Analysis: The numbers behind the FCA and the dog merger

FCA PSA cars

ZDK-Psa Puty collects 15 brands under one roof

As the car-decoration group agree to tie the knot, we take a closer look at the prospects for the merger

An agreed merger with Fiat Chrysler Automobiles and PSA Group will create the world's fourth largest automotive company based on sales.

The two European companies last week announced their intention to create a new entity owned 50/50 between the two, but under the leadership of PSA Group CEO Carlos Tavares. Psa can also appoint six board members, versus five for Zia, effectively giving French control over the company's decision-making.

The combination of the two create a 15-brand tech behemoth that together sold 4,2 million vehicles in the first half of this year, behind Volkswagen. Toyota and Renault-Nissan-Mitsubishi Alliance, but ahead of General Motors and Hyundai-Kia, figures from Jato Dynamic.

The company will be big enough “to successfully capture the opportunities and effectively manage the challenges of the new era of mobility,” the joint statement said, citing the high cost of investing in new technologies such as electric vehicles and self-driving cars.

Despite extremely favorable terms, the FCA has been pursuing the merger ever since its previous CEO, the late Sergio Marchionne, warned in his 2015 tract 'Confessions of Capital Addict' that automakers have been forced to consolidate to have any hope of controlling rising development costs. The ARC has already encountered more than once, most recently, after negotiations with Renault, it collapsed at the beginning of this year.

Now just over a year after his death, Marchione's dream has been realized. By sharing technologies and platforms, and pooling other resources, the companies will end up making cumulative annual savings of €3,7bn (£3,2bn), the two said.

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That target can be reached without shutting down factories, the statement said - something the PSA has proven it can do after a successful pivot around GM's money-losing Vauxhall-Opel division.

The barriers to success are huge. The FCA term can be lucrative but, in the €7,3bn (£6,3bn) it made last year in pretax profit, the €6,2bn (£5,3bn) was made in The US is thanks mainly to the demand for RAM pickup trucks and jeep SUVs. The company is struggling in Europe, where demand for its core Fiat brand is too heavily dependent on the sale of lower margin 500 and Panda City cars. It also fails to make serious money from its legendary but underfunded premium brands, Alfa Romeo and Maserati.

Psa could quickly fix Fiat in Europe, argues Felipe Munoz, global analyst at Yato Dynamics. “TSF can use the new 208/Corsa platform to re-enter the supermini segment with the new Punto,” he said. The new Tipo could then follow the Peugeot 308 platform.

The big problem is, FSA's production base is in Italy, where it has an amazing 27 production facilities for vehicles and parts. Behind the cadre in underfunded factories running far from full capacity is a major problem that will take all Tavares' skill to negotiate. It has earned praise in the UK - so far - for managing to keep Vauxhall two stations, but Vauxhall/Opel is still returning to profitability, and the Italian unions are looking for assurances that the same can happen in Italy, where Fiats, Alfas, Maserati and small reason jeeps.

Interesting question, what's going on with Alfa Romeo and Maserati? Turning Maserati into the Italian equivalent of the VW-group profit car Porsche has always been an incredible goal, and earlier this year the FCA announced a €5bn (£4,3bn) investment program to electrify Maserati and launch a new sports car with electric and internal combustion engines for the next year. The dog is described by Maserati and Alfa Romeo as having “considerable development potential”, and perhaps Tavares is the man to fully reveal this. Or maybe he will finally sell the Alfa Romeo to the VW group, to which he has historically been coveted.

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The big strengths of the planned merger are in SUVs and vans – two of the most profitable segments right now. The TSF-PSA merger will create the world's largest manufacturer, with sales of over a million and a half in the first half, according to Yato Dynamics. It is also the third largest SUV maker with sales of 1,5 million over the same period. Combined, with over 1,2 million small cars sold (up to the size of an Astra) but seriously underrepresented in medium-sized saloons (14th largest in the world), a new structure would need to be addressed to overcome weakness in China.

Max Warburton, Bernstein's analyst, admitted that Europe is likely to be a big advantage. “Obviously, the dog does not provide synergies in the US, and very little in Latin America,” he said. “Putting dog and AFP together in China isn't much of a deal, either: two mistakes don't make a right. The deal does nothing to change Alfa and Maserati's outlook, either."

Nick Gibbs


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