Possible FCA-Renault Merger To Face Challenges To Pledge Cost Cuts

According to reports quoting auto industry veterans, there are some challenges to the plans of Fiat Chrysler and Renault to generate significant cost savings from a possible merger because of the long product cycles of the industry and the issues that are typical of translating deal blueprints into real world situations successfully.

Back in 1994 when BMW AG purchased Rover, and in 1998 when Daimler AG merged with Chrysler Corp, both the deals were welcomed by the industry a. investors and analysts. Combination of vehicle production platforms and engine families would result in hike profits, both the companies had pledged. But both the projects had to be unwound because the deals were found unworkable in the real world.

On the other hand, it has been 20 years that Renault and Nissan Motor Co had formed an alliance which was formed to share vehicle components. But according to Morgan Stanley, use of common vehicle platforms has been possible only for about 35 per cent of Nissan’s vehicles even though the two companies had originally targeted to achieve it for 70 per cent of the vehicles produced.

FCA and Renault have ruled out possibilities of plant closures because of the merger which would put pressure on the two companies to achieve the promised savings from synergies of more than $5 billion by sharing procurement and research investments.

There is an ongoing process of consolidation in the auto industry because of pressure on the auto companies to reduce automotive pollution. Companies need to invest millions of dollars for the development of low or no emission hybrid and electric vehicles as well as create less polluting internal combustion engines. The merge of Fiat Chrysler and Renault would allow the companies to jointly design common electric vehicle systems, hopes the two companies. The companies then plan to use their respective brands and dealer networks for selling of the products which would ultimately reduce the price of the cars.

According to industry experts, the companies can avail greater opportunities to share costs from the outset by development of all-new electric vehicles.

“With the emergence of connected, autonomous, electric and shared vehicles, carmakers face immediate investments, so new opportunities for sharing costs have emerged,” said Elmar Kades, managing director at Alix Partners.

However, most electric vehicles lose money. This is a challenge for city car brands in Europe in particular. Both Renault and Fiat rely heavily on this segment for sales.

“The economics of cheap small cars are getting harder,” said Carl-Peter Forster, an auto industry veteran. “Hybrid technology is too expensive in the small value segment and with electrification there is the dilemma of having a large battery which is too expensive or having a battery which is cheaper and small, but offers only limited operating range,” he explained.

While not wanting to comment on the proposed merger of FCA and Renault, he said that plans for synergies from sharing platforms and engines typically take quite a bit of time to get translated into tangible benefits for both partners.

“The Opel Fiat partnership to develop a new platform for the Fiat Punto and Opel Corsa shows it is possible to do cooperation on architectures and powertrain, but it takes a minimum of three to four years before you even start reaping the benefits,” Forster said.

(Adapted from Reuters.com)

Categories: Economy & Finance, Regulations & Legal, Strategy, Sustainability, Uncategorized

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