Merge Those Powertrain Operations

Does a merger between General Motors and FCA make sense? Not to GM’s board of directors. They blew off Sergio Marchionne when he suggested it.

That fight may not be over, but GM and FCA may want to consider a smaller merger that still could save billions of dollars, and maybe lure Ford into the deal at the same time. This suggestion no doubt will bring out mobs with pitchforks and torches, but here goes.

Detroit-based automakers should seriously consider merging their powertrain operations. I know that’s a sacrilege in an industry that considers the engine the “heart” of the car. And those automakers have built up considerable brand equity in some of their engines. But hear me out.

The vast majority of American car buyers could not tell you what kind of engine they have under the hood of their car. They might be able to tell you whether it’s a four, a six or an eight. But that’s about the extent of their knowledge. And they can tell you nothing about the kind of transmission they have, except to tell you it’s an automatic. Even more importantly, most car buyers really don’t care what kind of engine or transmission they have as long as it’s reliable, durable and efficient.

There are exceptions, of course. Hard-core enthusiasts care deeply about the powertrains in their cars. So do most diesel and hybrid owners. But all of them account for maybe 15% of the car-buying public.

So that means about 85% of car buyers don’t care where their engine and transmission come from. Just as they don’t know or care who supplied the steel, who made the headlamps or who delivered the seats on a just-in-time basis. To them, that’s immaterial. And that presents the automakers with an opportunity to achieve a staggering level of manufacturing scale.

In the NAFTA market alone, GM, Ford and FCA will build nearly 9 million engines and 9 million transmissions this year. Globally they will build over 20 million of each. FCA estimates nearly 90% of that production overlaps, meaning they’re all building very similar engines and transmissions. Combining that production would give the Detroit Three scale that no one else could match. And that would give them the lowest powertrain costs in the industry by a wide margin.

Engines and transmissions are expensive. They take years to design and develop and require a huge capital outlay to tool up. A common rule of thumb is that it costs half a billion dollars to develop a new engine, and another half billion for a factory to build it. The same rule of thumb applies to transmissions. By merging those powertrain operations together the Detroit Three could eliminate a lot of duplication and cut costs considerably.

They could also keep some of that work in-house, to develop variations that already enjoy solid brand equity, like GM’s LT4, FCA’s Hemi and Ford’s EcoBoost. As long as they keep it to bolt-on technology, they could afford to develop unique variations that gearheads would pay extra to buy.

But how would you merge this all together? The best way would be to form a separate company, or turn it over to a supplier. I don’t think it could be done on a collaborative basis. Each automaker would be arguing that its designs should be adopted by the other two, and those arguments could go on for years. You need an impartial arbitrator to make those hard-nosed decisions, and that calls for a separate, stand-alone company.

There’s another reason why a merger like this makes sense: As car sharing and mobility services become ever more popular, car ownership is likely to decline. Automakers will need fewer factories in the next couple of decades. So merging those powertrain operations now would provide a smoother transition to right-sizing and downsizing. A kinder, gentler chop of the axe, if you will.

Merging powertrain operations would not deliver the kind of savings that a full-blown combination of GM and FCA would provide. But it would be far more manageable, quicker to implement and would result in instant savings.