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How Fiat Chrysler Automobiles dropped Renault for PSA

After months of talks with Renault, Fiat Chrysler Automobiles has finally decided to merge with PSA. Why this reversal? Sociacom decrypts the case. 

Carlos Tavarès and Mike Manley signed the PSA-FCA legal merger agreement on December 18.

Chronology of events:

May 27, 2019 : Renault's board of directors announces its interest in the proposed merger of equals with FCA.

June 6, 2019 : FCA withdraws its merger offer with Renault. 

December 18, 2019 : FCA and PSA announce the signing of a memorandum of understanding (Mémorandum of understanding en anglais) pour créer le quatrième constructeur automobile mondial, ainsi que l' establishment of the new head office in the Netherlands. 

January 22, 2020: Mike Manley, managing director of Fiat Chrysler Automobiles (FCA,),reaffirmed  that he hoped to reach a deal with PSA within 12 to 14 months.

Why is FCA looking at all costs to merge?
 1 - To compensate for its faulty range

Looking at FCA's financial results over the past few years, they appear to be quite stable. FCA's operating margin is within the average values of a general car manufacturer – except for Toyota, which stands out from the rest with the margin levels of a premium brand.


FCA brings together all of the following brands : Fiat, Lancia, Alfa Romeo, Abarth, Maserati on one side and Chrysler, Dodge, Jeep, RAM, SRT, Mopar on the other. If the first brands are known to the European public, the second are mainly to the American public.


On the European side, sales of Lancia, Alfa Romeo, Abarth and Maserati remain fairly confidential. Maserati by its positioning, the other brands by a very weak product offer and responding less and less to market expectations. It now sells less Alfa Romeo in Europe than Smart. And more Fiat 500s are sold in Europe than Alfa Romeo + Lancia + Abarth + Maserati combined ! FCA's sales in Europe are mainly based on Fiat, through the Fiat 500 and its variants, the Fiat Panda and the Fiat Tipo. Jeep, through the Compass and the Renegade, stand out with reasonable volumes.

This is FCA's first problem. In Europe, its range is inhomogeneous and is based on the success of a very small number of models, which are beginning to age (the Fiat 500 is 13 years old) and whose sales are starting to run out of steam(strongly for the Tipo, which will not be replaced).


Moreover, the future does not seem to have been well prepared : during the presentation of FCA's strategic plan, the late Sergio Marchionne barely mentioned the Fiat brand, while heavy investments and many projects were promised for the other entities of the group.

2 - To meet European pollution standards

The second problem of FCA  is its lack of investment  to meet the drastic European standards on the pollution of vehicles sold.

From 2021, average CO2 emissions per brand should be around 95g/km. Each builder has its own lens. These are the CAFE (Corporate Average Fuel Economy) standards. 

This required manufacturers to make substantial investments to depollute thermal vehicles, and above all, to offer alternatives to thermal engines, hence the emergence of electric and hybrid vehicles. FCA has not made the necessary investments and has suffered a substantial delay.


Each gram of excess will cost the manufacturer €95, multiplied by the number of vehicles sold. A study ofPA Consultingdeduces a penalty for FCA of around, for 2021, 2.5 billion euros !


CAFE standards also exist outside Europe, but they are much less restrictive : 125g/km in the USA, 122g/km in Japan, 117g/km in China, for 2021._cc781905-5cde-3194- bb3b-136bad5cf58d_But even outside Europe, FCA exceeds the requested thresholds, and to avoid paying penalties, buys C02 credits from Tesla, for a cumulative amount estimated at around 2 billion euros since 2010.

The drastic reinforcement of the CAFE standard in Europe therefore sounds a general state of alert for FCA, unprepared and subject to colossal penalties threatening its future.


This is why FCA was actively looking for a merger : to be able to benefit from a competitor's technologies to drastically reduce its C02 emissions, in the absence of having invested for it.

Why PSA rather than Renault?

A marriage only made sense with a manufacturer that had developed the technologies required to comply with future standards, on comparable engine ranges. In this sense, both PSA and Renault have been preparing for this for a long time and could meet this need for FCA.

The details ofwithdrawal of FCA's offer to Renaultare not known, but this change of course is probably linked to the complicated context that the Alliance has experienced sincethe arrest of Carlos Ghosn.

The interest for PSA is to acquire market share outside Europe, which it is sorely lacking today. PSA sells 75% of cars in Europe, while the Renault-Nissan-Mitsubishi Alliance sells less than 50%. This dependence on the European market is a risk for PSA, because it is a market that is changing little and which is becoming more constrained from an environmental point of view compared to the rest of the world.

If the portrait of FCA in Europe is lackluster, it is quite different outside Europe where the group achieves the bulk of its sales. The distribution of sales is complementary between PSA and FCA.


>> So this is the strategic interest of this marriage : to form a generalist group present on almost the entire globe - it will remain to solve the problem of China, a very large market where the two groups do not break through -  relying on PSA's technological expertise in pollution control to sell in Europe and on FCA's base in America to get there develop.

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