Fiat lost out in the battle for Opel – and that has a knock-on effect for the group, making it harder to make for much-needed cuts in Italian capacity. Sergio Marchionne still wants a third partner – but who will it be? Mark Bursa investigates
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Sergio Marchionne’s bid to add Opel to his Fiat-Chrysler empire failed on two counts – politics and money. German politicians in particular didn’t like the Fiat boss’s blunt claim that factories would have to close – yes, even German ones.
And neither the politicians nor General Motors liked the fact that Marchionne wasn’t offering a wad of cash to take Opel off their hands – just the transfer of management and technology, and the promise of profits down the line.
Now Sergio has a problem. Without Opel in the mix, Fiat-Chrysler is some way short of the magic 5.5 million units of production, a figure Marchionne himself claims is the entry point for competitiveness in the 21st century. In a good year, Fiat and Chrysler’s combined production is around 4.2m. This year it will be much lower.
The group sits in sixth place in the world manufacturing league – behind Toyota, Ford, VW, Renault-Nissan and ‘New GM’, which looks more like old GM minus Opel the more you look at it. But it’s clear that Marchionne needs another acquisition or merger of some kind to get up around the 5.5m level. And he has to achieve it without splashing the cash – simply because he hasn’t got any.
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By GlobalDataMarchionne needs a deal not just to make Fiat group bigger – he also needs to make Fiat Auto smaller. The Fiat-Opel deal gave an opportunity for some much-needed consolidation in Europe, and the shedding of some of the continent’s overcapacity. Not just within Opel – but within Fiat, and specifically in Italy.
Just as any shuttering of Opel plants was unpopular in Italy, so is closing Fiat plants in Italy. Unions are strong and militant, and not unafraid of strike action. The Opel deal, portrayed at home as a great Italian business triumph that made Fiat one of the world’s leading automakers, would have provided a convenient smokescreen to allow Fiat to make these cuts.
What’s more, it would have given good political leverage – Fiat would have been seen to be taking its fair share of the pain, and that might have made it easier to persuade German chancellor Angela Merkel that closing a German Opel plant or two might be for the best.
Now Marchionne is faced with the prospect of making the cuts in broad daylight. The out-on-a-limb plant at Termini Imerese, Sicily, will stop producing cars in 2011, he has announced – though it won’t close. It makes the Lancia Ypsilon hatchback, a car that really only sells in Italy, and will be easy to integrate into another plant, probably Melfi. Other cuts are promised, but these are hardly earth-shattering. Marchionne is treading carefully.
He has other problems too – just last year, Fiat was adding Central European capacity, buying up Serbian automaker Zastava as the site for a new small ‘Topolino’ city car. The pressure would be on from Italian politicians and unions to abandon such a move rather than close Italian plants, though the Topolino only becomes viable with lower labour costs than achievable in Italy.
The big picture is still the same. The path to competitiveness depends on scale – and that requires a takeover or merger. But with which company? And how will Fiat fund the deal? The finger of speculation keeps on pointing at PSA Peugeot Citroen, and to some extent, this makes sense. The two companies already have strong links, via the Sevel van and MPV joint venture, and other shared LCVs, such as the Turkish-built Minicargo models (Fiat Fiorino, Peugeot Bipper and Citroen Nemo).
But PSA has been through management upheavals recently, with Christian Streiff lasting less than two years as CEO. A carefully-honed strategy, helmed by Streiff’s predecessor Jean-Martin Folz a decade ago has seen PSA forge a path based on individual alliances – such as Sevel, or the deal with Ford on diesel engines, with Toyota on small cars in the Czech Republic, or with Mitsubishi on SUVs.
These deals have allowed a relatively small company such as PSA to leverage greater economies of scale, helping bring down costs. And the company has stuck with the plan, resisting any grand merger overtures.
Until now, that is. Recent comments by Thierry Peugeot, a member of the family that still controls 30% of PSA, have suggested that a larger alliance is possible – provided the Peugeots remain a “major shareholder”.
Whether that means majority shareholder is another issue – and although the Agnelli family that controls Fiat is open to diluting its share, it’s clear that the Peugeots would not be in any position to dictate terms. They would have to accept that their share in a merged Fiat-PSA would be diluted, and control would remain in Fiat – and Marchionne’s – hands. But crucially, the deal could be done on a share-swap basis, so cash could be kept out of the equation.
