Weekly Reflections - 38/2015

Why Marchionne is right about a deal with GM

When six years ago Marchionne placed his bet on Chrysler the case was for putting together the two vehicle manufacturers that mostly complemented each other, both in terms of geographical markets and product segments.

Six years on and Marchionne is causing a stir again in the automotive industry. As a great poker player, he’s doubling down by hinting he has some great cards on hand. Does he?

The FCA-GM case is the opposite of the Fiat-Chrysler case. This is a high overlap, synergy-creation case. The two vehicle manufacturers compete in the same product segments and geographies, the notable difference being the stronger presence of GM in China than FCA. Both face the challenge of increasing CAPEX in the next 3 years and beyond in order to push new products into the pipeline.

FCA is planning Euro 23 b of CAPEX in 2016-18, GM plans to increase the percentage of registrations from new / facelifted vehicles from 23% to 36%

CAPEX for business development is the curse of the industry: vehicle manufacturers need to continue to inject huge amounts of money into expensive product development to stay in the market, but as Marchionne has always said the returns hardly pay back the invested capital in comparison to many other industries. By sharing product development GM and FCA would save considerable amounts on their CAPEX. This time not only on powertrain and some purchased commodities but on the entire vehicle platform. For example, both manufacturers need to relaunch and grow their premium brands, Cadillac on one side and Maserati + Alfa Romeo on the other side. In this case, besides platform costs – that will begin to generate savings no earlier than two years – distribution costs could immediately bring benefits to both vehicle manufacturers as well as to dealers.

Other area of synergy could be the labour cost in the US. FCA has a $ 10 / hour labor cost advantage vs. GM because of its ratio of entry level workers over the total hourly workforce (45% vs. GM’s 20%). Through the recent deal FCA and the UAW have agreed a progressive salary increase. By combining the GM and FCA workforce the two manufacturers would have a lower labor cost per hour vs. Ford. If GM managed to change its entry level / total workforce ratio over time, it would improve the combined labor cost advantage even further. Moreover, GM and FCA together could increase their critical mass to negotiate bulk discounts from health care providers for their retired workforce.

Certainly, there are many more areas of synergy for both manufacturers than just these examples. On paper the case looks good for both. However, some high hurdles could cause big pain: antitrust issues, cultural clash, clarity about who is in charge for what within the two organizations, and a number of execution issues that could derail the two companies. On the other hand, it is move that has the power to disrupt the entire automotive industry.