Sergio Marchionne explains the FCA-PSA merger

Sergio Marchionne in 2007 (Image: Wikipedia)

At some point, as we grow and age, we will have attended enough funerals that the distinction between a person’s physical body and the person’s insubstantial intellect, the dynamic result of neurons working in harmony like software running on a computer, starts to become very apparent. We sit at a funeral and often think “This is a person’s body, but the person has gone.” But when we create things we leave something of an echo of our intellect. Sometimes the echo is very weak, like in the way a departed person arranged their home, but sometimes it can very strong as when a person designs something or writes something substantial. You can feel it when you read the autobiography of a long gone person.

And so we have news of Fiat Chrysler Automobiles (FCA) merging with PSA Group (PSA), the maker of Peugeot, Citroen, Opel, Vauxhall, and other brands. To explain why this is happening we consult the late Sergio Marchionne, former CEO of FCA. In April 2015 he gave a presentation titled Confessions of a Capital Junkie: An insider perspective on the cure for the industry’s value-destroying addiction to capital. The slides for that presentation are available here (PDF), hosted by Autonews. Presentation slides are, of course, not written documents but we can still get a sense of Sergio’s thinking.

In brief, what he tells us is this: The automotive industry is consuming more and more capital to perform research and product development, hurting profitability. This is happening due to both increasingly strict governmental regulation and consumer demand for high-tech features. The money is generally going into the development of proprietary components that are not readily discernible to customers. For this, think things like suspension and powertrain components, HVAC systems, and seat mechanisms. The solution to this is to reduce the number of unique components that need to be developed (reducing cost) and sharing common ones across multiple models (good) and brands (better), thereby increasing volume and reducing unit cost due to economies of scale. In other words, he tells us that shared platforms are the way out of this profitability trap. The “Top Hat,” the part of the vehicle that sits atop the core platform, is what the customer experiences and provides the required uniqueness.

Marchionne goes on to tell us that some companies, such as VW and Toyota, have successfully spread common platforms across multiple brands with some success but that this capability is limited in smaller manufacturers because it requires significant scale across many different vehicles that can mechanically similar, albeit with different top hats. He also argues that partial integration, think two separate companies trying to share an agreed upon common platform, doesn’t work well because they have separate goals, interests, and culture. (The DaimlerChrysler saga comes to mind here, but on a smaller scale we can consider Ford’s agreement with VW to use the MEB platform.)

He concludes by arguing that the solution is full integration of product development, meaning the full merger of separate companies, is the way to reap the full benefits of common platform development. He suggests that the merger of FCA with another large OEM would yield benefits on the order of 2.5 to 4.5 billion Euro/year, an enormous amount of money.

In short, FCA is not merging with PSA in order to sell Peugeots and Citroens in the United States, although that would be nice. The companies are merging so they can stop developing redundant platforms, systems, and technology. The cash required to develop new technology for the upcoming transition to electric vehicles is going to come from things like your Jeep sharing an HVAC system with a Citroen. The need to sell those EVs at affordable prices means that a future Dodge EV needs to share a platform with a Peugeot EV. In fact, that same platform is going to have to stretch across as many FCA and PSA brands and models as possible to get the required economies of scale.

Thanks for the insight, Sergio.