By William Boston and Mike Colias 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (June 7, 2019).

The abandoned merger talks between Fiat Chrysler Automobiles NV and France's Renault SA renew questions about how both car companies will fare in a rapidly-transforming industry that favors manufacturers with deep pockets and technical expertise.

The proposed merger deal that fell apart this week amid opposition from the French government already faced high regulatory and political hurdles. But investors were encouraged by the deal's prospects, believing a tie-up of these two smaller car firms would give them the global heft and financial means to compete in an industry dominated by Toyota Motor Corp., Volkswagen AG and other auto-making giants.

Car companies are already struggling to adjust to the changes taking place in the industry, from the rise of self-driving vehicles to shifts in the way people buy cars -- if they even choose to own one at all.

A 10-year boom in the global auto industry is coming to a close with new-car sales in China falling after decades of growth and the European car market weakening for the first time in six years. Declining sales can put car companies in a bind, hurting profitability and leaving manufacturers with unused factory space.

Auto makers also are under pressure in China, Europe and the U.S. to lower tailpipe emissions, which means investing billions of dollars in electric and hybrid-car technology. The stiffer emissions regulations are denting profits and forcing more collaboration among car companies.

Moody's Investors Service in March revised its outlook for the global auto industry to negative from stable, citing slowing new-vehicle demand, political risks, as well as technological and regulatory pressures.

Fiat Chrysler, the result of its own merger involving Italy's Fiat SpA and the U.S.'s Chrysler Group LLC, continues to confront challenges on several fronts. It has a weak presence in China and its fuel-efficiency ratings lag behind many major competitors -- a costly problem to fix. The company's debt load tops many competitors, and its European business remains troubled, leaving it reliant on North America to drive profits as U.S. sales are slowing.

The deal with Renault would have created one massive car manufacturer that would rank third world-wide in sales and have a combined value of $40 billion. It also would have given each car company more scale in Europe, a highly competitive market where mass-market brands struggle with low to negative profit margins and excess factory space.

Now, Fiat Chrysler "is at risk of looking rather desperate," said Max Warburton, an analyst at Sanford C. Bernstein.

Renault can still rely on its alliance with Nissan Motor Co. and Mitsubishi Motors Corp., a three-way partnership that has helped it build scale globally and save on costs by sharing parts and engineering. But the Nissan-Renault alliance has been fraying since the arrest late last year of former Chairman Carlos Ghosn, and some analysts are calling on Renault to dissolve the collaboration.

Many competitors of Renault and Fiat Chrysler are better funded and moving faster to adjust to the regulatory and technological changes on the horizon.

General Motors Co., for instance, has attracted about $6 billion in outside investment over the past year to help fund autonomous-car development.

Volkswagen announced this week that it would invest more than $4 billion to digitize its business. BMW AG and Daimler AG have agreed to combine efforts to develop self-driving car technology and new mobility-service businesses to lessen the capital burden.

As stand-alone entities, Fiat Chrysler and Renault "do not generate sufficient free-cash flow in order to be seen as strong players in a global context," said Arndt Ellinghorst, an auto analyst at brokerage Evercore ISI.

Fiat Chrysler Chief Executive Mike Manley has repeatedly said the company can thrive as a stand-alone manufacturer. However, his predecessor, Sergio Marchionne, had been a vocal advocate of industry consolidation, arguing car makers were wasting money on parts and technology that could be shared because they aren't seen by the customer and don't differentiate the brand.

"We have failed, I think, collectively as an industry to deliver value," Mr. Marchionne said during a 2015 conference call with analysts. In 2015, Mr. Marchionne led an awkward and ultimately unsuccessful campaign to initiate merger talks with GM.

The failed Renault deal could revive discussion about whether Fiat Chrysler would be better off being broken up or sold off in parts, rather than merged with another major car company. Fiat Chrysler sells nine brands globally, but analysts estimate only two -- Jeep and Ram -- generate the bulk of the company's profits.

Morgan Stanley analyst Adam Jonas has said those two brands combined are worth more than Fiat Chrysler as a whole. In a research note last year, he estimated Ram and Jeep combined generate annual revenue of more than $80 billion and an operating profit of around $12 billion, on par with Boeing Co.

"There's long been this idea for investors that a spinoff of Jeep and Ram...could unlock some hidden value," Mr. Jonas said in a recent interview.

Adrienne Roberts contributed to this article.

Write to William Boston at william.boston@wsj.com and Mike Colias at Mike.Colias@wsj.com

 

(END) Dow Jones Newswires

June 07, 2019 02:47 ET (06:47 GMT)

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