Fiat Chrysler, Peugeot to create world’s fourth-biggest carmaker

Fiat Chrysler and France’s PSA Peugeot said Thursday they have agreed to merge to create the world’s fourth-largest automaker with enough scale to confront big shifts in the industry, including a race to develop electric cars and driverless technologies.

Italian-American Fiat Chrysler brings with it a strong footprint in North America, where it makes at least two-thirds of its profits, while Peugeot is the No. 2 automaker in Europe.

Both lag in China, however, despite the participation of Peugeot’s Chinese shareholder, Dongfeng, and are playing catching up in developing electric vehicles.

The 50-50 merger is expected to offer savings of $4 billion, which the automakers expect to achieve without any factory closures—a concern of unions in both France and Italy where the carmakers have more overlap.

Fiat Chrysler’s strongest brands are Jeep SUVs and Ram trucks and it is focusing on relaunching its premium and luxury brands, Alfa Romeo and Maserati, with a focus on hybrid engines. It still makes smaller cars under the Fiat marquee, mostly for the European and Latin American markets.

PSA Peugeot makes mostly small, city-friendly cars, family sedans and SUVs under the nameplates of Peugeot, Citroen and Germany-based Opel, which it bought in 2017. That is where the companies can expect to have the most overlap.

The new company would be worth $50 billion, with revenue of $189 billion. It would produce 8.7 million cars a year—still behind Toyota, Volkswagen and the Renault-Nissan alliance, which make over 10 million each.

Once a merger is finalized, PSA Peugeot CEO Carlos Tavares will be chief executive of the new company, with Fiat Chrysler Chairman John Elkann becoming chairman. Fiat Chrysler CEO Mike Manley will have a senior executive role.

“This convergence brings significant value to all the stakeholders and opens a bright future for the combined entity,” Tavares said in a statement.

Manley called it “an industry-changing combination,” and noted the long history of cooperation with Peugeot in industrial vehicles in Europe.

The 11-member board will be made up of five members from each company plus Tavares, who is locked in as CEO for five years.

The combined company would be able to share in the cost of developing electric cars and autonomous driving, among other things, as well as to save on investments in vehicle platforms.

European automakers have been looking to mergers and alliances for years to share R&D costs and tackle the issue of overproduction on the continent.

“We have to face the challenges of electric cars and autonomous cars. To face this you need to have champions at the world level,” French Finance Minister Bruno Le Maire told a news conference.

The French government has a stake in Peugeot through its investment bank and just five months scuttled a similar deal between Fiat Chrysler and French automaker Renault. There were no signs of resistance to this deal, beyond concerns for jobs.

Le Maire also wants the new group to create a European electric battery industry, something the French government has pushed for to ensure that European carmakers can reduce their dependence on U.S. and Asian battery technology.

The French state investment bank currently has a seat on the PSA board; Le Maire declined to answer at a press conference whether it would be retained.

There was no immediate comment from Italian officials.

Because of the overlap in European operations and product, there is concern among unions about job cuts, though the companies have promised to not close any plants.

The new company would continue to have offices in France, Italy and the United States, and shares would be traded in all three countries. The parent company would be based in the Netherlands, as is currently the case with Fiat Chrysler.

Both companies have strong shareholder participation by the founding families—the Peugeots in France and the heirs to the Agnelli family in Italy, represented by Elkann.

As part of the agreement, the main shareholders—the Peugeots, the Agnelli family investment arm Exor, as well as the Chinese investor Dongfeng and the French state investment bank—agree to maintain their stakes for seven years. The only exception is that the Peugeots could increase their stake by up to 2.5% during the first three years by buying shares from Dongfeng and the French investment bank.

The next step in the deal is expected to be a signing of a Memorandum of Understanding, which could come before the end of the year.

Here are a few areas that could be crucial to the two automakers’ success:

TECHNOLOGY

For years, Fiat Chrysler has lagged its rivals in electric vehicle technology, with its former CEO once trying to discourage people from buying its only fully electric car in the United States, the Fiat 500E, because he lost money on each sale. The company has made progress on gas-electric hybrids and may have plans for more fully electric vehicles, but PSA has valuable technology that FCA can use, said Navigant Research analyst Sam Abuelsamid.

Peugeot was relatively late to the electric vehicle game but is now working fast to catch up, notably with fellow French rival Renault. CEO Carlos Tavares has made a point of stressing the company’s need to adapt to changing technology at car shows and earnings calls. Last year he announced plans to offer 40 electric models across its lineup by 2025.

“Electrification hasn’t been a huge part of their play up until now,” Abuelsamid said. “Between the two of them, I think they could generate some scale for whatever they’re doing, sharing component costs, development costs across electrical platforms,” he said.

More electric vehicles also would help FCA meet pollution and fuel economy regulations in Europe.

As far as autonomous vehicles, neither company is among the leaders, Abuelsamid said. But that’s a technology that’s years into the future, giving them time to share the huge expenses and catch up together. FCA also has alliances with other companies such as Google spinoff Waymo that could bring autonomous vehicle technology to the market when ready, Abuelsamid said.

UNITED STATES

At an appearance in Detroit last year, Tavares said PSA would be selling vehicles in the U.S. within the next decade.

“If you want to be a global player, you have to be there,” he said.

The company has since been working on ride-hailing services and talking to dealerships, but little progress has been revealed. A deal with FCA could accelerate that goal greatly.

With 2,640 dealers across the U.S., Fiat Chrysler would be a ready distribution network for Peugeot and other PSA vehicles. PSA even could remain separate from Fiat Chrysler brands by selling in underutilized Fiat and Alfa Romeo dealerships.

PSA specializes in small and medium-sized cars, which have fallen out of favor with U.S. and even some international buyers who prefer SUVs and trucks. PSA could build its own vehicles off the underpinnings of FCA’s hot selling Jeep SUVs and Ram trucks, Abuelsamid said.

ASIA

The merger is expected to do very little to help the two carmakers in the world’s largest market: China.

Despite a 2014 investment in Peugeot by the Chinese carmaker Dongfeng, there has been no real push to expand the French carmaker’s sales in the Chinese market. This seems to indicate that the two carmakers are not as intertwined in China as expected.

PSA Peugeot last year reported its sales in China down 34% in a market that slipped just 2%, with the Dongfeng joint venture posting losses last year of 234 million euros.

Fiat Chrysler, which produces four Jeep models in a joint venture with the Chinese company GAC, saw sales dropped 24% to 163,000 in 2018. It cited higher competition the SUV segment. Fiat had just a 0.8% market share in China last year.

While China sales are off again this year, they are projected to keep growing in future years.