Stellantis - the merger of FCA and PSA

Left: Carlos Tavares, CEO of Stellantis; right: John Elkann, Chairman of Stellantis

It is fascinating to rediscover the history and study the strategies of the major car manufacturers, for three reasons:

1. A "new", capital-intensive industry

The car industry was born at the beginning of the last century, so a relatively short time ago, but its methods of production have changed many times over the years. The engine of change has been the evolution of technology and of the market, and in recent years globalisation has taken on considerable importance.

The first entrepreneurs who tried their hand in this new sector did not have large amounts of capital to invest. Banks and other lenders preferred to invest in other sectors such as railways and steel, forcing the first car makers to invest their own savings and so to work with very limited financial resources. The situation changed only after the First World War, when the first barriers to entry formed and reduced the opportunities for new entrepreneurs to enter the sector. The car market's potential for expansion was underestimated, and many judged the car makers' forecasts to be exaggerated and "visionary". In the event, those forecasts turned out to be lower than how the market actually developed. Every industrialised country developed its own car culture, stemming from the presence of its own manufacturers.

From the end of the 1970s, following the first oil crisis, the trend of acquisitions and mergers among car makers began, creating first national and then international champions.

The history of the car includes successful acquisitions, mergers and partnerships (few) and resounding flops or failures (many).

The most striking success is the acquisition of the Chrysler group by the FIAT group, masterfully managed by Sergio Marchionne.

The failures are numerous, among them DaimlerChrysler, the merger between Mercedes' parent company and the third-largest American car maker, or BMW's acquisition of Rover Group in the 1990s.

But botched mergers and acquisitions can even bring about the end of a country's car industry, as with British Leyland, which in the 1970s brought together all the brands of the British car industry, including Austin, Land Rover, MG, Jaguar, Rover, Triumph and many others, reaching 250 thousand employees, before leaving the market in 1986.

2. Car makers identify with their home nations: industrial powers are born with the industrial development of the automotive sector.

Every car maker identifies with its home nation, contributes to the nation's prosperity and acts as its "ambassador", through two methods, Hard Power and Soft Power.

Hard power

Making cars means building huge industrial complexes and creating districts with an efficient value chain that stretches from suppliers to sub-suppliers, involving tens of thousands, if not hundreds of thousands, of people, who need infrastructure and social services.

National governments can therefore attract investment, through tax levers and the general competitiveness of the country, to stimulate manufacturing at home.

In the United States, for example, the last two administrations, poles apart in style, policies and electorate, the Obama administration and the Trump administration, both gave priority to reviving car manufacturing in the Midwest: the first through the bailout of Chrysler and its subsequent sale to Fiat with state financing, the second by cutting the tax burden on manufacturers, creating a "business friendly" climate and gathering around a table at the White House, more than once, the CEOs of the largest car companies with plants in the USA, both Detroit's "big three", GM, Ford and Chrysler, and the European and Asian companies with plants in the United States.

Mary Barra, CEO of GM, Donald Trump, 45th President of the USA, and Sergio Marchionne, CEO of FCA, at the White House in June 2017.

Lamborghini (owned by Germany's Audi) decided to expand its plants in Sant'Agata Bolognese to produce the Urus SUV in Italy, instead of in the Czech Republic as originally planned.

On one side the Italian government contributed tax relief of around a hundred million, while Audi invested about €1 billion in expanding production.

And in this statement by Lamborghini's CEO at the time, Stephan Winkelmann, Hard power and Soft power intertwine:

"It's great to be able to produce it here in Sant'Agata: everyone agreed, government, region, unions. Because luxury, even on four wheels, needs solid roots, and for our customer the car's origin is fundamental. Made in Italy is a fundamental part of the appeal of our cars, but it is also a guarantee, and I want to stress this, of technological excellence and high manufacturing capability ".

Hard power is, in short, the "power of blackmail" that car makers hold over national governments: industrial development and jobs in exchange for a country system that favours their production.

On the other side, governments attract investment that creates prosperity and well-paid jobs.

It is a win–win situation for both parties.

Stephan Winkelmann, CEO of Lamborghini, at the unveiling of the Lamborghini Urus prototype in April 2012

Soft Power Soft power consists in shaping the preferences of others through appeal and attraction. A defining feature of soft power is that it is not coercive; the currency of soft power includes a nation's culture, lifestyle and founding values.

