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Automatic consolidation is vital but requires a crisis



Most successful automatic mergers come out of the crisis. Even if Fiat Chrysler concludes an agreement with Renault, investors should not expect a wider consolidation wave as long as the sector's profits do not seem much more fragile.

Expectations of a merger between the two automakers, apparently dashed when the Italian-American company withdrew its proposal earlier this month, are reborn. Renault President Jean-Dominique Senard vigorously defended the proposed merger at the company's general meeting on Wednesday. More importantly, French Finance Minister Bruno Le Maire told the Nikkei Asian Review this week that Renault, in which its ministry holds 15% of the capital, would be willing to reduce its own stake in Nissan. This would apparently secure Nissan's approval for a rapprochement, giving the French government the opportunity to reopen talks with Fiat Chrysler Chairman John Elkann.

Nevertheless, investors should not hold their breath. Mr Elkann must be sufficiently comfortable with Paris as a partner to resubmit his proposal. Confidence is shaken after last week's breakup.

Even if the agreement is concluded, it is not likely to announce new mergers. It is extremely difficult to find successful combinations between the auto industry and the failure of the agreement reached in 1998 between Daimler and Chrysler still haunts the leaders. Personalities and politics tend to be embarrassed.

Sergio Marchionne, the late boss of Fiat Chrysler, explained the reasons for the mergers in 2015 in a presentation titled "Confessions of Capital Junkie". He observed that financial returns are poor because the faster than in other industries "is more valuable than ever, as automakers focus on electric vehicles and connected cars.

There have been some successful transactions – the most recent

Peugeot
of the

the acquisition of

General Motors

European company mismanaged in 2017. The French company has returned unity to its profitability by reducing the number of platforms of vehicles. Thanks to Mr. Marchionne, Fiat Chrysler is also the product of a cross-border merger. Significantly, this was made possible by the financial crisis that led Chrysler to bankruptcy, giving Fiat all the bargaining power it needed. It's the same thing for

Tata Motors

'Acquisition of Jaguar Land Rover.

These exceptions suggest that the economy and policy of auto mergers and acquisitions are better aligned when businesses need relief. The next major slowdown could lead to similar agreements, but it is not yet close to the United States or Europe. Car sales are stagnating, but at a high level, and consumer confidence is still strong, especially in the United States. Despite all the worries about technological change, the profits of most automakers remain high by historical standards. This makes traders reluctant to compromise.

Jean-Dominique Senard from Renault

Photo:

Christophe Ena / Associated Press

China, the largest car market in the world, is in a different place, with sales falling rapidly. It is no coincidence that it is in China that the first signs of consolidation of the sector are emerging, according to analysts Bernstein.

In the absence of complete mergers, automakers are turning to industrial alliances to share the costs of technology. Numerous reconciliations have been announced this year, particularly between Ford and

Volkswagen
,

Daimler and

BMW
,

and more recently, BMW and Jaguar Land Rover. The problem is that such arrangements do not have much experience. Even before sinking into acrimony, the Renault-Nissan alliance never seemed to significantly increase corporate profits.

There is a potential catalyst for an industry crisis looming on the horizon: Chinese manufacturers could eventually find a way to sell cars abroad, like their counterparts in Japan and South Korea. "We are facing a period during which the rise of Chinese industry will probably result in a form of tsunami," Senard warned Renault shareholders on Wednesday. Mergers, such as his deal with Fiat Chrysler, were the best answer, he hinted.

Auto investors focused on consolidation need to pay attention to what they want.

Write to Stephen Wilmot at stephen.wilmot@wsj.com


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