PSA, FCA whip up new recipe in merger menu

It was during a roundtable at the Frankfurt Motor Show when this writer asked Carlos Tavares if his company would still be open to the idea of teaming up with another carmaker.

To this, the Chairman of Groupe PSA replied that there was really no compelling reason for the French auto group to look scour for an ally on the lines of Toyota-Suzuki. “If there is an opportunity, we will look at it but we are not looking for it,” he said.

Tavares went on to say that PSA was in a good shape in terms of profitability, technology and management execution capability “which we already have”. The message was loud and clear: for now, the company could handle things on its own, thank you very much!

Clearly, the mood has changed over the last few weeks with PSA confirming a 50:50 merger with Fiat Chrysler Automobiles (FCA) which only, a few months earlier, had contemplated something similar with Renault. It was the shortest offer in recent times: FCA withdrew it in barely 10 days simply because the French government, which has a stake in Renault, was keener that the company strengthen its ties with decades-old ally, Nissan Motor.

In fact, reports were doing the rounds that FCA had reached out to PSA earlier but the manufacturer of the Peugeot and Citroen brands, which has recently added Opel and Vauxhall to its kitty, was not quite receptive. The wheel has come full circle now with the two moving quickly with the merger and emerging the fourth largest automobile entity globally (with nearly nine million units) after Volkswagen, Toyota and Renault-Nissan.

Challenging time

Tavares had also indicated at the roundtable in Frankfurt that these were really not the easiest of times for the auto industry and the situation would become ”highly challenging for companies” during the course of the following decade,

There would be a host of challenges to cope with on the technology front (for emissions, connectivity and driverless cars) along with a generous share of geopolitical anxiety in the form of trade wars, fuel prices and, of course, Brexit which has anxious automakers chewing their nails.

This was when the PSA Chairman reiterated to this writer on the issue of an ally: “I think it is more important to stay focused on getting things done properly, in managing things and making sure that products are of the right quality.

By the end of the day, PSA dealers needed to take care of customers and make sure that they were happy. “The focus on business will be extremely demanding over the next decade given the challenges,” he said. It is quite evident that both PSA and FCA believe that it makes more sense to meet these challenges jointly rather than handle them solo. Tavares has also got the attention of the world with his remarkable efforts in turning around Opel and Vauxhall in record time since the time PSA acquired these brands from General Motors. It is this feat that possibly attracted the attention of FCA since it is in need of a competent ally to steady the ship.

It is also no secret that its former Chairman, the late Sergio Marchionne who passed away last year, was keen on roping in a partner as part of a consolidation drive. Even while he had struck gold by leading the way in buying out Chrysler during the aftermath of the Lehman crisis a decade earlier, Marchionne was of the view that this was not enough to help Fiat (rechristened Fiat Chrysler Automobiles subsequently).

He reached out to General Motors to explore the possibilities of a merger but the latter was not even remotely interested. Speculation was rife that Volkswagen was keen on joining hands with FCA but there was no truth to this. What emerged true, however, was the aspiration of a Chinese SUV maker, Great Wall Motors, to acquire the Jeep brand from FCA but this turned out to be a case of shooting off one’s mouth even before talks could begin. The subject eventually died a quiet death even while there was no doubting Great Wall’s intent.

Since Marchionne’s passing, the leadership team at FCA has continued this mission of scouring for an ally. It was John Elkann, Chairman, who hit the headlines earlier this year for the merger offer to Renault which was withdrawn as quickly. He has clearly been at the forefront in the effort with PSA too and it will be interesting to see how the merged entity plans its next moves.

Apart from taking on new challenges like electrification, the merger also makes sense in terms of accessing markets like Europe and North America where the Jeep brand is one of the biggest draws. PSA recently made known that it would bring in the Peugeot brand for North America while Citroen will lead the charge for India.

The group has not been doing very well in China despite the fact that it was extremely bullish in the country at one point in time. After all, it was Dongfeng Motor which had rescued PSA when the latter was nearly down and out some years ago.

FCA, likewise, has little to show in China and its key markets are Europe and North America. Combining competencies with PSA will help expand its reach here even while taking on new challenges in mobility disruption. Europe has also been very stringent with emission norms and future investments for areas like electrification are bound to be substantial. Joining hands with a stronger ally like PSA will be more than helpful in this context.

It is but natural to ask what this means for India. Very little at this point in time considering that neither company has really made a profound impact in this market yet. Sure, FCA has been around much longer but has had little success in its earlier avatar as Fiat even while products like the Uno and Palio had their share of brief glory only to fizzle out later.

It is only Jeep that has been the real big story but even here the problem is to sustain numbers in a lacklustre market coupled with the need to bring in more products. In the case of PSA, its first Citroen offering is still a year away and building a decent market share will take up a large part of the following decade.

India focus

Now with the merger a reality, the two companies are likely to initially tap India’s competencies for global sourcing and later contemplate joint platforms to roll out products. All this may happen only over the next five years at best. FCA already has an R&D setup in Chennai while PSA has kicked off powertrain exports from its Avtec joint venture with the CK Birla group at Hosur.

Interestingly, there is an interesting tidbit from the 1990s when the two companies had actually kicked off discussions to explore a joint business model for India. This was the time when the country had ushered in its economic reforms and multinational car companies were invited to set up shop here.

Automobiles Peugeot (as it was then called) was among the earlier entrants but found itself neck deep in a host of problems ranging from poor market response to a cash crunch and a falling out with its local partner. Fiat, meanwhile, had the same India ally and was riding high on the success of its Project 178 in Brazil with ambitions to replicate the success story in India.

When Peugeot realised that it could not do much here, its top brass in Paris reached out to their counterparts in Turin to see if a joint manufacturing operation could be considered. Peugeot had a plant in Kalyan near Mumbai which was hardly being used and the company offered Fiat two-thirds of the capacity to make its own cars there.

Peugeot’s reasoning was that the market had not matured enough and it made little sense for one company to have so much capacity at its disposal . Fiat, however, refused since it was keen on establishing its own operations here from a facility at Ranjangaon near Pune.

The talks yielded little and Peugeot finally exited in end-1997 just when it seemed that it was set for a fresh start in India. Fiat, likewise, had to shelve its Ranjangaon plans and take over its local partner’s operations to salvage the Uno.

Citroen, the face of PSA

Today, Citroen is the face of PSA for India and the Peugeot chapter is largely forgotten. Fiat, likewise, has graduated to becoming FCA, moved back to its original Ranjangaon location and is banking on the Jeep brand to set things right after being rudderless for over two decades.

The merger announcement on Thursday could just bring some exciting developments in this country which is on its way to becoming the third largest car producer in the world after China and the US. How soon all this will happen is the million dollar question.

COMMENT NOW