May 26, 2019 / 3:14 PM / 2 months ago

Breakingviews - Car industry second-stringers lock arms to compete

The logo of FIAT carmaker is seen on a vehicle in Cairo, Egypt, May 19, 2019. Picture taken May 19, 2019.

PARIS/MILAN (Reuters Breakingviews) - Less than a year after his untimely death, Sergio Marchionne’s dream is coming true. The former Fiat Chrysler Automobiles boss, whose 2015 palimpsest on the need for consolidation shook the car industry, must be blessing from above the automaker’s talks with European rival Renault. Faced with a future where technology - perhaps more than brand power or engineering prowess - may determine whose wheels dominate the roads, second string operators like Renault and Fiat must lock arms. 

Both face challenges that could eventually render them contract manufacturers in a world where vehicles drive themselves on electric batteries. By teaming up, either through an operating alliance or a full-blown merger, they can reduce costs, pool spending on new technologies and position themselves to strike a better bargain with bigger competitors. Their combined equity value of 35 billion euros today lags key German, American and Japanese rivals. 

There’s money to be made along the way for shareholders of both groups, as Marchionne predicted. The quantum of that harvest will depend on how closely Fiat cuddles with Renault, whose travails with Nissan have necessitated a look for new partners. Synergies from the existing Nissan-Renault-Mitsubishi alliance hit 5.7 billion euros in 2017, or just above 3% of their combined sales.

Assume Fiat-Renault generated half as many savings, and there’s 2.5 billion euros a year on offer. Taxed and capitalised that would exceed the French company’s 15 billion euro market capitalisation. Slashing costs won’t be easy in Europe, where the overlap between the two is greatest. Italy’s economic-nationalist government isn’t going to welcome factory closures. Nor would it help French President Emmanuel Macron’s weekend battles with populists in yellow vests.

So a partnership should initially focus on tech spending. Each firm is projected to spend 3.5 billion euros this year on research and development, according to Refinitiv estimates. Reducing the combined figure by a third would deliver a lasting boost to earnings which, in today’s money, would be equal to Renault’s market value. Channelling fewer euros to startups in Palo Alto or battery makers in Seoul won’t much bother policymakers in Rome and Paris.

But if Renault and Fiat want to choose between what Marchionne called “mediocrity or fundamentally changing the paradigm for the industry”, this is how it begins – if belatedly for the Fiat boss.

Breakingviews

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