To simplify, a nation's use of soft power, whether conscious (the 1980s film "Rocky IV", for example, is a clear use of soft power by Reagan's America to draw the rest of the world towards the American way of life) or unconscious (Fellini's Italian Dolce Vita), creates a stereotype.

A stereotype is a simplified and persistent subjective characteristic applied to a place, an object, an event or a recognisable group of people who share certain characteristics or qualities. It is an abstract, schematic concept that can have a positive meaning ("the French are romantic") or a negative one (the association between drug use and a reckless life) and, in that case, sometimes reflects the opinion of one social group about other groups.

Car makers exploit nations' positive stereotypes to build the marketing around their brands.

Germans: precise, reliable, no surprises -> the most successful German cars, such as the VW Golf or the Mercedes saloons, identify with these stereotypes.

Italians: creative, stylish, passionate, likeable: a foreign consumer thinks of Ferrari, Maserati and all the way to the Fiat 500, the true Italian world car .

On the other side, nations and their politicians exploit the car makers' successes to identify with them: when Ferrari wins an F1 Grand Prix, the Italian prime minister, whoever it may be, tweets a message of pride.

At every edition of the Frankfurt Motor Show, the showcase of German manufacturing power, the German chancellor proudly tours the German companies' pavilions, followed by TV crews and journalists.

Dieter Zetsche, CEO of Daimler, presents to Chancellor Angela Merkel

a prototype at the 2017 Frankfurt Motor Show

3. The car market is the world's largest "laboratory" of branding and marketing.

The great transparency of sales data, guaranteed by dedicated national authorities, and the fact that car makers are listed on the world's largest stock exchanges, allow analysts to evaluate the various strategies of the managers running these multinationals.

Italy and FIAT

FIAT (Fabbrica Italiana Automobili Torino) always moved in step with Italy's development in the twentieth century, becoming Italy's most important private financial and industrial group, and in the 1990s Europe's leading car maker and the fourth-largest car group in the world.

The history of Fiat is the history of the Italian economy and of the industrial development of a country that managed to play a leading role on the international economic stage.

Its origins date back to 1899, when a group of Turin businessmen led by Giovanni Agnelli decided to build a prototype car. They took advantage of the creative ferment of Turin in those years, a city showing a strong innovative spirit, above all in industry. And they managed to create an empire.

How was FIAT born?

At the beginning of the twentieth century the factory produced just over 20 cars a year, built by about thirty workers. They were luxury cars, for buyers who could afford them. In 1903 the company was listed on the stock exchange, and after the 4HP other models followed. Production soon reached the Australian and American markets. In 1916 the Lingotto factory came to life, a sign of the transformation from niche product to mass product that FIAT made possible in Italy's car sector. In 1930 the world's first railcar was born, the Littorina, while in Turin the Mirafiori plant was opened.

The history of FIAT after the Second World War

After the crisis of the Second World War, the FIAT group achieved a miracle, managing to produce and sell about 400 thousand cars a year. In 1955 the 600 was launched, two years later the 500. The 500 soon became the symbol of the company, and FIAT opened factories all over the world.

The Fiat 500L

Between the late 1980s and early 1990s, under the leadership of Vittorio Ghidella, Fiat became Europe's leading car maker and the fifth-largest in the world, thanks to cars such as the Fiat UNO, a worldwide sales success.

Between the 1990s and the 2000s Fiat entered a difficult period, and from this period a series of interlinked events and decisions led first to the birth of FCA and then of Stellantis.

Fiat - GM

At the start of the 2000s , Gianni Agnelli, the company's chairman, was convinced that Fiat could not face the challenge of the global market alone (between 1990 and 2001 FIAT 's market share in Italy fell from about 53% to about 35%, and in Europe from just over 14% to under 10%).

Gianni Agnelli, “l'Avvocato”

He reached an agreement with the largest car company of the time, General Motors (GM): the Americans bought 20% of Fiat Auto, paying with their own shares (a capital increase reserved for Fiat) worth in total about 5% of GM's entire capital, and Fiat obtained a put option, the right, exercisable in this case after two years and within the following eight, to sell GM the remaining 80% of Fiat Auto at a price determined by certain predefined criteria, which GM would be obliged to buy.

