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Deft diplomacy needed for FCA-Renault merger

 |  May 30, 2019
 By The Editorial Board, Financial Times
Even in the age of globalisation, culture clash is an issue — especially in the automotive industry. Carmakers are more than producers of vehicles. They are tied closely to national identity and bring distinct management and working practices which can be difficult to integrate.
Fiat Chrysler Automobile’s proposal for a “transformative merger” with Renault emphasises the need for careful diplomacy in mergers, especially across borders. Meshing together Italian, American and French working practices will be one struggle. Another will be balancing the expectations of governments with often fractious relationships.
The €32.6bn all-share merger would see FCA and Renault each own 50 per cent of the business. Combined sales would be 8.7m vehicles a year, the third highest behind Volkswagen and Toyota.
The proposed merger would likely mean plans for Renault to merge with alliance partner Nissan would be put on hold in the short term. It would also give Nissan voting rights under a new Dutch holding company structure. On paper, such a merger makes eminent sense. Sales across key markets are falling. New technology, such as electric vehicles and automation, requires substantial investment.
The late FCA chief executive Sergio Marchionne argued in 2015 that mergers were the only way to stay competitive in a capital-intensive industry. His call to action has only become more urgent as innovative but costly new research and development has grown more important to the car industry. Nevertheless, tie-ups have often proved less than smooth. The union of Daimler and Chrysler, vaunted as a “merger of equals”, unravelled in 2007 amid reports of culture clashes.
At the other end of the spectrum, alliances such as Renault and Nissan lack advantages such as economies of scale. Unless companies are using the same platforms, plants and engineers, significant amounts of capital is wasted. FCA is a rare success story, starting as an alliance in 2009 before undergoing a full merger in 2014.
There is also a strong political element to a transnational merger of this scale. Franco-Italian relations have been strained by the opposing directions in which Emmanuel Macron and Matteo Salvini wish to drag Europe. There is continued rancour over a planned takeover of a French shipyard by an Italian shipbuilder, after France submitted an antitrust referral to the European Commission.
Keeping both sides happy, as well as dealing with US president Donald Trump, will require deft government relations. Achieving cost savings will be particularly tricky. FCA has pledged that there will be no plant closures from the deal, making it difficult to see how big reductions can be achieved. No government will find a decision palatable if it affects their workers, however.
FCA chairman John Elkann and Renault chair Jean-Dominique Senard planned the bold proposal for the new, pan-European entity. If it goes through, its leadership will have to encourage the French and Italian government to put aside national differences.
At the same time, it needs to keep Nissan on side in order to maximise the benefits from the wider alliance. Finally, it will have to apply the lessons learnt from merging the cultures of Fiat and Chrysler to the tie-up with Renault: showing respect for national differences, while finding or creating synergies throughout the business.
An ability to avoid clashes will determine whether the deal succeeds. As the auto industry moves towards further consolidation, this lesson applies to more than just FCA and Renault.