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Huge Mergers to Shape the Future of Car Industry
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Huge Mergers to Shape the Future of Car Industry

The age of significant car industry mergers is coming. Recently, the two large transactions were announced with the PSA Group getting the Opel brand from GM, which announced the withdrawal from the European market. Volkswagen - Fiat Chrysler´s wedding is the second significant transaction. What can we expect from these changes?

Opel and PSA Group - Win - Win Situation or Tavares´ Folly?

On March 6th, the representatives of the maker of Peugeots and Citroëns announced that it would also add the Opel brand to its portfolio. The transaction is connected closely with the General Motor's decision to leave the European market. The reasons were pretty clear - Opel has only about 6% of the European market with cars, and that's not a number significant enough to generate any income. The brand meant a 16 years period of losing money for General Motors, and that´s why it made the decision.

The decision allows the American company to pour money into its profitable factories in China and America, where it reaches positive results.

The acquisition, however, is a significant milestone for PDA. The brand now controls 16% share of the market which means the second spot just behind VW and ahead of Renault. The real reasons for the PDA´s decision are unclear. One of the possible interpretations is hidden in the fact that the CEO of PDA, Carlos Tavares, was sacked by Renault and wanted revenge on his former employer. The transaction may represent a particular risk since Opel is not in good shape.

The total price for the purchase was €1.3 bn with GM being still responsible for the pensions obligations. The plans are to reopen factories in Germany and expand into the oversea markets. The decision is crucial since one of the biggest problems is that PDA company's incomes are mainly based in Europe, with more than 70% share. The local market growth is slowing down, and the manufacturer will have to find a way to sell more cars in the other regions.

VW - Fiat Chrysler Transaction - Regaining the Credit

Long gone are times when Volkswagen's board refused any ideas about mergers. The possibility to create 40% more cars than Toyota was just too exciting. The historical catastrophe of the BMW acquisition of Rover and Daimler´s disastrous merger with Chrysler are now long forgotten, and the German generality is awaiting the transaction with high hopes.

The merger´s positive impacts are that it will drastically reduce the cost of research and manufacturing of the cars which will allow the brands to lower the price of their products. The research is a key feature of the current automobile production since the companies are competing on the field of the electric and self-driving vehicles.

The savings of Volkswagen and Fiat Chrysler are estimated to sum of €4.5 bn per year which represents more than a third of their combined market capitalization. However, there is one great danger for the Italian manufacturer. The position of VW brand and its powerful worker union is so strong that the Fiat Chrysler will have to settle with the lower position in the relationship.

The transaction is crucial for the German company since it should help to keep the secure credit rating, which has been under fire after the emission tests cheating affair. However, a straight takeover would suck the whole amount of financial reserves of the brand, so the companies are now talking about some share-based deal. The final shape of the deal cannot be estimated because of the various inner mechanisms inside the companies. The principal shareholders don't want to lose their position, so they will have to agree to a particular compromise.

There is also one political problem since Fiat Chrysler is partly American company and the USA doesn't have a real relationship with the German rival. VW´s share in the American market is weak, and it needs its partners´ brand to build itself a stronger position there. The plan for the American region is to reach more than 4% of the share on the market, an amount which has already been exceeded by smaller European companies like Peugeot.

The two large transactions represent big changes in the car industry as a whole. Increasing financial demands on research and new technology production put pressure on the brands to try to lower the cost as much as possible. That´s why the mergers will continue, and the manufacturers will have to cooperate more than ever before to secure their share of the market.

Image credit: Huffington Post

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