FCA Finds No Love (From Renault, PSA, Or Daimler)
After a long history of falling down, struggling, and getting up again, followed by a failed merger with Daimler AG, there was nobody willing to help rescue Chrysler after the 2008 crises. That is, until the nearly broke and also struggling Italian FIAT Group dressed in its best white knight suit and showed willingness to try it.
FIAT did not have cash to offer, but it did have probably the best financial manager, Sergio Marchionne, in the whole car industry. Combined with access to export markets and modern efficient technology, the deal was made in a few months.
Financially, both FIAT and Chrysler recovered after the 2008 crisis. But there was a cost. The focus was on short-term profitability and Sergio Marchionne did not believe in an electric car future. He famously asked prospective customers to not buy his compliance electric car, the 500e. He claimed every sale generated thousands of dollars in losses.
The result is not surprising. With low R&D and no serious R&D in fully electric and autonomous technology, FCA is at a dangerous disadvantage to most other car companies. Even when you are willing to spend the money, building an R&D organization takes time, far more time than FCA has before the market asks for electric and autonomous solutions. Not to speak of the more realistic timelines we see emerging.
The first overture was courting PSA. But PSA did not fall in love, like the financial markets hoped. The second candidate was Renault, with a new chairman, great with finances, less so with the future of the car industry. Being old buddies with the FIAT scion of the Agnelli dynasty, love was in the air.
The financial markets were jubilant, no more fighting with the unwilling fiancée from the other side of the world. Renault–FCA could be the third largest carmaker in the world, and that former prospective partner could become part of the family, or try it out on her own in the big bad world.
The partner was not impressed, but Nissan was nice, polite, asked whether this was really what they wanted. Did they think of everything? And what did the parents and Godfather think about it? Because Renault does have a Godfather, in the form of the French state, who holds 30% of the voting rights in the shareholder meetings.
The French state was not on board. The whole relationship was based on cutting costs. And while the financial markets are all in favor in screwing over all other stakeholders in order to get more profits to shareholders, that is not the position of the French state. It is one of those shareholders, like many Tesla shareholders, that have different priorities. It is not about saving the world in this case, but about supporting the French economy and employment.
To most of us, looking at the car industry from the viewpoint of the transition to sustainable transportation, it never made sense for PSA or Renault. FCA just had very little to offer, if anything at all. But what was it the financial markets saw that we overlooked?
Today there was a nice article in the Finacieel Dagblad, a Dutch clone of the Financial Times, that explained it. Both Renault and PSA are trying to stay relevant after the transition. That requires large investments in R&D for electric driving and autonomy. Renault spends nearly as much in euros (6.1% of revenue) as twice as big FCA spends (3.4% revenue), and PSA is even spending more.
In the thinking of the financial market gurus, the synergy of a merger would allow Renault to shrink its R&D budget to the percentage of revenue FCA is spending. And FCA was the most profitable, so the FCA level must be the correct level. That would be savings of €1.6 billion for Renault, or even €1.9 billion for PSA, per year. Which investor would not start salivating about those prospects.
To get on board with the transition to sustainable transport, FCA has to raise its R&D spending to above the percentage Renault and PSA were spending. FCA has a lot of catching up to do to get at the same level of Renault and PSA.
While Renault and PSA both have a small and coherent product portfolio, FCA is all over the place. FCA has the luxury sport brands of FIAT, the low budget bulk of the FIAT brand itself, the different truck and SUV types of the Chrysler family. This forces FCA to spend a lot on developing electric technologies and platforms for all those different segments. There is far less synergy between the FCA product lines than between the PSA or Renault product lines.
The savings the financial markets see for a merger would be suicide for Renault and PSA. It is clearly not only Wall Street that is clueless when electric cars are in the equation.
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