Amidst an Industry Revolution, Automakers Fiat Chrysler and Peugeot Hit the Gas on Their Merger

Full scale mergers, particularly between large, multinational firms, are rarely seen in the automotive industry, hence why the impending merger between Italian-American carmaker Fiat Chrysler Automobiles N.V. (FCA) and French carmaker Groupe Peugeot SA (PSA) turns heads. The merger intends to benefit shareholders throughout the process, while also helping both firms cope with ongoing issues and changing industry trends. Both firms have announced their merger as a new standalone firm named Stellantis which will be headquartered in the Netherlands.

To the delight of shareholders, the two firms agreed on the payment of a number of shareholder distributions, both pre-merger and post-merger. FCA will distribute a €2.9 billion special dividend to its shareholders before the merger. The amount of FCA’s special dividend has been lowered, while PSA’s scheduled pre-merger special dividend has been cancelled due to the impact of the COVID-19 pandemic on both firms’ liquidity. Shareholder distributions will also continue after the finalization of the merger, when PSA will spin off its 46% stake in Faurecia, an automotive supplier, along with FCA spinning off Comau, a manufacturing automation subsidiary. These spin-offs will result in roughly €4.33 billion in further shareholder distributions. The combined entity of Stellantis will rank as the third largest automotive company in the world by revenue and fourth largest by unit sales, while housing 14 brands and maintaining a strong balance sheet with a large cash base.

FCA and PSA’s inability to adapt to current industry trends coupled with the numerous problems plaguing both firms made Stellantis’ formation an inevitability. Trends such as the electrification of vehicles (EV), autonomous vehicles (AV), mobility, and connected cars are here, and FCA and PSA are woefully unprepared to capitalize on them. Neither firm has a strong electric vehicle base. FCA only offers one fully electric vehicle, the Fiat 500-e which yields a mere 84 miles of range on electric charge, while PSA is aiming to offer electric versions of each of its models by 2025. Rival firms like General Motors and Volkswagen have released numerous iterations of their electric vehicle brands, with their vehicles yielding 250+ miles of range on electric charge. Furthermore, other companies like Volvo are already offering electric versions of all of its models. This emphasizes just how much FCA and PSA lag the industry in terms of their EV offerings. In addition, they lack established autonomous driving strategies, partnerships with firms specializing in the practice, or even up-to-date advanced driving assistance systems (ADAS) in their current portfolios, trailing behind their peers in every respect.

Apart from their inability to capitalize on these industry trends, FCA and PSA have also struggled to penetrate the Asian market. On a firm-specific level, FCA’s portfolio contains many underperforming brands, such as Alfa Romeo and Lancia, and the automaker finds it difficult to comply with tightening regulations around CO2 emissions, paying fines, and buying carbon credits from other manufacturers. On the other side of the equation, PSA doesn’t have a North American presence and has struggled to establish one. These factors make the creation of Stellantis a necessity.

The larger, combined entity will be flush with cash, while also possessing numerous overlapping processes and brands. As a result of the larger size, the firms will have the ability to tap into greater economies of scale by spreading costs over more vehicles, while also attaining greater bargaining power against unions and suppliers. Due to the overlapping brands and processes, Stellantis could also condense its portfolio by phasing out its underperforming brands while converging the platforms its products use. This will be more feasible with the firm’s larger size as it absorbs the cost of phasing out a brand through its replacement by the overlapping brand, and by also spreading the cost out over more units. The condensed portfolio would require a smaller manufacturing footprint which the firm’s greater bargaining power over unions would help achieve, ultimately further decreasing the hurdles faced while winding down unprofitable divisions. Moreover, this merger will allow PSA to tap into FCA’s established dealer network and manufacturing footprint in North America as it attempts to expand its portfolio’s reach, cutting the cost it would’ve otherwise incurred as a separate firm. Cumulatively, the merger should achieve €5 billion in synergies.

Furthermore, Stellantis’ most useful asset, and the driving force behind this merger, remains its larger cash base. FCA and PSA both need to increase their capital expenditure (Capex) and research and development (R&D) costs to catch up to peers and continue to capitalize on the current industry trends they lag behind in. This increase in Capex and R&D also has higher importance for FCA as it attempts to reduce its vehicles’ CO2 emissions and meet tightening regulations around the world. Both firms also need to increase spending in order to penetrate the Asian markets. Taking a lesson from Ford’s mistakes, FCA and PSA must prepare to introduce new models on a quicker basis in China, while meeting the Asian appetite for function over form, as was learned by American automakers upon their entry and subsequent exit from the Indian market. These changes mean both firms need to conform to the Asian culture while establishing dealer networks and manufacturing plants in the area. All of these changes require a continuous hemorrhaging of cash, a need that the combined firm of Stellantis will meet adeptly.

This impending megamerger serves as a preview for the future of the automotive industry, one with a lot less competition due to a lot more consolidation. Even ten years after the Great Recession, firms struggle to achieve their previous levels of financial success. They have spent a good portion of this past decade deleveraging their balance sheets, cutting costs, and exiting unprofitable markets to return to sustained profitability. Resultantly, they simply don’t have the cash or size to compete in and penetrate all possible markets, while also funding Capex and R&D to stay up-to-date with the EV and AV innovations. The current industry trends don’t just require FCA and PSA to catch up to their peers, they represent a revolution underway in the industry, one that will require enormous Capex and R&D costs in the present and for the foreseeable future. These factors make industry consolidation a necessity for the survival and growth of automakers. It will allow firms to utilize similar platforms and parts while also cutting redundancies, hence experiencing an abundance of synergies and allowing for an increase in margins and cash reserves.