Wednesday, March 15, 2017

Hey, Want to Buy a Car Company?

Fiat-Chrysler has been offering itself for sale for some time now....

Who would buy Fiat-Chrysler and why?   It is an interesting question, and one that may be answered soon.  The CEO of Fiat-Chrysler, Sergio Marchionne, has been aggressively pursuing suitors like a desperate girl on Tinder.   What's up with that?   When you come across as too desperate, well, it can be a turn-off.

The thought is, consolidation makes sense in the auto industry, as cars become more of a commodity item and become largely interchangeable.  I noted in an earlier posting that the idea of the "luxury car" is really becoming obsolete, as even the most plebeian car can be optioned up with every electronic doo-dad the "luxury" brands have.  Selling status and perception of status is the real deal in the luxury segment today - you pay double for a hood ornament, basically. 

The cost of developing new "platforms" for cars is staggering as well, and car makers are already sharing these costs, particularly for lower-volume cars such as sports cars.  Toyota has partnered with Subaru for a sporty job, and is slated to partner with BMW for a Z4 replacement.   The car business is quite incestuous these days.

And in this climate, Fiat-Chrysler may be struggling to develop newer platforms, given the current environment of high fuel mileage requirements (soon to change under Trump - for a while at least) and new safety standards.   And let's not forget self-driving cars, which will definitely cost a lot to develop.  Fiat's car offerings have been shown to be somewhat lame, and famously, they cancelled their entire small-car lineup after most folks turned their noses up at them.   Fiat-Chrysler needs help, to be sure.  They need a sugar-Daddy!

Mr. Marchionne's main crush is GM, which has spurned his offers of flowers and candy.   And it is not hard to see why.  There are two main components to Fiat-Chrysler, neither of which GM wants.  There is the US division, which makes pickup trucks and SUVs which are profitable in America but not really salable overseas.   The US car division, like most US companies, is shrinking as cheap gas once again goads Americans into driving movable houses-on-wheels as personal transportation.

The other half is the Italian arm, mostly represented by Alfa-Romeo.   Alfa makes some pretty decent cars I guess, but you can imagine the cost of manufacturing in Italy, where corruption is rife and people tend to favor three-hour lunches.   Quality has been a real sticking point for Fiat-Chrysler, as they seem to land in the bottom of the heap with regularity.  Chrysler was always the least of the big-3, and the quality perception of Fiats has always been challenging.

For GM, this is a total non-starter.  Let's take aside the fact that GM famously offered to buy Fiat more than a decade ago, paying billions of dollars for the opportunity and then famously paying billions more to get out of the deal.   This the cash that Fiat used to buy Chrysler with, and they got a few GM platforms and technical know-how in the deal.   GM was burned once by buying Fiat, I doubt they will ever, ever, ever do it again.

Plus the product lines make no sense for GM.   Other than the iconic Jeep brand, there is little to offer GM.  And GM can make a new Blazer if they wanted to compete with Jeep.   The entire US product line of Fiat-Chrysler would simply overlap with GM.   GM would once again find itself with too many cars, too many plants, and too many divisions - something it has struggled mightily to extricate itself from in the past.  Other than maybe taking some Jeep models, the only smart thing GM could do is just close down the rest of Chrysler in the US.

As for Italian operations, this is also a non-starter.   GM just famously dumped its Opel and Vauxhall brands, correctly perceiving the European market as being difficult to crack, due to delusional unions and governments who put the "rights" of union members above all else.  After decades of losing money, GM threw in the towel.   They'd want to jump right back in again, this time with Italian unions to deal with?   You must certainly be kidding.

So who does that leave?   Well, ideally, it would be a company that does not already have a significant US presence, and does not have a large truck and SUV line already in their product mix.   To such a company, a merger or acquisition might make sense.  They would gain entry into the pickup truck and SUV market instantly, without having to spend years of R&D money developing their own lines - and product reputation.

It would also have to be a company that has experience in managing plants in the EU, who hopefully can wring a profit from those Fiat plants - and improve quality as well.

These criteria leave out Ford and GM.   The Japanese might seem like a good bet, and I opined that Honda might be interested.   Of the big-3 Japanese makers (Toyota, Honda, Nissan) only Honda doesn't have a serious body-on-frame pickup truck or large SUVs to sell.  Toyota and Nissan have pickups and SUVs and are starting to build a reputation in that market - and would be loathe to abandon it.  Nissan is selling Titans with Cummings diesels in them - a direct competitor to Dodge.  The Japanese have yet to crack the really heavy duty 3/4 and 1-ton markets, but like anything else the Japanese do, they tend to take it in incremental steps.  They'll get there, eventually on their own.

So who does that leave?   I think the Chinese and Indians are out, as while they have acquired niche manufacturers like Volvo and LandRover, they might not be prepared to swallow as large a fish as Fiat-Chrysler.  Dealing with US unions would no doubt drive them insane, much less dealing with Italian unions.

Maybe some European manufacturerPeugeot just bought GM's interest in Europe.  Renault already is paired with Nissan.   Mercedes already swallowed Chrysler at one time - and then spit it out.  I doubt they are interested in Round 2 of such a mess - just as GM doesn't want to go back the altar a second time.   BMW?   I doubt it.  The quality issues and union issues would be too much to bear.  And it would degrade the sporty quality image that BMW has struggled to develop over the last decades. 

Volkswagen.  That might be the ticket.  They want to be the world's largest car maker, and are doing so, squeaking by Toyota and GM to claim the prize - in spite of dieselgate.   They don't have much of a US presence in terms of manufacturing (one plant only, recently opened) and have little or nothing in the way of trucks and SUVs to sell.   They already have sold some Chrysler products in the past - rebadging the Dodge Caravan as the "Routan" for a few years.  It could be a good match for VW, expanding their US manufacturing base and dealer base.   Their expertise in car-making could fill in the gaps in the Chrysler lineup (which as noted, is shy on cars) while at the same time providing them with a line of hot-selling SUVs and trucks.

As for the Fiat part, VW would be in a better position to manage EU operations of Fiat.  They just need some of that German efficiency, right?  And besides, Italy used to be part of the Axis.

It will be interesting to see how this plays out.   But VW, in retrospect, seems like the obvious fit for Fiat-Chrysler.

UPDATE:  A lot has happened since this posting was made.   Sergio Marchionne died unexpectly and the car business has hit rough times, even before the virus struck.  GM sold off its European divisions to PSA (Peugeot) and now PSA is merging with Fiat-Chrysler.   Reminds me of the old saying about the Studebaker and Packard merger - "two drunks, holding each other up!"

PSA is a huge operation, and Fiat-Chrysler is, as well.   Problem is, the combined company now has huge assets in terms of auto plants all over the world - many running at well below capacity, and as such as not really "assets" as they are liabilities.   PSA is still trying to swallow up its GM purchases, and finding that there was a reason GM wanted out of Europe - intransigent unions, local governments, and even customers, as well as antiquated car designs.  Now, they are swallowing money-losing Fiat as well?

Meanwhile, the head of Renault-Nissan is jailed in Japan and tunnels his way out to Lebanon of all places.   Then the virus strikes, and car production worldwide shuts down for over a month - no big loss, as car sales drop to nearly nothing for a month as well.

All I can say is, hang on to your hats, this is going to be a bumpy ride.  Expect one or more of these car companies to go broke in the next year or so, and the mergers and consolidation in the industry accelerate greatly.