Sergio Marchionne is worried. The CEO of Fiat Chrysler (FCAU) seems to be pushing hard to get General Motors (GM) interested in partnering or merging with his company, which would create the world’s biggest automaker and give Fiat Chrysler global scale it currently lacks. GM sees little to gain from such a deal, which is why Marchionne is trying to ally himself with hedge funds that have previously exercised influence over GM, according to the Wall Street Journal.
Marchionne’s concern about his company’s vulnerability is justified. Fiat’s 2009 purchase of Chrysler gave the struggling Italian automaker a streamlined U.S. division that now provides the bulk of the company’s revenue and profit. Yet Fiat Chrysler is still only the seventh-largest global automaker, with a chronically weak home market in Europe, scant investments in new technologies such as electrification, and major shortcomings in its product lineup. Its profit margin is just 0.8%, less than one-third that of GM and one-tenth Toyota’s, according to S&P Capital IQ. And that’s with a booming U.S. market with near-record sales and transaction prices as high as they’ve ever been.
Fiat Chrysler has made huge strides with the new products it’s been introducing, and Marchionne seems to think the automaker’s lineup would blend nicely with GM’s. But at least two storied divisions — Chrysler and Dodge — would end up as orphans more likely to be wound down than given new life.
“Everything Fiat Chrysler is doing is right,” says Dave Sullivan of research and consulting firm Auto Pacific. “But it’s hard to figure out what they would do with the overlap.”
Chrysler consists of just three models these days—the aged 300 sedan, the relatively new 200 family car and a minivan due to be updated next year. GM might want the minivan, since it no longer offers one, but the other two models would duplicate GM cars such as the Chevy Impala and Malibu. As for Chrysler’s continual efforts to tiptoe upscale, at GM, that’s called Buick, which already struggles for recognition in the U.S. market (but is a hit in China).
Too much overlap
Dodge has the same minivan as Chrysler (slightly dressed down), plus other offerings with direct analogues at Chevrolet. Dodge has earned strong marks for newly designed models such as the Durango SUV and Challenger muscle car, but why would GM want them when it has the Tahoe, Camaro and Corvette from Chevrolet?
Likewise, Fiat Chrysler’s Ram full-sized pickup, which used to be a Dodge, has won plaudits and buyers -- but it would be redundant next to the Chevy Silverado and GMC Sierra. Fiat also owns Ferrari and Maserati, prestige brands that nonetheless might not fit with a mass-market American car builder.
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Ford (F) once owned Jaguar, Land Rover and Aston Martin, but sold those high-end brands in 2007 and 2008 to raise badly needed cash. GM probably noticed that Ford’s experiment with European boutique brands ended with Ford deciding they were expendable.
Fiat Chrysler’s crown jewel is its Jeep division, which just about any automaker, including GM, would probably love to have. When Chrysler was facing the possibility of liquidation in 2009, Jeep emerged as the one asset that might trigger a bidding war were it to go on the block. Jeep’s rugged reputation and loyal customer base make it one brand that would complement GM’s other offerings, rather than duplicate them.
Jeep’s allure still isn’t enough to make the whole package attractive, however. GM already has a struggling European division in Opel, and combining that with Fiat would just create an even larger money-losing automaker stuck with Europe’s impossibly high labor costs. Fiat Chrysler is weak in China, and aside from Jeeps that GM could offer through its network there, GM doesn’t really need anything Fiat Chrysler can offer in Asia. Fiat Chrysler is stronger in Latin American than GM is, but LatAm has become a less interesting market as Brazil, its most populous country, has hit an economic stall.
The crafty Marchionne may be floating the idea of a GM merger as a way to court interest from other automakers.
“They need to find someone who doesn’t have trucks and SUVs nailed down the way GM and Ford do,” says Karl Brauer of car-research site KBB.com. On paper, Fiat Chrysler’s lineup might fit best with Volkswagen, Hyundai or Honda, he says. None offers large trucks and SUVs comparable to what the domestics offer, and instead of an outright merger, Fiat Chrysler might be able to work out a more modest strategic alliance such as Nissan and Renault have had in place since 1999.
On the other hand, Marchionne might have to wait for another crisis to torpedo an automaker and compel it to enter a shotgun wedding. Provided the target isn’t Fiat Chrysler itself.
Rick Newman’s latest book is Liberty for All: A Manifesto for Reclaiming Financial and Political Freedom. Follow him on Twitter: @rickjnewman.