The architect of the agreement, with its clauses favourable to Fiat, was Paolo Fresco, then chief executive; five years later it allowed Sergio Marchionne, the new chief executive, to fly to Detroit in March 2005 and convince GM and its CEO Rick Wagoner NOT to exercise the PUT option.

Paolo Fresco, Chairman of FIAT from 1998 to 2003

Marchionne's reasoning was that if GM bought Fiat, GM would risk bankruptcy, dragged down by Fiat, which at the time was losing almost a billion dollars a year.

And this is where Marchionne pulled off his great coup.

Instead of selling the whole car business, which at that moment was worth about 3 billion dollars, he got GM to pay him 2 billion to tear up the put option (the right to sell) held by the Agnellis, which, if exercised, would have forced GM to buy.

With 2 billion dollars of fresh cash in the bank, the group started again with new ideas, a new line of young managers and new products, such as the new 500.

Fiat - Chrysler

Sergio Marchionne's second masterpiece was the Fiat - Chrysler marriage.

It all began in January 2009 when, without spending a euro, Fiat signed a preliminary, non-binding agreement to acquire 35% of Detroit's third car maker, then owned 19.9% by Germany's Daimler and the remaining 80.1% by the American fund Cerberus. In April of that year, with the powerful American unions involved in the negotiations to complete the deal, Chrysler entered 'Chapter 11', a procedure that, orchestrated by the US administration led by Barack Obama, led to a "managed bankruptcy" of Chrysler that threw the doors wide open for Fiat's definitive entry. In May Marchionne announced that he would also become CEO of Chrysler, and in November of that year he was already presenting a new industrial plan with 16 new models for Chrysler.

Sergio Marchionne, CEO of FCA, and Barack Obama, 44th President of the USA, in 2010

In the first quarter of 2011 Chrysler returned to profit for the first time in years; in May, after exercising certain contractual clauses, achieving various bonuses and repaying the loans granted by the American and Canadian governments, Fiat found itself holding a total stake of 46% in Chrysler. The stake was raised to 58.5% in 2012, and in January 2014 Fiat completed the operation, reaching 100% by buying the remaining 41.5% from the Veba fund of the UAW autoworkers' union for about 3.6 billion dollars.

FCA is born

In May 2014 Marchionne presented FCA's first industrial plan (to 2018), and on 1 August that year the historic extraordinary shareholders' meeting approved the merger of Fiat with Chrysler and, with it, the official birth of FCA.

John Elkann and Sergio Marchionne, Chairman and CEO of FCA

So ended Fiat's 115 years, with its registered office moving from Turin to the Netherlands. On 6 October Wall Street gave the go-ahead for the listing of FCA shares, with trading set to begin on 13 October, the same day the group's new shares also began trading on Piazza Affari under the new name that replaced Fiat's after 111 years of history.

After Marchionne

When he died suddenly in July 2018, Marchionne left FCA with its accounts and figures in order, but also with a thin future product pipeline (especially for the Italian brands), not comparable, for example, with the product investment of the German car makers.

FCA's young chairman, John Elkann, heir to the Agnelli dynasty, understood, as his grandfather had in the 1990s, that securing the company's future required another merger, so as to have the backing to face the investment that electrification and autonomous driving demand of car makers.

On 27 May, FCA submitted a 50-50 merger proposal to the Renault Group, to create the world's third-largest car maker, with 8.7 million vehicles a year and revenue of about €170 billion (based on 2018 results). The proposal envisaged €5 billion of synergies and the creation of a Dutch parent company listed in Milan, Paris and New York, owned equally by the existing shareholders of FCA and Renault.

FCA withdrew its merger offer to Renault in June 2019, after the French car group's board had twice been unable to respond to Fiat Chrysler Automobiles' proposal. Elkann therefore decided not to proceed with the project.

Stellantis

On 31 October 2019 a new agreement with PSA (Peugeot) was announced, which would lead to the birth of the world's fourth-largest car group: Stellantis.

