The global Risiko of the automotive sector

Everything started in September 2015, when the Dieselgate exploded both in the U.S. and in Europe, involving Volkswagen group. During the following period, other automotive companies seemed to be involved in other scandals related to the use of software designed to get around the super-strict laws on emissions and on air quality. However, today everything is going to be forgotten through the payment of heavy fines.

While the dieselgate was blowing up, Europe, and partly U.S., were still facing the consequences of the financial crisis, with low consumptions that make the automotive market unable to grow.

In this scenario, the growth rate of the automotive market started becoming positive at a global level just from the beginning of 2016, with some notable performances such as double-digit growth, which emerged at the end of the last year and during the first months of 2017. In this context, FCA has reached the most significant results, due to the stunning long-term strategy developed by Sergio Marchionne. We are able to affirm that, without him, the Italian carmaker company would probably not exist any longer, causing tremendous impacts also for the linked activities and for the entire Italian economic system.

As regard the movements of automotive companies, the most recent operation in the sector, is certainly represented by the acquisition of Opel/Vauxhall by the French PSA group, from the American General Motors. Within the same operation, GM has also been able to sell its European financial activity in a trade that has involved also the French bank BNP Paribas. The combined value of the deals is about $2.3 billion.

Figure 1: The brands of the PSA Group after the acquisition on Opel/Vauxhal, Source: Caradvice.com

Opel’s history highlights some controversial aspects in the recent past since it is a well-known fact that, during financial crisis, Angela Merkel, Germany’s Chancellor, has put pressure on GM in order to make Opel its unique business in Europe. The aim of the most relevant woman in the world was to stop selling other brands of the GM group in the Ancient World, such as Chevrolet. The unique willingness of Merkel was not to have consequences in the German economic system, since, we remind, that Opel is a German company.

However, besides this controversial political agreement, GM has lost about $ 9.1 billion in Europe since 2009, and this certainly represents a sufficient reason to abandon the European activity. So, why would this deal be a winning move for PSA if it has just bought a losing company?

Figure 2: The losses of GM in Europe, Source: Bloomberg

Analysts and even other players have been uncertain on the reasons at the basis of this operation by Carlos Tavares, CEO of the French Group. Certainly, he took advantage of the opportunity because acquiring GM’s Opel and Vauxhall brands would give his group a comprehensive 16.3% of the European passenger car market. In this way PSA could become the second European player, ahead of the other French carmaker Renault SA.

Moreover, he declared that the goal for Opel/Vauxhall is to reach a recurring operating margin of 2% by 2020 and 6% by 2026, and to generate a positive operational free cash flow by 2020. This could happen through the creation of positive synergies and economies that would lead to cut as much as € 2 billion in annual costs.

In the opinion of the writer, the deal could lead to relevant consequences in the entire automotive sector at a global level.

The first possibility is that GM has decided to divest itself of its European activities in order to prepare the field for a merger with FCA, after a long, and apparently ineffective, courtship that Marchionne has been doing in the last years to Mary Barra, GM’s CEO. On the one hand, FCA would become the unique European business of GM, on the other hand GM could exploit the huge American success achieved by two brands of FCA: Jeep and 500. In relation to this opportunity, an important aspect not to be underestimated is the position of the new President of the United States. Actually, Trump has shown, also through a tweet, a strong support to the FCA’s $ 1 billion investments in USA, and he would certainly support a new American champion.

Figure 3: Trump meets with auto executives, here Sergio Marchionne (FCA) and Mary Barra (GM), Source: Breitbar

The second possibility is that FCA and Volkswagen build up a long-term agreement in order to cooperate for reinforcing their positions in the U.S. market and above all to affirm again the predominance of the German group in Europe. Last financial gossip talks about a “FCA dossier” inside the first drawer of the CEO of the Volkswagen group, Müller. This group of documents would deal with a possible total or partial acquisition of FCA, and certainly VW, with a cash position of € 27  billion at the end of 2016, could afford a deal like this.

The time when dieselgate will be completely forgotten, fines will be paid, and tricky software will be dismissed, is not so distant. From that moment, the global Risiko for becoming the dominant player in the automotive sector will officially begin. For now we are just warming-up.

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