Commentary: This is For Real, Now

The deal is almost done between Fiat Chrysler Automobiles and Groupe PSA to merge as one entity.

It may be done, but there’s plenty of shouting that might happen sometime afterward. Before the shouting starts, I better take a look at this deal to see if this is a good one for the combined companies, especially when it pertains to North American operations, employment, and market presence.

The following are points from the press release from FCA's North American media site. I want to examine each point and see what kind of sense I could make from them. Or, at least try…

"Combines companies' extensive and growing capabilities to address the challenge of shaping the new era of sustainable mobility."

"Mobility" is the buzz word for the automotive industry going into the 2020s and beyond. It goes beyond selling automobiles to consumers, but to expand the idea of automotive use to everyone. It also means the expansion of electrification efforts and autonomous driving.

Each company has an opportunity to work on mobility efforts towards using its combined resources in executing them. I have no doubt they will succeed, but where? Since the company will be well rooted in Europe, these initiatives will play out well, as many countries within the European Union have set new standards towards electrified vehicle expansion into the next decade and beyond.

If they want to target this strategy in North America, it is going to take a massive combined effort towards acceptance and execution – both areas that seem to be resistant here in the USA by the government and the general public.

"Combined company will be the 4th largest global OEM by volume and 3rd largest by revenue with annual sales of 8.7 million units and combined revenues of nearly ($190 billion)."

The PSA-FCA combined entity will be primed to challenge the likes of Toyota, Volkswagen, Ford, and other major manufacturers. There is more to this, as I go through the other points…

"Creates a diversified business with among the highest margins in its core markets of Europe, North America and Latin America and the opportunity to reshape the strategy in other regions."

In the three regions listed here, a combined PSA-FCA company offers greater opportunities through diversification, but with some shared strategies. Yet, one challenge I offer is to brand presence in these three regions. How do you leverage Fiat, Jeep, Peugeot, and Citroen in Brazil and Argentina when one brand leads the other? In other words, how do you customize brand strategies in individual countries, while maintaining a region-wide combined strategy?

"Merger will deliver approximately ($4.1 billion) estimated annual run-rate synergies with no plant closures resulting from the transaction – synergies are expected to be net cash flow positive from year 1."

This is where I have to throw caution in the wind. It is great to keep all of the plants running across the company – particularly, in Europe. With plants stretching across the continent, feeding a total of ten brands, there has to be some sort of attrition based on platform consolidation down the line. By attrition, this may mean terminating brands that have been around for a century or so – with rich histories attached to each one.

Platform sharing is already happening for Opel and Vauxhall with the Corsa subcompact, now built on the Peugeot 208 platform, also known as the CMP/EMP architecture. There are reports that it will be happening on FCA’s vehicles, as well. Consolidating models onto shared platforms is a great idea – sometimes. I am curious how PSA will approach aging models on the FCA side of the merger – the 500, for example.

I would like to see these platform synergies played out where they are needed. Jeep, Ram/SEVEL, Dodge, Alfa Romeo, and Maserati vehicles might be just set, but I would not be surprised that some crossover/SUV platforms would be in the favor of PSA’s architecture instead of FCA’s.

Back to the assembly plant infrastructure, it is a bold statement to make when you are committed as a combined company to maintain all facilities worldwide – again, with an eye on Europe. If there is an export strategy for selected markets – the Americas, perhaps – then, yes, go full bore with all plants running near or at capacity. Again, I throw caution in the wind if, all of a sudden, a model line is canceled due to sales from another brand within the combined company. That could ultimately lead to a plant closure and loss in jobs.

I would be curious if keeping all plants running across Europe would work for the combined PSA-FCA enterprise in both the short and long run.

"Strong combined balance sheet and high level of liquidity provide financial flexibility with an investment grade credit rating expected."

Good. Next?

"Combined company will leverage investment efficiency across a larger scale to develop innovative mobility solutions and cutting edge technologies in new energy vehicles, autonomous driving and connectivity."

I touched upon some of this earlier in this article. However, am I correct to assume that FCA has a great connectivity architecture over PSA?

"Broad portfolio of well-established iconic brands offering best-in-class products covering key vehicle market segments and delivering higher customer satisfaction."

Though I mentioned my concern over possible consolidation of brands across the merged company, I have to make further points here.

For starters, Jeep is the golden asset that everyone wants. Under FCA, Jeep became a global brand with greater acceptance in Europe, while making inroads elsewhere. I can see Jeep playing a major role in the combined company as the purveyor of great SUVs worldwide. That does not stop other brands from offering their own products in the same segments. PSA’s people will have to find ways to combine platforms while ensuring Jeep customers that their vehicles will be available with Trail Rated versions. That does not lessen the value of Peugeot, Opel, and Alfa Romeo’s SUV offerings, but to ensure that each brand has a specific purpose for them to offer their own product.

The death of the Opel Insignia does not spell the end of the sedan/hatchback across PSA and FCA. The Peugeot 508 looks like a brilliant vehicle and could underpin a bunch of new sedans/hatchbacks that we might even see in North America. Well, one could dream, right?

When it comes to commercial vehicles – i.e., trucks in North America – the shared strategies of the SEVEL van lineup has been beneficial for all brands offering their own version of the Fiat Ducato. This is a prime example of how this newly merged company could operate in this particular segment.

"Excellent working relationship between the two management teams, which share successful track records in turnarounds, value creation and successful OEM combinations."

Again, I certainly hope so. In most corporate transactions Chrysler had been involved with, the shared talent among key positions within the expanded company created deeper benefits towards fiscal success and positive product development. For example, when Renault sold AMC to Chrysler in 1987, some of Renault and AMC’s talent helped changed the product development culture within Chrysler. This led towards taking the strengths of the Eagle Premier’s platform and transforming it into the LH platform and the Cab Forward design strategy.

It is safe to say that Sergio Marchionne's legacy was rooted in his "love" for Chrysler. From that love came a talent pool across both sides of Fiat Chrysler Automobiles to make it a combined success with a mix of global and local products made for each market without making too many compromises.

"Strong governance structure to underpin combined company performance with John Elkann as Group Chairman and Carlos Tavares as Group CEO, with a majority of independent directors."

There are a lot of legacies that will drive the merged company. Elkann is from the Agnelli side of the house, which brings the passion of adding Maserati and Alfa Romeo to the mix. Fiat will still be dear to the heart, but there may have to be some balancing with Peugeot and Citroen as part of this combined portfolio.

This is why I hope Tavares and his executive team – FCA CEO Mike Manley, included – will have to drive this combined company towards making this merger work.

"Strong support of long-term shareholders (EXOR N.V., Peugeot Family Group, Bpifrance) who will be represented on the Board."

Good.

One thing I would like us to consider is the broad portfolio of brands that the combined company will have. There are not enough cautions being thrown in the wind to explain that such a strategy may backfire in the years to come. However, it would give the expanded company some ideas on what to do with brands that have a limited portfolio and not enough customers supporting them. Chrysler and Lancia come to mind.

I would be curious as to the kind of solutions the expanded company will have to maintain those brands – among others. Are Vauxhall and Opel still worth selling? What about Chrysler and Lancia? And, what about DS? Could Alfa Romeo’s pedigree supplant the new premium idealism of DS?

But, hey, Maserati and Citroen are back together again! Sort of…

This is not the end of the coverage of this merger. I’m sure we’ll have more details in the months and years to come. If Fiat and Chrysler worked, maybe this one will.

Photo of Carlos Tavares, PSA (left) and Mike Manley, FCA – courtesy of Fiat Chrysler Automobiles.

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