would make some 8.7 million vehicles a year, leapfrogging General Motors and trailing only Volkswagen and Toyota.

Shares of both companies jumped more than 10 per cent on the news of the offer, which would see each side’s shareholders split ownership of the new manufacturer.

Renault welcomed what it called a “friendly” offer. The company’s board met Monday at its headquarters outside Paris to discuss the proposal and said afterward that Renault will study it “with interest.” In a statement, Renault said such a fusion could “improve Renault’s industrial footprint and be a generator of additional value for the Alliance” with Japan’s Nissan and Mitsubishi.

Fiat Chrysler’s offer comes at a key moment for Renault. The French manufacturer had reportedly wanted to merge with Nissan, but those plans were derailed by the arrest of boss Carlos Ghosn on financial misconduct charges in Japan.

 

Now, questions are growing over the Renault-Nissan-Mitsubishi alliance, which is the biggest maker of passenger cars in the world. While Fiat Chrysler says the merger with Renault would accommodate the alliance and lead to savings for them, it is unclear how the Japanese companies might react in the longer term to being tied to a much larger partner.

A deal would save $7.53 billion for the merged companies each year by sharing research, purchasing costs and other activities, Fiat Chrysler said in a statement. It said the deal would involve no plant closures, but didn’t address potential job cuts.

The companies are largely complementary: Fiat Chrysler is stronger in the U.S. and SUV markets, while Renault is stronger in Europe and on electric vehicle developments. Together, they would be worth more than $60 billion.

The elephant in the room is who will run the entity.Analysts Philippe Houchois and Himanshu Agarwal

“This operation will bring benefits to both countries,” Fiat Chrysler Chairman John Elkann told reporters in Italy, noting that it had been 10 years since Fiat’s takeover of bankrupt Chrysler, in exchange for small-car technology and management know-how.

The car market has shifted dramatically in the meantime, with Fiat Chrysler abandoning small cars in the U.S. in favour of SUVs.

Analysts at financial firm Jefferies said it was “hard to disagree with the logic” of the deal as there is a strong fit in the markets each company covers and the brands they offer.

“The elephant in the room is who will run the entity,” analysts Philippe Houchois and Himanshu Agarwal wrote in a note to investors.

France is open to the idea

Mergers of equals can be difficult to manage over questions of who gets the top leadership positions and which brands are promoted and invested in most. A tie-up between Daimler and Chrysler in the 1990s was billed as a merger of equals, but it collapsed nine years later amid cultural differences and recriminations.

Investors were nevertheless enthusiastic, pushing shares in Fiat Chrysler up 11 per cent and Renault 14 per cent in European trading.

The French government, which owns 15 per cent of Renault, said it is “favourable” to the idea of a merger with Fiat Chrysler, but wants to study its conditions more carefully, especially in terms of “Renault’s industrial development” and employees’ working conditions, government spokeswoman Sibeth Ndiaye said. “We need giants to be built in Europe.”

Ghosn’s legal problems in Japan have left Renault vulnerable. Ferdinand Dudenhoeffer, head of the CAR automotive research centre at the Duisburg-Essen University, said Ghosn’s plans to merge Renault with Nissan-Mitsubishi had “little appeal” for the Japanese.

He noted that Renault’s sales represented just 36 per cent of 2018 alliance sales and the Japanese didn’t want to see the French carmaker drive a merger with those numbers.

A Renault merger with Fiat Chrysler, however, could strengthen both companies’ positions and put pressure on smaller companies like Ford in Europe.

Collaboration between automakers has taken on greater importance in recent years as they seek to build their technological capabilities in pursuit of electrical vehicles, net connectivity and artificial intelligence for vehicles. Automakers are also under pressure from regulators, particularly in Europe and China, to come up with electric vehicles so they can meet tougher climate change regulations and after scandals over the amount of pollutants engines truly emit.

Major focus on job numbers

The merger idea is the biggest corporate move so far by Fiat Chrysler CEO Mike Manley, who took his position after the unexpected death of the charismatic leader Sergio Marchionne last year.

What happens to jobs is likely to be a source of concern.

France’s influential CGT union warned against cuts should a deal go through, and said it wants the French government to retain a blocking stake in any new company.

Matteo Salvini, the leader of Italy’s rightwing populist League party and the deputy premier, said that “if Fiat grows, it is good news for Italy and Italians,” though he warned a deal should protect “every single job.”

In Tokyo, Nissan CEO Hiroto Saikawa wouldn’t comment directly on the idea of the deal but said, “I am always open to exchanging constructive views on strengthening the alliance.”

With files from Yuri Kageyama, Colleen Barry, and Sam Petrequin