As Renault was considering Fiat Chrysler’s proposal to merge,
industry executives and analysts believed “that carmakers must link up to share
the cost of a transition from internal combustion engines to avoid being run
over by fast-moving tech industry challengers like Tesla or Uber.”[1] To
be sure, (b)y purchasing parts together, combining their manufacturing
operations and sharing the cost of research and development,” the merger could
“eventually save 5 billion euros per year,” according to Fiat.[2] The R
& D would include funds spent on developing new models as well as on high
tech oriented to the future. Although significant efficiency could be achieved
due to under-used factories and all the money going into product development,
the basic problem was one of insufficient scale (i.e., revenue) to support
(i.e., finance) the very costly research and development needed on electric
and/or self-diving cars. In its statement, Fiat Chrysler pointed to “the need
to take bold decisions to capture at scale the opportunities created by the
transformation of the auto industry in areas like connectivity,
electrification, and autonomous driving.”[3] The insufficient scale was
particularly troubling given the declining E.U. auto market at a time when
Tesla, Google and Uber were making progress on electric and self-driving cars.
Fiat Chrysler could really use the expertise at Renault and Nissan on electric
cars. I'm not sure, however, that a merger was the optimal route forward.
As with nearly everything, potential downsides existed. First, the
merger would dilute the shares that the state of France already had in Renault
from being its largest stockholder. Second, political leaders in that state as
well as Italy would doubtless “fight to preserve as many jobs” in the respective
states as possible.[4] In its analysis, however, The New York Times
claimed at the time that it would be difficult for the merged company to avoid
job cuts, given that the companies’ respective companies were operating below
capacity.
So perhaps the anticipated savings of €5 million were optimistic,
which raises the question: why not an alliance to fund a shared R&D center
where work would be done on high cost, future revenue electrification and
self-driving cars? Pushing for a full-blown merger would risk clashing
corporate cultures. Also, the inevitable politics as duplicate management
positions are eliminated would not be cost-free. Furthermore, the alliance
between Renault and Nissan, already strained, could suffer or break apart in
the event of a merger but not another alliance.
The basic problem was not enough scale (i.e., revenue) in either
company to finance the heavy cost of R&D without compensating revenue in
the short or medium term. When the gains from other efficiencies are not the
main point of a merger, an alliance or partnership focused on the main problem
may have been a better fit.
The problem of scale in terms of having enough money to finance
the high-tech research need not incur the disproportional costs that
come with increased organizational size and complexity. The costs of
integration organizationally, for example, increase disproportionately with
organizational size (and complexity).[5] Empire-building, a political as
much as economic propensity at the upper level of organizations, can give rise
to optimistic forecasts of savings from various efficiencies from mergers while
the financial downsides are minimized. We could note, for example, the
skepticism regarding Fiat Chrysler’s claim that no jobs would be lost and no
factories would be closed. If the urgency for the merger was due to the
advances by Tesla, etc., then perhaps a better proposal would have been
delimited by that main problem rather than blown up to the form of a complete
merger.
[1] Jack Ewing et al, “Renault Considering Fiat’s Offer to Merge Into a New Auto Giant,” The New York Times, May 27, 2019
[2] Ibid.
[3] