Fiat Chrysler Automobiles
works towards a merger that will bring Fiat Chrysler into the Renault-Nissan-Mitsubishi Motors alliance, selling nearly 11 million light cars every year.
The biggest effects of the deal, if approved, will be felt across the Atlantic. The combined company will be the second largest in Europe, including
S (ticker: 7201.Japan) European sales volume-behind only
But investors should not underestimate the North American implications. It's possible that Fiats Jeep or Dodge brands – or both – may end up selling. While not doing so, a broader shake-up in the automotive industry begins as companies adapt to the rise of electric vehicles, a shift that will make economies of scale more critical.
"[The impact on] North America will depend on future integration with Nissan, Seaport Global analyst Mike Ward to Barron's
. "It will be interesting to see if US assets remain with the new company. Jeep and Dodge are probably worth much more on their own and away from the combined unit. "
It's an exciting idea. A Fiat spokesman said it's too early to talk about how things will play out.
Fiat Chrysler Automobiles (FCAU) has a business value of $ 24 billion in debt and market value. The figure is $ 28 billion, including the company's unfunded pension liability. (Pension liabilities tend to be large in relation to the size of the company for the automakers, so some analysts include them in market valuations.)
And $ 28 billion is only twice estimated 2019 earnings before interest, taxes, depreciation and amortization or ebitda . There is an 80% discount on Dow Jones Industrial Average s valuation more and a 40% discount to Ford (F) and General motors (GM)
Adding Jeep or Dodge to a larger US franchise can unlock significant value.
European investors like the idea of a larger car manufacturer with a higher regional market share. Renault (RNO) shares jumped 12% Monday and Fiat Chrysler stock closed 8% higher. Stocks from both car manufacturers were back in European trade on Tuesday.
Of course, there is no guarantee that an agreement will happen, and even if it does, it is difficult to capture cost savings in large automotive industry conflicts. Fiat's press release said no production facility was slated to be closed.
That's a smart thing to say. The policy is great in the automotive industry.
Car companies are big employers, and governments are highly interested in employment levels and layoffs. The governments are sometimes also big car companies. For example, the French government owns 15% of Renault and the Land of Saxony in Germany owns 20% of Volkswagen.
Politics is one reason why partnerships - such as the Nissan-Renault-Mitsubishi Motors alliance, formed in 1999 and 2000 - are more common than large transformation mergers.
Nevertheless, partnerships have similar goals as typical mergers: increasing scale and descent costs. Historically, the automotive industry has been less interested in competing for production costs and has instead been able to compete for branding and fuel performance.
They don't care if they pass on best practices to their rivals. Do not forget, Toyota Motor (TM) and GM made cars together for decades at the factory near Fremont, California, which now produces Tesla (TSLA) vehicles.
Monday's Fiat Chrysler-Renault news could create an impetus for other car manufacturers to make offers, but activity has already picked up. Ford and Volkswagen announced a commercial vehicle partnership earlier in 2019 and agreed to develop commercial vehicles and medium-sized trucks into global markets.
With the electrification of the station train with batteries and generic electric motors, petrol engines replace and the transmissions-a central point of differentiation between the automakers goes away. The shift means that car production is more about costs and less about the performance of gasoline engines. This means that scale that can be achieved through mergers and partnerships is more important, and internally developed engine technology is less important.
Performance will still be important, but EV range, charging time and battery life depend on technology beyond the automotive industry. Car companies can buy batteries from many independent manufacturers, making internal technology less critical.
It is a shift from how the automotive industry has worked historically: Car manufacturers have produced their own engines. Therefore, there is only one independent engine manufacturer: Cummins (CMI). It makes engines of heavy trucks and has a small business that produces diesel engines for trucks.
There can't be more big mergers advertised, but Barron's would bet on more offers.
Here is an overview of the playroom with regard to existing car associations:
- Nissan, Renault and Mitsubishi Motors (7211.Japan) The Alliance includes cross-company ownership. Nissan owns 15% of Renault and 34% of Mitsubishi. Renault owns 43% of Nissan's shares.
- Fiat Chrysler also works with Waymo, the autonomous driving company started by Google Parents Alphabet (Google).
- Honda (HMC) and GM also cooperate on autonomous driving technology. Honda and Japan Soft (9984.Japan) are also investors in GM's Cruise Autonomous Drive.
- SoftBank and Toyota (TM) has had a mobile service company similar to Lyft (LIFT) and Uber Technologies (UBER) - since 2018. Honda joined the partnership in 2019.
- Daimler (DAI.Germany) and BMW (BMW.Germany) are partners in a separate mobility service.
- And don't forget that almost all major global automakers have a Chinese partner because the Chinese government prefers it that way. Until recently, foreign car manufacturers had no majority stake in local facilities that built foreign brand cars to the Chinese market. BMW, Volkswagen, Peugeot (UG.France) and GM have all important Chinese joint ventures.
Write to Al Root at email@example.com