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.
“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.”