In the fast changing automotive industry, collaboration seems to be the preferred strategy for sustainability and growth. French carmaker and Europe's No. 2 auto major by volumes Groupe PSA, which owns the Peugeot, Citroen, DS, Opel and Vauxhall brands, is in talks with Italian-American OEM Fiat Chrysler Automobiles (FCA) for a possible merger. FCA owned brands are Jeep, Fiat, Alfa Romeo, Lancia, Maserati, Chrysler, Dodge, Ram, and LCV brand Fiat Professional.  

The two auto giants are evaluating a consolidation opportunity for cost sharing and risk-hedging in times of major technological disruptions in the mobility space. After a news report by the Wall Street Journal hinting at the strong likelihood of a dialogue between the two companies, Groupe PSA has now confirmed in a press statement that there are ongoing discussions with FCA "aiming at creating one of the world's leading automotive Groups." The merger could lead to the formation of a conglomerate valued at $46 billion (Rs 325,266 crore). 

A possible way of combination being discussed between the two Groups is by means of an all-share merger of equals, according to the news report. Carlos Tavares, CEO and chairman of the managing board, Groupe PSA and John Elkann, chairman, FCA and head of the Agnelli family which holds a 29 percent stake in FCA through a holding company Exor NV, are together being touted to assume the shared responsibility of being CEOs of the new combined automaker.

Hurdles along the way

However, the formation of a joint entity should still be taken with a pinch of salt considering the recent fallout of FCA's proposal of a 50:50 merger with France's Groupe Renault, which couldn't get a full backing from the French government (a major shareholder in Renault) and Renault's global alliance partner Nissan.

While Exor NV also holds a 23 percent stake in luxury sports car marque Ferrari, PSA on the other hand sees a 12.2 percent stake in Peugeot by China's state-run Donfeng Motor Group Company. Analysts believe that this could ring some alarm bells with the regulators in the US who would be overlooking the merger, where the Committee on Foreign Investment in the United States has been keeping a close watch on all Chinese-related deal making involving US companies and technology. But, with the stake being rather modest, they also expect it not to be much of an issue.

The automotive industry the world over is increasingly observing a trend of collaboration and joint development between companies, some arch rivals of decades, all in an attempt to ensure business viability at a time when most of them have been struck with the targets of meeting extremely stringent emission norms in most countries, while also tasked with making huge investments into the development of new propulsion technologies such as electric mobility as well as autonomous driving. Shrinking product lifecycles and fast changing trends are also making it increasingly challenging for a player to ensure healthy return on investments in projects singlehandedly. In some cases, they may also pose a risk of losing money.  Also, sharing costs in a business environment of prolonged slowdown has emerged as being the best solution for long-term sustainability.

A win-win opportunity
A combination of the two giants, if achieved, will hold the potential of escalating the duo's global ranking to No. 4 by the virtue of their combined sales volumes, whilst also offering them added scale and cost cutting opportunities. FCA and PSA together sold 8.7 million cars in 2018, putting them ahead of General Motors, which clocked sales of 8.4 million units last year. However, the front-runners would still be ahead by some margin with Volkswagen leading globally with 10.8 million units, Renault-Nissan-Mitsubishi (10.8 million units) and Toyota (10.6 million units).

What would also come as a bonus opportunity for the two is that while Peugeot will find inroads into the US market where it has been conspicuous by its absence for over three decades, through FCA's well established dealer network selling Jeep and Ram brands, Fiat would get more exposure within Europe, where it could manage to sell only a million units last year. The company is also finding it difficult to adopt a go-alone strategy and meet the highly demanding investment requirements in clean emission technologies when its global sales are facing headwinds.

Successful merger discussions between PSA and FCA could also have an impact in their India businesses. FCA is now present in the country only through its Jeep brand, and PSA has made an announcement to enter the market with a mid-sized Citroen SUV next year. It won't be surprising if there would be leveraging of synergies between the two in this promising but highly competitive automobile market.