As developments in the global auto industry continue apace, it is becoming increasingly evident that Fiat has fashioned itself as a change agent in an industry rife with overcapacity. While eyes in the U.S. are fixed on a Fiat-Chrysler link-up, eyes in Europe are also fixed on Fiat in a Fiat-GM Europe merger. But, these are not the only developments ongoing at present. There has been a rush of activity involving VW, Porsche, Daimler, BMW, Saab, and GM Latin America. Let me fill in the gaps in those developments and sum up what I think it means for the industry going forward.
Fiat – Chrysler
Chrysler has now filed for Chapter 11 bankruptcy. It has also received approval from the bankruptcy court to access a loan of $4.5 million from the Canadian and U.S. governments (Chrysler has a major presence in Windsor, Ontario, just across the U.S.-Canadian border from Detroit).
The company is looking to sell its assets to Fiat under section 363 of the U.S. bankruptcy code. This gives Chrysler, as a company protected under Chapter 11, the opportunity to sell assets to another party without expressed consent of its creditors, secured and unsecured. And it can do so even before a restructuring plan has been developed. Effectively, what this means for creditors at Chrysler is fewer fixed assets against which to make their claim. Obviously, Chrysler will receive money for these assets, but because there is only one bidder in discussion, Fiat, the assets will not command a premium price. It has filed a motion in court to request approval to do this quickly (the Obama Administration wants bankruptcy fast-tracked to finish in two months or less). Selling to Fiat will likely mean losses for creditors. As a result, a number of secured creditors have sued to stop this. You should note that Chrysler’s argument before the court is that it MUST sell quickly or its assets will quickly depreciate, leaving even less for creditors.
GM Europe – Fiat – Magna
While Chrysler has already filed for Chapter 11, General Motors is working under a deadline of June 1st imposed by the Obama Administration, after which time the company would run out of cash and be forced to file for bankruptcy protection. So General Motors is keen to sell as many assets now as possible, chief among them its European operations in Germany (Opel) and the U.K. (Vauxhall). The major contenders for a GM Europe bid are Fiat again and an Austrian-Canadian auto parts maker called Magna. Basically, this is a choice between vertical integration and horizontal integration as Fiat and GM Europe are direct competitors, whereas Magna is a supplier to automakers.
In my opinion, much of this discussion hinges on the position of the German government, because the GM Europe deal will not proceed without government backing and credit guarantees. The government, which is preparing for a country-wide election, consists of a grand coalition of the two major parties led by the the CDU (right of centre) and joined by the SPD (left of centre). In the elections, Chancellor Merkel of the CDU will face off against Frank-Walter Steinmeier, the Vice Chancellor from the SPD. So, this is a crucial issue for the government.
You should note that Fiat is considered the buyer of choice for the CDU. The go-between there is Roland Berger, a well-regarded businessman and founder of the large consultancy by the same name. Magna is the SPD choice and this deal is being facilitated by none other than Gerhard Schroeder, the former German Chancellor. SO, as you can see, this is a very political environment.
Making things even more complicated here is the fact that the German unions are opposed to a deal with Fiat. It is widely expected that there will be major job cuts if Fiat wins the GM Europe bid. The Fiat head Marchionne pitched up in a $125,000 Maserati Quattroporte in Berlin for talks with the German government while rumors circulated that he planned to shutter the Kaiserslautern factory, one of four major Opel locations in Germany (the other three are Russelsheim, Eisenach, and Bochum). Marchionne subsequently said he would not close the Kaiserslautern factory (perhaps just to get the deal done, in my opinion).
But these are not the only developments in the car industry at the moment.
Porsche – VW. The internecine fight over Porsche, pitting the Porsches against Ferdinand Piëch and his family, is reaching a fever pitch. Somehow, Porsche got itself deep into debt as it looked to swallow Volkswagen whole. Piëch has an alternative plan for VW to take over Porsche The whole thing is a mess that has included a massive short-squeeze last year and the suicide of a major shareholder.
Fiat – Saab. Is Fiat looking to take over the world? NRC Handelsblad, a major Dutch financial daily, says that Fiat is also interested in Saab, the Swedish automaker now owned by GM (See link in Dutch). When we hear about GM Europe, it is generally used to mean Opel and Vauxhall as these two brands run on the same platforms and are easily integrated. Vauxhall had its own production pre-Oil Shock II in 1979, but around that time GM rationalised production and the Opelization of Vauxhall made the platforms identical. Saab is another story. It is completely separate from the other two and has significant problems in that its cars are now outdated and a major overhaul would be necessary (see my post, “GM finding no takers on Saab?”). How and why are two good questions to ask Fiat regarding its plans for Saab.
Fiat – GM Latin America. Apparently, Fiat is talking to GM about its Latin American operations as well, or at least this is what the Sydney Morning Herald is reporting. No specifics have been given. A blurb reads simply, “Fiat is interested in US auto giant General Motors’ operations in Latin America and discussions on a possible deal are under way, an industry source told AFP Tuesday.” Bloomberg goes a bit further saying: “People familiar with the matter said Fiat may also seek to acquire the GM’s operations in Latin America, China and Russia to expand its reach.” From these stories, you could infer that all options are on the table for Fiat. They want to acquire and grow in a number of different markets.
Saturn and Hummer. Dagens Nyheter, a major Swedish daily reports that, in addition to the ongoing discussions about Saab, Opel and Vauxhall, GM is currently looking at ways to unload Saturn, the once promising company within a company, and Hummer, the U.S. maker of gas-guzzling tank-lie SUV’s. While the short article (in Swedish) says there are “several” bidders for Saturn, it mentions nothing about interest in Hummer.
Daimler – BMW. As a testament to the depth of the downturn in the auto industry, even luxury car makers Daimler and BMW are looking for ways to work together. To date, the two have cooperated in terms of buying from suppliers (like Magna). But, they want to cooperate on deeper initiatives. According to German daily Die Welt, they are exploring the possibility of working together on green technologies, higher safety standards and auto-assisted safety measures (see story in German).
I am sure there is much I am leaving out here. But, as all of these stories have popped up just in the last day, it is testament how the Chrysler bankruptcy and the GM deadline are driving the industry toward a much-needed consolidation. Fiat is looking to lead the charge in that realm, judging from Marchionne’s statements and the number of different fronts on which it is now holding merger and acquisition discussions. In my view, Fiat risks over-reaching, with disastrous consequences down the line. They have already tried and failed in a joint venture with Opel. Daimler has already tried and failed in a merger with Chrysler. And Saab is a potentially bottomless pit, which needs to hoover up cash to meet re-model its antiquated product line. Professor Garel Rhys of Cardiff Business School compares the Fiat dealmania to the “Organized chaos” of the British Leyland merger from 40 years ago.
I would have thought swallowing Chrysler or Opel whole was enough. Digesting them both, two companies that operate on different continents and in different languages from Fiat, is sheer madness. Adding the talks over other GM brands into the mix makes these negotiations look that much more risky.
In the end, however, this flurry of activity is good for the auto industry. There is significant over-capacity which makes it difficult for all players to turn a profit, especially in this downturn. One way or another, this industry will consolidate, whether through merger or bankruptcy and liquidation.
Originally published at Credit Writedowns and reproduced here with the author’s permission.