Gentlemen, Start Your Mergers

It would have been unthinkable a few years ago: France's state-owned producer of lackluster cars, Renault, talking merger with that upscale pride of Swedish industry and suburban U.S. driveways, Volvo. But times are changing for Europe's carmakers. Competition and costs are up. Profit margins and growth prospects are down. The shakeout is hitting Renault and Volvo. They're ready to merge, if they get a green light from the French government.

They're not alone. Around Europe, auto makers are chasing alliances as a cost-cutting antidote to harsh competition, particularly from Japan. Renault and Volvo would be the biggest deal yet, in a wave that has seen such specialty makers as Jaguar, Saab, and Alfa Romeo swallowed by larger players. The pain of restructuring is being eased by such EC protectionist tactics as limits on Japanese imports and exclusive dealership networks that prop up prices.

After Renault, Italy's Fiat is the prime merger candidate: Its long-sheltered home market is vulnerable as Europe becomes a single market. It has courted Peugeot in recent years, "and still does," says Peugeot Chairman Jacques Calvet. So far, Calvet says he isn't interested, apparently because Fiat wants to run the show. Struggling Porsche may fall to Volkswagen or Daimler Benz. Rolls-Royce cars are on the block. And Britain's Rover Group, 80%-owned by British Aerospace and 20% by Honda, could be next.

Even if full-blown marriages don't blossom, companies are stepping up efforts to build cars and components jointly to save cash. VW and Ford are building a plant together in Spain, as are Peugeot and Fiat in France.Peugeot hopes to build transmissions with archrival Renault. With the Japanese coming, "it's unrealistic to spend $500 million developing a new transmission alone," says Jean-Yves Helmes, head of Peugeot's auto division.

VOLVAULT? A debt-ridden weakling a few years ago, Renault has made a strong comeback under Chairman Raymond H. Levy. In his five-year tenure, Levy has cut employment 25% and launched sexier models, such as the subcompact Clio. It's a hot seller in Germany, where Renault is the top import. And two years ago, he and Pehr G. Gyllenhammer, Volvo's chairman, worked out an arrangement in which their companies traded minority stakes, meshed purchasing, and shared parts.

Now, they propose putting the carmakers under a new holding company, probably 51%-owned by the French government. Volvo is expected to own 40%, the public the rest. Volvo is half Renault's size and in worse shape: It lost $280 million last year on cars but made an overall profit of $280 million on sales of $219 billion because of trucks and stock holings. Renault had a profit of $560 million on sales of $30 billion.

But Levy, who turns 65 next month, won't be around to see the results of his efforts. He's retiring, and his likely successor is Renault's 49-year-old finance director, Louis Schweitzer, a grand-nephew of humanitarian Albert Schweitzer. He's proud of having cut Renault's debt to 10% of sales, vs. 40% in the past. "It's still too high," he says, "but now we're a normal company."

VANISHING NICHE. Schweitzer and Gyllenhammer, who would probably alternate as CEO of the merged company, see huge savings from joint component development and other areas. Next year, a Volvo engine will power a new Renault model, saving the French company $180 million. Volvo now sells Renaults in Scandinavia, and Renault distributes Volvos on the Continent. The alliance will save Volvo $660 million a year by the mid-1990s, Gyllenhammer believes. Such savings are crucial: Some analysts think that without a partner such as Renault, this medium-size niche player faces extinction.

It's a fate that may confront other European auto makers as well. To prevent that from happening, Old World auto companies are likely to be busy kicking tires and talking deals in coming months.

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