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FCA’s Marchionne Screams for Industry Consolidation

CEO says industry wastes half of capital spent.

by on Apr.29, 2015

FCA Chief Executive Sergio Marchionne reiterated his belief in the need for mergers and consolidation in the auto industry today.

The auto industry globally is failing to earn its cost of capital and needs a major reorganization that would allow major companies, such as Fiat Chrysler Automobiles NV, execute a sweeping consolidation of platforms, technology, and research and development, FCA Chief Executive Officer Sergio Marchionne insisted during a conference call with reporters and analysts.

Marchionne said his talk about the need for consolidation is quite serious and not flip.

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“We need to be brutally honest,” he said, while presenting a series of charts, showing the auto industry isn’t covering the cost of the capital it consumes in enormous quantity.

Consolidation is the only logical way to reduce costs, according to Marchionne, who said he wanted the keep open the discussions about the possibility of combining with other companies such as General Motors or Ford.

Senior officials at the aforementioned automakers have dispelled any notion of a merger with FCA in the last week. Marchionne suggested that the type of merger he foresaw would not require killing brands, closing factories or dumping production workers.

“I think a fundamental problem that can’t be ignored. These were not hallucinations by someone trying to grab headlines. It’s fundamentally immoral to let that waste continue. It cannot continue,” he said. “Joint ventures only get so far. We need to bring down the cost of execution. It’s too large way too large.”

Marchionne admitted Fiat Chrysler hasn’t been able to generate an adequate return on capital. Consequently, after completing the company’s five-year plan last spring, he ordered an extensive study of the industry’s capital investments.

“I’m trying to drive the business away from mediocrity,” he said.

(FCA turns Q1 profits, improves margins. For more, Click Here.)

The mandate for safer and cleaner vehicles is certainly making new demands on carmakers. But he estimated that half the capital used by the industry is simply wasted.

Marchionne acknowledged previous mergers, notably the combination of Chrysler and Daimler-Benz AG, failed, but added that the failures and problems inherent in combining large companies ought not prevent senior executives and the capital markets from forcing consolidation. The capital markets need to get tougher on the industry, added Marchionne.

“I think we need to find a way to get this done. It’s important for everyone not just us,” he said. “We have a unique opportunity to change the paradigm in the industry.

“Consolidation they have failed because cooperation never found a way to build consensus. There was a lack of trust and respect. The complexity was too much for the current leadership to manage,” added Marchionne, who noted even premium makers such as Mercedes-Benz and BMW have barely made an adequate return during the upturn in sales that followed the 2008-2009 recession.

(Click Here for details on VW’s strong earnings despite management strife.)

However, Marchionne said consolidation offers a “tremendous way to reduce the cost of investment. We have run simulations and the savings in powertrain development alone could reach 1 billion euros.

“I can’t ignore the size of the savings,” he said.

By and large, analysts seemed impressed by the case Marchionne made for a sweeping consolidation. But they were also skeptical about the prospects for a merger in North America or anywhere else.

Dissatisfied shareholders simply “walk away,” noted one analyst.

(GM CEO Mary Barra dismisses idea of merger with FCA. Click Here for the report.)

“If the industry can’t consolidate in the trough (of a recession) when the industry’s in flux and bankrupt, it’s unlikely it’s going to happen at the top of the cycle,” observed one analyst. “Besides we have no influence. The Germans don’t listen to us. You think Piech or Winterkorn of (Volkswagen AG) ever read a banker’s note.”

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7 Responses to “FCA’s Marchionne Screams for Industry Consolidation”

  1. Paul Schroeder says:

    Consolidation likely means higher prices and less innovation. I suppose it is good to be the consolidator and not the consolidatee.

  2. Rt says:

    I think Sergio is full of it when he says consolidation wouldn’t affect workers. The first thing that investors would look at is closing factories and killing brands. Actually, we’ve seen this movie before, albeit by another name, reorganization of GM. Saturn and Pontiac disappeared, and factories were closed, workers were laid off, and wages and benefits were negatively impacted. Sergio knows this.

    • Jorge says:

      Agreed, the execs paint a pretty picture to dupe the public. Once upon a time a company named Mercedes did a “merger of equals” with Chrysler. We saw how that “merger of equals” ended up… and the disclosure that it was a façade and never meant to be a merger of equals, but simply an acquisition with a lot of blood shedding to appease stock holders.

  3. GT101 says:

    It sounds like Marchionne is trying to save Fiat from imminent demise.

  4. veh says:

    Sergio is looking out for Sergio. And if you only worry about return on capital, instead of focusing on making the best product, then you’ll ultimately fail.

    If things are this dire, why isn’t anyone else singing the same song?

  5. Ex Chrysler Employee says:

    Chrysler has been sold “3″ times now within the last 18 years. 1) Daimler 2) Cerberus 3) Fiat…The industry does NOT need consolidation. Subaru is doing just fine!! So is Ford, Hyundai, Toyota, etc….What he means to say is “I don’t want to work any longer”. Same with all prior Chrysler execs who sold out. Benedict Arnold had nothing on Chrysler management. And it perpetuates itself based on the example that has been set forth.

  6. Colin Baird says:

    He’s had five years to turn it around, and now is discovering his capital has been wasted? He needs to pull his head out of his arse. He is the only one who can identify which process within HIS OWN COMPANY are inefficience. AND HERE’S NEWS: WORK IN PROCESS, INVENTORY LEVELS, AND THROUGHPUT RATES AREN’T GOING TO SOMEHOW MYSTERIOUSLY IMPROVE UNLESS YOU IMPROVE THE PROCESSES THAT DRIVE THE LOSS. Every time I hear one of these knucklhead leaders with an M and A solution to their personal woes, I throw up on myself.