Peugeot-Fiat merger – UK plants fear future

Peugeot-Fiat

It’s official: Fiat Chrysler Auto (FCA) and Peugeot Citroen owner PSA are merging to create a European automotive giant, and one of the biggest auto firms in the world.

The two firms have signed a binding merger agreement. It’s a $50 billion deal that should be completed in 12 to 15 months, the firms said today.

The new entity – yet to be named – will have an 11-person board, with five members nominated by PSA and five by FCA. These will include labour representatives from both firms.

PSA’s boss Carlos Tavares will become the Chief Executive of the new entity for a five-year term and will take up the 11th seat on the board.

As part of the deal, voting rights will be limited so that no shareholder would have the power to exercise more than 30 percent of the votes cast at shareholders’ meetings.

Tavares is reported as saying that the merger will place PSA and FCA in a stronger position to master the big challenges facing the sector: “The challenges of our industry are really, really significant… The green deal, autonomous vehicles, connectivity and all those topics need significant resources, strengths, skills and expertise.”

So what’s driving this?

International auto markets are slowing or stagnating, impacting on the bottom line, while at the same time auto firms are indeed investing huge amounts on a raft of new technologies – think autonomous, connected and electric vehicles (EVs) as Tavares has stressed.

A big squeeze is playing out, and scale is seen as increasingly important for car firms.

As a result car makers are looking to jointly develop platforms (the expensive technologies that underpin cars) and share them across different brands and models, as well to find cost savings through bulk purchasing of components, as well as through plant closures and job cuts.

So even big firms like VW and Ford are collaborating on EV development. Similarly Jaguar Land Rover (JLR) and BMW are cooperating on electric motor development, as well as on new internal combustion engines. That agreement may extend to platform sharing.

Fiat has been lagging behind, especially in EV development. It is also exposed to tough new EU emissions regulations, so much so that it has had to buy credits from Tesla to avoid big fines from 2020. So Fiat wants scale and access to new technology.

Meanwhile Peugeot has a pile of cash and is looking for takeover targets. A deal with Fiat-Chrysler would open up new markets outside of Europe – in particular in the US via FCA’s valuable Jeep and Ram brands.

That would be attractive to PSA as it is very heavily focused on Europe in production and sales. PSA would also get access to FCA’s premium brands Alfa Romeo and Maserati.

PSA had previously indicated its interest in premium brands when rumours circulated over talks of a possible tie up or takeover of JLR earlier this year.

But a tie up would mean PSA looking again for major cost savings. In the wake of the PSA takeover of GM Europe (which included Opel and Vauxhall) it had looked for some €2 billion of cost savings (‘synergy estimates’).

This time round, PSA and FCA have said that they are looking for annual cost savings of €3.7 billion euros ($4 billion) from the merger.

The firms have said that this will be achieved by sharing technology, products and platforms, joint purchasing, and merging various business functions such as marketing and logistics.

The savings are not based on any plant closures, according to the two firms.

Is that credible? For now maybe, but down the line there will be pressure for further cost cutting. ‘No plant closures’ simply means ‘no plant closures for now’, and that’s why unions in the UK are rightly worried about the long term future of Peugeot’s UK plants.

That’s not because they are inefficient plants – far from it; workers and management at both Ellesmere Port and Luton have pulled out all the stops in recent years to work flexibly, get costs down and win contracts to build new models, beating competition from across Europe.

PSA has only recently said that Ellesmere Port is now on a par in efficiency terms with other European plants.

Rather, unions fear that a combination of the UK’s flexible labour markets (it’s easier to fire workers here) and uncertainty over the UK’s trading position with Europe after Brexit leaves them exposed if a PSA-FCA merger means a fresh round of cost cutting and likely plant closures.

PSA of course, shut its (profitable) Peugeot plant at Ryton, near Coventry back in 2007, shifting production of small cars over to Slovakia.

Vauxhall’s Ellesmere Port plant is anyway arguably one of the most vulnerable UK auto plants, in the context of uncertainty over the future of the UK’s trading relationship with Europe.

PSA’s CEO Carlos Tavares was reported today saying “as soon as we have better visibility on the outcome of a customs union (with EU) we will be able to make decisions” on the plant’s future.

While the UK will leave the EU at the end of January, exactly what form of Brexit Johnson wants is still not clear, and there is a major risk of not agreeing a trade deal by the end of 2020.

The new Astra model is due to be assembled there in 2021, but PSA has already said that in the event of a no-deal Brexit it would shift production to southern Europe.

The point here is that not only will be there be a big push to cut costs but that FCA will also bring to the table under-utilised plants in Italy.

Both the French and Italian governments will be keen to maintain capacity in their respective countries, and that could leave UK plants vulnerable to the axe being swung down the line.

That’s why unions in the UK are understandably worried about the future of Peugeot’s UK plants, especially in the context of Brexit uncertainty over the UK’s future trading relationship with the EU.

All of which highlights again that exiting the EU in an orderly way with a trade deal and minimal trade friction beyond the transition period remains vital for the British auto industry.

Failing to conclude a trade deal by the end of 2020 would be damaging to output, jobs and investment, just at a time when the industry is undergoing profound change as it invests heavily in the shift towards electric and – in the longer term – autonomous cars.

By David Bailey, Senior Fellow at The UK in a Changing Europe and Professor of Business Economics at Birmingham Business School.

Disclaimer:
The views expressed in this analysis post are those of the authors and not necessarily those of the UK in a Changing Europe initiative.

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