Stellantis is, as mentioned, the fourth-largest car group in the world, with 8.7 million cars sold in a year, overtaking General Motors and coming in behind Volkswagen and Renault-Nissan-Mitsubishi, with estimated revenue of over €200 billion and 400,000 employees worldwide.

The organisation chart has John Elkann as chairman of the new group, while Carlos Tavares (CEO of PSA) holds the post of CEO and sits on the board. It is John Elkann who realises the great dream Sergio Marchionne pursued for years: allowing the group to shed its inferiority complex towards the other global giants while keeping a leadership position in the newly formed group, since EXOR, the Agnelli family's parent holding company, is the largest shareholder in Stellantis.

PSA

PSA too had come through crises and acquisitions, and while at FCA the leader who made the turnaround possible was Marchionne, at PSA the figure who emerged was Carlos Tavares.

Portuguese, born in 1958, Tavares is a car guy, someone who has made his career in the automotive world.

Tavares began his professional life at Nissan, then became COO of Renault, before becoming CEO of Peugeot.

During his tenure he led cost-cutting measures and increased the company's market share in China, returning Groupe PSA to profitability after several years of losses.

Tavares became CEO of Groupe PSA in 2014. As CEO he won praise for PSA's acquisition of Opel and Opel's return to profitability, and for PSA's record sales and profits.

Carlos Tavares, CEO of Stellantis, a great rally enthusiast

STELLANTIS

On 31 October 2019 the international press was told that the two groups, FCA and PSA, “plan to join forces to create a global leader in a new era of sustainable mobility”.

On 4 January 2021 the two companies' shareholders approved the merger via streaming at their respective extraordinary meetings. The votes in favour were 99.8% of PSA shareholders and 99.1% of FCA shareholders.

In mid-January, on the 16th, Stellantis was officially born, and then listed on the New York, Milan and Paris stock exchanges under the ticker symbol "STLA".

Stellantis is made up of fourteen car brands and has plants in twenty-nine countries around the world, with more than fifty facilities, owned and in joint ventures, between Fiat Chrysler Automobiles and Groupe PSA.

Stellantis' production capacity varies by group of origin: according to the latest research, FCA's plants in Europe run on average at 55% of capacity and PSA's at 68%, while in North America FCA's plants run on average at 75%.

Shareholders

The group's main shareholders at the completion of the merger are:

Exor N.V. – 14.4% (Agnelli family)

Peugeot family – 7.2% (with an option to rise to 8.5%)[65]

French State (through the public investment bank "Bpifrance") – 6.2%

Dongfeng Motor Corporation – 5.6%

Tiger Global – 2.4%

UBS Securities – 1.6%

The Vanguard Group – 0.96%

The two groups announced the birth of the new company through a merger of equals.

John Elkann is the company's chairman, while Carlos Tavares becomes its CEO.

Stellantis' industrial plan, brands, market and challenges.

The merger of FCA and PSA is not a defensive move but a strategic one, created by two business leaders (Elkann and Tavares) who clearly understood the importance of having significant critical mass, so as to fill the production plants and be profitable in the long term.

It is not defensive because the financial indicators were positive in the years before the merger, with both companies posting an operating profit of around 7%.

It is not defensive because FCA and PSA have complementary markets, and the merger makes Stellantis market leader in North America, Europe and South America.

The industrial plan rests on two concepts:

1. Synergies between the two companies in production and purchasing, with annual savings of about €5 billion.

2. Development of what Tavares calls "sister cars".

This "sister car" development strategy is the evolution of Ghidella's development strategy, used in the past for the Fiat Group brands, which made the Turin company Europe's leading car maker, and today masterfully implemented by the VAG Group, the Volkswagen Group, the world's leading group and Stellantis' real competitor.

The "sister car" strategy rests on two pillars:

• Shared platforms among the group's cars in the same category, to spread the development cost of the floorpan and mechanicals over more units produced.
• Maximum customisation of the interior and exterior design of the car, respecting the positioning of each brand that uses that particular floorpan and mechanicals.

For example the VAG group, with seven active brands, Volkswagen, Audi, SEAT, Škoda Auto, Bentley, Bugatti, Lamborghini and Porsche, develops the maximum number of cars on each single floorpan while customising the interior and exterior styling.