But there are other problems with a Fiat-PSA merger. For a start, the companies are extremely similar in terms of market position and geographical spread. Essentially, both are European-South American focused.
Indeed, Fiat and PSA were until the 1990s linked in South America, under another JV also called Sevel (but confusingly unrelated to the van JV). When this split, Fiat took the Betim plant in Brazil, while PSA took Palomar in Argentina. Both Fiat and PSA have subsequently built new plants in the region, so both now have a presence in Brazil and Argentina. A merger would create a very dominant player in Mercosur.
The combined company would still be a relatively minor player elsewhere in the emerging world, though there are some opportunities. PSA has a sizeable plant in China, while Fiat has struggled to stake a presence there.
However, Fiat is relatively strong in India, via its venture with Tata. PSA is looking to enter the market, but has a patchy history following a failed 1990s attempt to build the ageing Peugeot 309 in India. Fiat has Russian facilities and a plant in Morocco, while PSA has a venture in Iran. The bones of an emerging markets strategy are there – especially if Fiat’s low-cost platforms could be leveraged across the PSA brands too.
Elsewhere, at least Chrysler gives a decent US market presence – but even so, Fiat-Chrysler-PSA makes a lot less sense than, say, Renault-Nissan, where the geographies were different and the alliance is genuinely global, or even Fiat-Chrysler-Opel, where there was marked brand differentiation, which would allow Opel to be pitched above Fiat.
This is not the case with Fiat, Peugeot and Citroen. All are essentially small car brands, competing for the same European A/B/C segments. If you were to leverage platforms to gain the maximum economies, it would surely result in plant closures in France and Italy – so we’re back to the thorny problem of getting European governments to accept there has to be some pain if the industry is to move forward.
And government intervention certainly colours the picture as far as PSA is concerned. PSA accepted a €4bn French government loan earlier in the year, and this, together with French president Nicolas Sarkozy’s protectionist stance, might make it even more difficult to shed PSA plants in France than it would be to close Opel plants in Germany.
Maybe Marchionne has something else up his sleeve. Maybe PSA isn’t the third partner. Indeed, maybe PSA is looking elsewhere too – Ford of Europe, for example, which also has strong ties with the French group, notably on diesel engines. Whether Ford of Europe’s well-run business – just four main car plants, with almost no overcapacity – needs the complication of PSA is another issue.
Perhaps Marchione is lining up another company, with a better fit with Fiat and Chrysler. A brand that covers different territories; that has different values and strengths – perhaps more up-market, and better able to build bigger cars.
Looking at the potential suitors, there are one or two candidates – companies that fall shy of Marchionne’s magic formula for success. BMW is one – though, like PSA, it is ruled by a strong family that would be reluctant to surrender control. And it’s hard to see where you could leverage any economies of scale – Mini, perhaps? BMW platforms for Lancias and Alfas? It looks an unlikely prospect.
Maybe Sergio might be better off casting his eyes eastwards. By his own reckoning, there’s only room for one Japanese-owned brand – Toyota. But what about Honda? Culturally, it’s not dissimilar to Fiat – family-run, with a strong engineering and sporting heritage. It has strength in large cars – such as the Accord – and a presence across Asia. And in the US, a combined Honda-Chrysler would be a very big player.
Pure speculation, of course. The partners would have to be willing – and there’s no indication right now that Honda wants anything other than complete independence. There are other Asian options too – such as Mitsubishi – but Mitusbishi is a minnow, and wouldn’t get Sergio close to his volume target.
He’s probably resigned to playing a longer game now. It might be no bad thing – there is much to sort out at Chrysler. Any putative partner might want to see how that pans out before jumping into bed.
And perhaps Plan A isn’t dead yet. The Magna/Sberbank/GAZ combine might yet fail to complete a deal for Opel – the Russian elements give cause for concern, especially considering the role of Oleg Deripaska in the deal, and the shaky nature of his finances. If the deal hits the rocks, it would give Marchionne a very strong hand indeed. I’ve said it all along – don’t bet against SuperSergio.
Mark ‘Coolbear’ Bursa
