FCA business is complicated — merger Renault even more challenging

Fiat Chrysler Automobiles is a creature of the 2008 financial crisis and the skillful financial engineering of late CEO Sergio Marchionne.

Marchionne had turned around Fiat before he saw bankrupt, bailed-out Chrysler — the basket-case of the collapsing US auto industry — as an appealing target. His dealmaking was sweetened by the US government’s desire to effectively pay Fiat billions to take Chrysler off its hands.

The new entity, Fiat Chrysler Automobiles, has been a success. The Jeep and RAM brands have witnessed surging US sales, and Marchionne savvily spun off Ferrari, the crown jewel, in an IPO that unlocked what’s now a nearly $30-billion market cap (FCA’s is only about $20 billion).

Read more: No one has the details of why Renault-Nissan head Carlos Ghosn was arrested — but here are the main theories

But that success has some issues. FCA is strong in the US market, but the company is heavily exposed to Europe, where Fiat has struggled. The group is well behind in China, and FCA has been using partnerships to keep up in self-driving development, mainly with Alphabet’s Waymo.

FCA, like Detroit rivals Ford and General Motors, has been able to amass cash as pickups and SUVs have sold well in recent years, but Marchionne also spent much of his CEO-dom chiseling down FCA’s debt. The carmaker’s ability to invest aggressively in the global transformation in mobility took a back seat to Marchionne’s banker’s instinct to tidy up FCA’s balance sheet.

Managing a many-headed automotive beast

The bottom line is that the truck and SUV brands kept the whole undertaking on track, while efforts to reestablish Fiat and Alfa Romeo in the US largely failed. The Ferrari spinoff was a highlight, leading to speculation that Maserati might follow — but that brand has seen sales take a hit as the luxury market has become more competitive and the China market has slowed down.

I could spend another thousand words sifting through all the ins-and-outs of FCA’s many-headed composition and detailing why this lucky beast — Italian and American, with hubs in Detroit and Milan but officially based in London and financially based in the Netherlands — is very difficult to sort out.

But I won’t — having covered FCA since before the financial crisis, suffice it to say that … it’s complicated.

Now a proposed merger with Renault could take the complexity into the stratosphere.

On its face, it’s straightforward: FCA and Renault would merge 50/50, with a new parent company holding the combined entity. However, there’s the not insignificant matter of Renault’s alliance with Nissan and Mitsubishi, created by disgraced CEO Carlos Ghosn, who was arrested last year in Japan and has been awaiting trial on financial malfeasance charges ever since.

“While the proposal focuses on a combination of FCA and Groupe Renault, FCA looks forward – as part of a combined enterprise with Groupe Renault – to working with Groupe Renault’s Alliance partner companies on ways to create additional value for all Alliance members,” FCA said in a statement.

“FCA recognizes the standing and achievements of Groupe Renault’s partners and sees significant expected benefits to all parties from the expanded partnership. The FCA and Groupe Renault combination together with its Nissan and Mitsubishi partners would be the largest global OEM alliance, selling more than 15 million vehicles annually.”

Politics, politics, politics

Obviously, this looks like an FCA-Renault hookup that’s excluding Nissan-Mitsubishi. Or, from another angle, Nissan concluding that it’s better off on its own, given that it contributed 80% of sales to the alliance and always chaffed at the imbalance

That could mean that we’re witnessing the enactment of a plan that Ghosn had devised to bolster Renault at his Japanese partners’ expense, adding to the “palace coup” theory of his ouster that sought to explain why his downfall happened in Japan. But it could also mean that the alliance served its purpose and Nissan was more than happy to cut ties with Renault, declining participation and marking the end of the world’s biggest combined automaker by sales.

Even if the outcome is somehow a mega-alliance, combining FCA, Renault, Nissan, and Mitsubishi, it’s tough to figure out how that alliance would be managed. To be honest, it’s tricky to figure out exactly how FCA CEO Mike Manley and Renault chief Thierry Bolloré would steer their new ship, with no Japanese captains on deck.

The Renault-Nissan-Mitsubishi alliance was already something of a miracle in the global auto industry, where tie-ups have often ended badly. FCA, after all, was a result of Daimler jettisoning Chrysler before the financial crisis.

Against that history, Manley and Bolloré could be looking to share costs as much as possible to remain competitive as the traditional auto industry comes under stress from expensive technological innovation and confronts a downturn in both the US and China, alongside the flat European market.

This is an old playbook, and it stands in opposition to what General Motors has been doing: cutting costs, selling off the underperforming division, and creating new entities such as Cruise, a self-driving startup, that can be independently capitalized by outside investors like Japan’s SoftBank.

As far as FCA and Renault are concerned, a merger might work, is better than nothing, and creates a way for Renault to either dictate terms to the Nissan side or frees Renault from an alliance that had run out of gas. But it doesn’t come without significant risks.