Merger Mania, Marchionne Style

Sergio Marchionne is telling anyone who will listen that the auto industry needs more mergers. Maybe he’s right, but history shows us that is a pathway laden with land mines.

While the CEO of Fiat Chrysler Automobiles makes compelling points why more mergers are needed, so far every automaker has turned him down. They may agree with his premise, but they sure don’t buy his solution.

First, Marchionne’s side of the story: He wrote a 25-page PowerPoint presentation titled, “Confessions of a Capital Junkie: An insider perspective on the cure for the industry’s value-destroying addiction to capital.”

In a nutshell, he argues the auto industry ranks dead last when it comes to providing returns on invested capital, because automakers duplicate so much in R&D and capital expenditures.

Worse, Marchionne argues half of those expenditures are for items that are “undiscernible” to consumers. He says most consumers don’t care what kind of steering, brakes, transmissions or engines are in their cars as long as they work well. And they definitely don’t care what kind of body architecture it took to build them.

Marchionne points out full-line OEM efforts that reduce platforms, such as Ford’s “One Ford” philosophy, or use large-scale commonization across multiple brands like Volkswagen’s MQB strategy, have failed to produce the expected return on investment. The same goes for one-off or long-term collaborations between automakers (the General Motors-Ford transmission venture), and for partial integration between automakers who take an equity position in each other (Renault-Nissan).

Only full mergers will produce results fast enough, Marchionne argues, using the best practices and components from each company. The key enabler is establishing an integrated product strategy, he says, promising dealers would not be merged and brands would be left untouched.

But haven’t we seen this movie before? At its peak, GM was a holding company that owned six separate car and truck manufacturers: Chevrolet, Pontiac, Oldsmobile, Buick, Cadillac and GMC. Beginning in the 1960s with the creation of the GM Assembly Div., it started to consolidate, culminating in the 1984 reorganization that essentially merged all back-office operations. Today, GM is the realization of Sergio’s dream, but its return on invested capital is no better than anyone else’s.

The more GM merged its divisions and their operations, the faster it lost its competitive edge. The more it sought out synergies and chased efficient capital allocation, the blander its cars became.

There are myriad reasons why this happened, and it can’t all be blamed on merging everything. But in my mind there’s no question that the shift from a holding company using de-centralized controls to a fully consolidated and highly centralized corporation ultimately paved the path to GM’s bankruptcy.

Big mergers can create as many problems as they solve. And the two most intractable problems they create are difficult to quantify and fix: complexity and culture clash.

Centralization leads to Kremlin-like complexity, culture clash pits one company against the other. Preventing one or solving the other can consume management’s attention for decades.

This doesn’t mean Marchionne is wrong. But maybe it helps explain why so far no other automaker seems interested in merging with FCA.

And yet, just give it time. Ultimately the industry will be forced to consolidate. To activist investors, what Sergio is saying is music to their ears. But that’s because all they care about is short-term shareholder return, not long-term customer retention.

No, the real force that will bring everyone to Marchionne’s line of thinking is mobility services. As connected and autonomous cars make it possible, more and more consumers will pay for their mobility on a per-trip basis, rather than buying or leasing their own car.

A study titled “Disruptive Mobility” from Barclays predicts new-car sales in the U.S. will drop from today’s 17 million a year to only 9.5 million a year over the next 35 years.

So if you think it’s hard to produce a decent return on invested capital today, just wait until production drops by 40%.