Autos

Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

Fiat Chrysler Automobiles' CEO Sergio Marchionne is at it again -- stoking speculation about consolidation in the car industry.

After General Motors staunchly resisted his advances, Marchionne hinted last week that Ford, Volkswagen or Toyota might make a suitable partner for his company. FCA Chairman John Elkann muscled in on the act too, claiming a partnership with one of the "big guys" could generate annual savings of about $10 billion.

Marchionne's willingness to discuss M&A publicly and speak frankly about the industry's tendency to obliterate shareholder capital have made him a darling among the media and the analyst community.

Doubtless, his outspokenness is supposed to make FCA seem forward-thinking but Marchionne's merger obsession succeeds only in highlighting his company's many weaknesses.

To be sure, FCA had a decent year. Marchionne's salesmanship helped FCA spin off Ferrari on an earnings multiple normally reserved for a luxury goods company, rather than a capital-intensive metal-basher. (Ferrari's stock performance since the IPO has been anything but racy, however, as Gadfly has noted.)

Meanwhile, booming sales of Jeep SUVs in the United States helped FCA generate more than 900 million euros ($1 billion) in free cash flow last year, according to Bloomberg data.  

But these successes can't hide the myriad other drawbacks which make FCA a highly unattractive merger partner.

Consider Latin America, which accounted for more than 13 percent of FCA's vehicle sales last year. The company is the market leader in recession-hit Brazil, where sales fell 32 percent last year. That helped to drag down full-year sales globally.

Brazilian Burden
Latin America didn't help FCA's global sales in 2015
Source: Company filings

Turn to Europe. FCA generates a quarter of its global sales from the region. Despite a recovery in the market, it still barely makes money there: earnings before interest and tax were just 1 percent of revenue in 2015.

Marchionne argues the industry needs to consolidate to cut high development costs, which automakers wastefully duplicate.

That's true -- but his message is also self-serving. Unlike GM or VW or Toyota, FCA lacks the financial resources to invest sufficiently in technologies like autonomous driving, electric vehicles or connectivity. FCA spent only 2.6 percent of net revenue on R&D last year, well below the average for the industry and peers such as VW, as this chart from Bloomberg Intelligence shows.

Research Spending
Fiat spends far less on R&D as a proportion of sales than most of its peer group
Source: Bloomberg Intelligence

FCA has about 5 billion euros of net debt after the Ferrari IPO. Its defined benefit pension plans were underfunded by more than 5 billion euros at the end of December. Not surprisingly, the company enjoys a junk rating.

FCA is relying on some ambitious growth forecasts to turn net debt into net cash. But the U.S. market now looks to be peaking .

Unlike many rivals, FCA lacks a captive finance arm. That puts it a competitive disadvantage. When sales slow, automakers with stronger balance sheets can borrow cheaply and use to proceeds to, in effect, subsidize price cuts. The company has tried to address that with a partnership with Santander to provide financing for customers.

Fiat's dependence on Jeep's success is particularly worrying. Marchionne seems to be making an all-in bet that low oil prices will continue to support the brand's sales for years to come. But complying with emissions regulations will become increasingly costly.

Under other circumstances, it's conceivable Jeep might have made an attractive takeover target for Volkswagen. The German automaker's reputation and sales in the U.S. have taken such a battering that buying a trusted, growing brand might have made sense once the German company's diesel liabilities have been settled. But separating Jeep from the rest of FCA is a non-starter because the other operations have too much debt and don't generate enough cash.

All this means Marchionne is likely to be be left whistling his lonely merger melody for a while to come.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. FCA expects the car industry's sales in NAFTA to be broadly flat in 2016: it estimates the industry will sell between 21.0 million and 21.5 million vehicles, compared with 21.1 million in 2015.

To contact the author of this story:
Chris Bryant in Frankfurt at cbryant32@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net