Fiat-Chrysler Could Be Good Fit With VW

Setting aside the inevitable culture clash for the moment, melding Fiat-Chrysler into Volkswagen – although a seemingly gargantuan task – might not be such a bad fit, at least from a market-footprint standpoint.

For the record, Fiat released a statement today saying  it has “not held discussions with Volkswagen regarding a potential merger,” following a report by Germany’s Manager Magazin contending VW Chairman Ferdinand Piech had met with associates of the Agnelli family about a potential Fiat takeover. The Agnelli family is the controlling stakeholder in Fiat-Chrysler.

Bloomberg says a spokesman for Exor, the Agnelli family’s investment firm, also says talks have not taken place. The Agnelli family reportedly would maintain control of the ultra-luxury Ferrari brand, which is considered conservatively valued at €4.3 billion ($5.8 billion). Fiat-Chrysler shares, worth €9.7 billion ($13.1 billion) climbed as much as 5.1% on the news, Bloomberg says, while VW stock fell as much as 3.2%.

No doubt Fiat-Chrysler CEO Sergio Marchionne, already in a recurring war of words with Piech over the potential sale of Alfa Romeo, is bristling at the reports. Piech has longed to get his hands on Alfa, which mostly has been a money-loser but is now a key piece in Fiat-Chrysler’s 5-year growth plan. Marchionne has insisted all along the marque is not for sale – particularly to Volkswagen.

In May, plans were disclosed for a €5 billion ($6.8 billion) investment in the Alfa brand that would include eight new products by 2018 in a drive to boost annual sales to 400,000 from 74,000 units today. Alfa returns to the U.S. this year with the market debut of the 4C model.

Although Volkswagen already has myriad brands, Piech believes Alfa could be a valuable addition to the portfolio, filling a luxury/performance-car niche between and among the VW and Audi brands and below the likes of Lamborghini and Bentley. And he now appears willing to buy the whole of Fiat-Chrysler to get it.

But would the rest of Fiat-Chrysler fit? Maybe not as badly as you would think at first blush.

Volkswagen long has stated its bold ambitions to become the No.1 automaker in the world, and clearly such an acquisition would achieve that overnight. Based on 2013 sales, Volkswagen-Fiat-Chrysler would combine for roughly 13.2 million units, making it some 40% larger than General Motors (9.3 million) and blowing well past rival Toyota (8.8 million).

Of course there would be some blood shed as operations are combined, capacity realigned and market strategies sorted out, but there’s surprisingly little overlap between the two mainstream players.

The acquisition would instantly solve Volkswagen’s deficiencies in the U.S., where its Audi brand is soaring but its VW marque is spinning its wheels. Relying on Chrysler for the volume end of the market would allow VW to focus on being a more-premium brand positioned just below Audi. VW would be the Buick of the stable, while Chrysler carries out its game plan to reposition against Chevy and Ford.

Chrysler also is strongest where VW is weakest: namely pickups and SUVs. Acquisition of the Ram and Jeep brands would give Volkswagen instant credibility in both sectors.

There wouldn’t be much to resolve in Asia, where outside of VW’s strong presence in China there’s little to brag about for either automaker. FCA is focused on expanding its Jeep brand internationally, and that would fit perfectly with Volkswagen, which doesn’t have anything in its portfolio to rival Jeep.

Europe is where most of the overlap would occur. Presumably, VW would turn Fiat into the SEAT or Skoda of Italy, meaning it would maintain its brand locally but pretty much exit the remaining markets. Brazil also would take some sorting out, as VW and Fiat are among the handful of dominant players there.

Managing all this consolidation would be the huge challenge, fraught with extreme peril. We’ve seen the clash of German and American cultures at Chrysler before, and it’s hard to imagine a world where Marchionne and even some of his key lieutenants stay onboard following such a coup.

But Volkswagen has done a better job of engineering similar moves in the past and maintaining some autonomy in product development and strategic planning at the brand level, evidenced by how it’s run Bentley since taking over in 1998 and the arm’s-length working relationship between its VW, Audi and Porsche operations. A similar strategy could work on the Chrysler/Jeep side as well.

This week, Volkswagen said it would seek €5 billion in annual savings as it battles high product-development costs and weak growth in some markets. It’s hard to imagine such a blockbuster deal being part of that cost-cutting picture, but it may not be as illogical as it sounds.

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