In addition, with an excellent brand positioning policy rooted in the experience of Alfred P. Sloan, CEO of GM in the 1920s and 1930s, the VW group manages to position its products while respecting the identity of its brands; for example, five large SUVs are built on the same floorpan, but sold at completely different prices.

Tavares is a master at applying this strategy, which he implemented successfully first at Peugeot and then at Opel with the birth of PSA; Opel itself went from 30 years of losses to positive results after only two years of the "Tavares cure".

This strategy calls for the maximum possible production on each floorpan, regardless of the brand of the cars produced. With the portfolio of brands Stellantis has inherited, Abarth, Alfa Romeo, Chrysler, Citroën, Dodge, DS, Fiat, Jeep, Lancia, Maserati, Opel, Peugeot, Ram and Vauxhall, correct execution of the "sister car" strategy and respect for brand identity, both FCA and PSA, now Stellantis, will at last be able to look their German and Asian competitors in the eye and challenge the Volkswagen group to become the world's leading car maker.

The Stellantis brands

Below are the strengths and weaknesses of the merger.

Strengths

Markets: USA, EU, LATAM

The American market is covered by FCA's US brands, the European one by PSA's brands and the Fiat brand, while in South America both FCA and PSA are already market leaders.

In Europe in particular, the crucial German market, difficult for any manufacturer that is not "made in Germany", is covered by Opel, a German brand that is performing very well in the mass market after the Tavares cure. Carlos Tavares

Carlos Tavares is the real added value of the merger. Tavares is an experienced automotive manager with successful case histories behind him, such as PSA's acquisition of Opel and the creation of PSA.

His strategy, savings and development based on "sister cars" and full production in the plants, is the winning one for a group like Stellantis.

The group's brands

Stellantis boasts a remarkable portfolio of brands: in particular it has a global brand like Jeep, long the leader in SUVs and off-roaders, brands developed across several continents such as Fiat and Peugeot, and regional brands that lead specific markets, such as Opel and Vauxhall.

Weaknesses

Markets: China

The Chinese market is the real weakness of the merger. Both FCA and PSA have tried to enter this market, without much success.

At present a committee of five experts at Stellantis is working on proposals for new strategic plans to bring to Tavares. Brand management: Alfa Romeo, Lancia and Chrysler.

Each of these brands has specific problems; Alfa Romeo in particular is one of the group's most attractive brands but also one of the hardest to relaunch.

A brand with a glorious past, it ruined its reputation in the years under IRI management and with the production of cars such as the Arna and the Alfasud.

The latest attempt at a revival, based on two products with excellent mechanicals, the Giulia and the Stelvio, did not generate enough sales to be profitable.

Tavares' task is a hard one: to bring the brand into profit by sharing mechanicals with other brands in the group, without losing the brand's identity.

Lancia and Chrysler, on the other hand, are on their last legs, since each has essentially a single model in its product portfolio: the Ypsilon city car and the Pacifica minivan.

In this case the relaunch is "simpler" than Alfa's: it is a product crisis (and a distribution crisis for Lancia), which can be solved with the "sister car" strategy and investment in new products.

Future prospects

Elkann and Tavares can aspire to make Stellantis one of the top three car groups in the world, if not the first.

What's more, the industrial plan includes neither plant closures nor job cuts.

It is the implementation of the "sister car" strategy, increasing the creation of individual models based on a shared platform for each market segment, creating critical mass for each floorpan to be "spread" across every model of every brand.

Alongside this first pillar is the second: creating models that respect the identity and positioning of each brand.

If the implementation of this strategy works, Carlos Tavares will go down in history as one of the greatest managers in the global automotive industry, and John Elkann as the heir of the Agnelli family who, following in the footsteps of his grandfather Gianni Agnelli, made "la Fiat" and the Italian automotive sector safe.

Positioning chart of the Stellantis group's brands according to the first industrial plan presented by Tavares, compared with the positioning of the brands of the VAG group, Stellantis' real competitor and the world's leading car maker.

Speak soon, Matteo Rivolta PS: To keep learning every month, read business analysis, find out more about the leading figures of our time, personal finance and the changing world, subscribe to Luxury, the new Italian monthly devoted to the high end of the market. Find out more at: www.luxuryrivista.com