Auto consolidation evidence of a challenged industry

This week’s confirmation that Fiat Chrysler and Peugeot have approved a possible merger, to create what would be one of the world’s largest auto groups, is no surprise. Fiat had been in merger discussions with Renault earlier this year, and this is the continuation of a trend seen throughout the industry. By joining forces, car companies seek to cut costs and benefit from economies of scale.

Fiat’s fortunes were transformed under the aegis of the late Sergio Marchionne, who believed that the auto sector was in desperate need of consolidation. A Fiat/Peugeot combination would offer huge cost-saving opportunities, economies of scale, and strength in areas where each group is individually under-represented; Fiat‘s North American business (Chrysler) has been outperforming, whereas in recent quarters its European auto business has been barely profitable. Conversely, Peugeot lacks North American exposure.

The combined group would have a market cap larger than Ford and on a par with BMW, although there are many hurdles to jump before these initial talks become anything more solid. What theoretically sounds like a good idea may become mired in the details of what would be largely a cost-cutting exercise – in markets where job reductions are notoriously difficult (Italy and France).

Auto companies are currently facing the double whammy of weakening consumer demand alongside the expense and time of developing an electric vehicle portfolio to comply with stringent emission targets and an increasingly environmentally conscious consumer. Whilst no other auto mega-mergers are known to be on the cards currently, collaboration across technologies and platforms will continue; Ford’s joint venture with Volkswagen on electric vehicles and autonomous driving technology is a case in point.

The global outlook for car demand is resoundingly negative. Whilst I’m not suggesting we are about to revisit the dark days of 2008/9, when European auto CDS spreads blew out to eye-watering levels and two of the big three filed for Chapter 11 bankruptcy, the direction of travel is decidedly downward and forward visibility opaque.

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