Fiat Chrysler set to propose merger with Renault for world's 3rd-largest automaker

[NEW YORK] Fiat Chrysler is planning to propose a merger with French carmaker Renault on Monday, according to two people involved in the negotiations, in a transaction that could reshape the global automobile industry.

The two companies were deep in talks over the weekend about the structure of the deal and how to handle the political implications, but many details remained unclear. Renault, which is partly owned by the French government, is already in a three-way partnership with two Japanese companies, Nissan and Mitsubishi, in what is known as the Renault Nissan Alliance. And Fiat has significant operations in Italy.

A combined Renault and Fiat Chrysler would become the third-largest automaker in the world by sales, behind Volkswagen and Toyota.

A merger, if it came about, would further underscore how auto companies are linking arms to cope with sweeping technological change, including the development of electric cars and autonomous driving technology.

The two sides have already agreed to the broad outlines of a deal to share technology, intellectual property, supply chains and plants to develop and manufacture vehicles, three people with knowledge of the talks said. The people all spoke on the condition of anonymity because the proposal was not public.

The deal would reduce the French government's stake and influence in Renault, one of the country's cherished businesses, because Fiat Chrysler would dilute the government's stake. That influence has been a key point of contention between Nissan and Renault.

While Renault and Nissan had long cultivated the impression that they operated as one, Nissan has not been a party in the merger talks although it has been kept apprised, another person with knowledge of the talks said. Relations between the French and Japanese companies have grown tense since Carlos Ghosn, the former head of the alliance, was arrested in Tokyo in November and later charged with financial wrongdoing.

Ghosn, who remains under house arrest and no longer works for the alliance, has said that he is innocent and that the accusations are part of a plot to strip him of power. Nissan has complained that Renault dominates the alliance even though the Japanese company sells more autos and has a stronger international presence.

People on both sides said the benefits of a Fiat-Renault merger would be from savings in combining purchases for supplies and in the development of new vehicles. Renault, for example, has a robust electric vehicle plan in place that would be shared with Fiat Chrysler, which is considered to be behind.

Sergio Marchionne, the former chief executive of Fiat Chrysler who died last year, may have set the path for the planned merger in late 2015. He wrote in a PowerPoint presentation for financial analysts that the automobile industry was spending too much money developing and manufacturing cars, and he called for consolidation.

The spending by so many manufacturers, he said, "is duplicative, does not deliver real value to consumers and is pure economic waste."

Renault and Fiat have been negotiating for several weeks over a "possible rapprochement" to collaborate on electric cars, autonomous and connected vehicles, and "new uses of the automobile," said a French government official with knowledge of the situation, who spoke on the condition of anonymity because a proposal had not yet been made public.

The Renault chief executive, Jean-Dominique Senard, who replaced Ghosn in January as Renault's chairman, informed the French finance minister, Bruno Le Maire, at a meeting on Friday that a proposal would be made to the Renault board in the coming days. The Japanese authorities were also informed, the government official said. Renault directors are expected to consider the plan during a board meeting at 8 a.m. Monday in Paris.

The French state is Renault's largest shareholder, with a 15 per cent stake, giving it sway over major decisions at the company as well as within the alliance with Nissan and Mitsubishi. The government isn't opposed to a tie-up that could make the alliance the leading maker of electric cars and technologies to shape the future of the global auto industry, the official said.

Nonetheless, Fiat and Renault will need to make commitments to maintain jobs as well as industrial sites in France for the government to sign off, the official said. Any merger would need to be achieved within the framework of the alliance with Nissan and Mitsubishi "in order to strengthen it," the official added.

Fiat Chrysler intends to say in its formal proposal that it will not close plants or cut jobs, the two people involved in the talks said. Such pledges are often difficult to keep in the long term.

Fiat Chrysler and Renault both have excess manufacturing capacity in Europe, and several plants are operating below full capacity. Consolidating production into fewer plants could wring significant savings for the companies.

A merger would help both companies manage a downturn in European car sales, which slipped 2.6 per cent in the first four months of the year.

As they work out their deal, Fiat Chrysler and Renault are expected to swap shares, though the terms of the proposal could not be learned. It was possible each side could take a stake of 10 per cent to 25 per cent. It was also unclear on Sunday what the governance structure would look like.

In his letter to shareholders this year, John Elkann, Fiat Chrysler's chairman, signaled a major transformation for his company. "The next 20 years for the automotive industry, like its first 20 years, are set to witness a greater level of change than during the intervening 100. We are determined that we and FCA will play our part actively and ambitiously in this new and exciting era."

Fiat has been struggling in Europe. Its market share in the European Union, including other company brands like Jeep and Alfa Romeo, has slipped to 6.4 per cent from 6.9 per cent a year ago. Because of a dearth of new models, Fiat has fallen behind Hyundai in Europe, where Asian brands have not traditionally been popular.

Fiat has also been slow to invest in electric cars, a technology that Renault embraced early.

Renault's market share has risen to 11 per cent so far this year from 10.7 per cent last year. But that is largely because of sales of its budget Dacia brand. Renault brand cars have lost market share.

Auto executives often speak as if a tsunami were bearing down on the industry, ready to sweep away all but the strongest. The pace of technological change is reminiscent of the early days of the automobile. The cars of the future will run on batteries and be capable of driving themselves. Many people will not own their own cars but instead summon transportation as they need it with an app.

Car companies must invest billions of dollars in these new technologies and services to remain relevant. Yet the payoff, if it ever comes, is years away. New competitors like Uber and Tesla have access to market financing that the traditional car companies do not. That creates a powerful incentive for companies to seek out partners with whom to share costs.

The imperative is especially strong for companies like Fiat Chrysler that do not have deep pockets, or companies like Renault that are overly dependent on one region. The French carmaker has no presence in the United States and is weak in China. Fiat has struggled to invest in new models, much less autonomous driving or other exotic technology.

"Fiat can't survive by itself," said Ferdinand Dudenhöffer, a professor at the University of Duisburg-Essen in Germany who follows the auto industry.

NYTIMES