Fiat Attempts to Add GM's Opel Operations to Its Chrysler Acquisition

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Fiat Attempts to Add GM's Opel Operations to Its Chrysler Acquisition

Written by Rich Truesdell

Monday, 04 May 2009

While we sleep Fiat's Sergio Marchionne seeks to scoop up GM's European operation in an effort to reach critical mass and become a top-tier auto maker.

Chrysler, Fiat, and Opel In some ways the concept is so audacious that it could not have been imagined just a few months ago. Fiat's Sergio Marchionne is well on his way to positioning Fiat as an auto producer on the same scale of Toyota and Volkswagen. In a February interview that appeared in the April 2009 issue of UK's Car magazine, Marchionne said that there will only be six major auto makers standing when the current round of consolidation concludes in the next 24 months. With these aggressive steps, first with Chrysler and now with Opel, Marchionne is trying to insure that Fiat is among the survivors. The near-doubling of Fiat's stock in the last 12 month is clear evidence that Marchionne is a force to be reckoned with.

If successful, Fiat will be the world's second largest automaker behind Toyota and ahead of the Volkswagen Group. The Wall Street Journal reported late Sunday that Fiat's board of directors authorized Marchionne to seek a merger between Fiat and GM's European operations. If the three-way alliance--that should generate in excess of $100 billion in annual revenues--is successful, Fiat would consider separating Fiat's auto operations from the larger Fiat industrial organization. According to CNBC Europe early Monday morning, Marchionne was on his way to Berlin to negotiate with representatives of the German government and later with GM Europe's management team.

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The word you'll be hearing in the weeks to come with regard to the global auto industry is consolidation. Addressing worldwide manufacturing over-capacity, we will watch as the current 20 or so major manufacturers in North America, Europe, Japan, Korea, and China combine into six to eight mega-companies. Prior to its move on Chrysler, Marchionne was candid in saying that he wasn't sure that Fiat would be one of the survivors.

Adding Opel with minimal cash outlay or investment on Fiat's part--it's thought that the German government would guarantee loans to Fiat to complete its purchase of Opel--to its Chrysler acquisition, Fiat leap-frogs over other global players in getting the scale necessary to be one of the top-tier manufacturers. And while the current focus is on GM's European operations including Opel, Vauxhall, and possibly Saab, don't forget that Marchionne has been in alliance discussions all through 2008 with Citroen-Peugeot (PSA) in France. If Marchionne is able to add PSA to a Fiat-Chrysler-Opel alliance, it will become the world's largest automaker by production volume.

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Of course, such a scenario faces obstacles at every step along the way. First is the pragmatic issue of integrating disparate operating units, each with its own corporate culture. No one knows this better than Chrysler after its ten years under the thumb of Germany's Daimler, but unknown to many American observers and the Johnny-come-lately automotive pundits on the TV finance networks is that earlier this decade Fiat and GM Europe were allied. This is the same alliance that GM spent $2 billion dollars to buy its way out of in 2005, one of the many expensive mistakes made under former CEO Rick Wagoner's watch. While the sharing of engines and platforms between Fiat and GM was only marginally successful in delivering cost-saving synergies, under Fiat's direction, there may be better success this time around.

In a rapidly changing automotive landscape, Marchionne may very well be right when he said in the earlier Car interview, "By the time we finish with this in the next 24 months, as far as mass-producers are concerned, we're going to end up with one American house; one German of size, one French-Japanese, maybe with an extension in the US, one in Japan, one in China and one potential European player."

Here's how this might unfold.

US--Ford with its European operations intact
Germany--Volkswagen Group (now owned by Porsche)
French-Japanese--Renault-Nissan possibly allied with GM
Japan--Toyota-Lexus
China--a single state-supported entity who will buy Volvo from Ford
One potential European Player--Fiat-Chrysler-Opel, possibly with PSA as well

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Like the rush to the life boats on the Titanic, this leaves some rather substantial players left standing on the deck, including BMW and Daimler-Benz in Germany, Hyundai-Kia in Korea, Honda in Japan, and Tata (with Jaguar and Land Rover) in India. They aren't going to disappear, but will need to find and form their own alliances. Other smaller, regional players, companies like Saab and Mitsubishi, will be absorbed by one of the larger players or will disappear altogether.

All of this consolidation, speeded up by the current global auto recession, is moving forward at warp speed. Fiat, taking advantage of the weaknesses of both GM and Chrysler is positioned to rise from its traditional second-class status and move to the big boys' table. While the success or failure of Marchionne's current moves will take years to play out, he must be applauded for his proactive moves in the face of today's incredibly difficult market conditions.