Fiat Chrysler and Renault show why automakers desperately need each other

Developing the cars of the future is expensive.

That’s one big reason France’s Renault is considering a merger with Fiat Chrysler that would create the world’s third largest carmaker and reshape the global auto industry.

Carmakers are facing a huge challenge. Global sales are falling at the exact time they need to be spending more to develop electric and autonomous vehicles. There’s also new competition from the likes of Tesla (TSLA) and Uber (UBER).

The pressure is forcing established automakers into arrangements that allow them to shore up revenue while sharing costs.

“There’s been talk of consolidation for a long time,” said Michelle Krebs, a senior analyst at Autotrader, who noted that former Fiat Chrysler CEO Sergio Marchionne was a big proponent. “It’s not surprising it comes now.”

Under pressure

Carmakers need to focus on the future of transportation. But the first major problem is flagging sales.

In China, annual car sales declined for the first time in two decades last year amid economic weakness and the trade war with the United States.

Sales of cars in the United States are also sliding. Fiat Chrysler’s US sales dropped more than 3% in the first three months of 2019 compared to the previous year.

“We are in a post-peak era where sales have hit records then come down a bit,” Krebs said.

Chevrolet Bolt EV and Chevrolet Sonic vehicles are assembled Tuesday, March 19, 2019 at the General Motors Orion plant in Orion Township, Michigan. (Photo by Jeffrey Sauger for Chevrolet)

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Meanwhile, the amount of money that car companies need to earmark for research and development is ballooning, especially as competition with Silicon Valley heats up.

A number of car companies have responded to this pressure by making cuts. Ford last week announced that cutting 10% of its salaried staff worldwide in order to save $600 million a year.

Yet others are also moving to deepen partnerships and alliances so they can spread out development costs.

Germany’s BMW (BMWYY) and Daimler (DDAIF) are putting $1 billion into a joint venture to develop ride-sharing and charging services. Ford and Volkswagen are building some new vehicles together.

A merger between Fiat Chrysler and Renault would take such cooperation a step further. The companies had been discussing ways to team up on new products and tech, but Fiat Chrysler argued Monday that a merger would be best.

Merger moves

Combining Fiat Chrysler (FCAU) and Renault (RNLSY) could benefit both companies.

Fiat Chrysler owns brands such as Jeep and Ram that have a lot of growth potential abroad, especially in the Middle East and Africa where Renault is strong, Krebs said.

Renault, on the other hand, does not have a significant presence in North America, where Fiat Chrysler is a major player.

Additionally, Renault is seen as a leader in electric vehicles, while Fiat Chrysler has lagged behind. The Italian-American company said a merger with Renault would produce annual cost savings of more than €5 billion ($5.6 billion).

Nissan's CEO said he has consistently been opposed to a merger with Renault.

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One wild card is Renault’s existing relationship with Nissan (NSANF). Renault holds a 43.5% stake in Nissan (NSANF), while Nissan (NSANF) owns 15% of Renault, as part of an alliance that also includes Mitsubishi Motors.

The French carmaker, which sells fewer cars than Nissan, had been pushing for the companies to merge but faced pushback.

“The biggest mystery in all of this is where does Nissan fit,” Krebs said.

Auto mergers don’t always work out, however. Fiat Chrysler would know: its merger with Daimler in 1998 ended less than a decade later, in part because of differences in corporate culture.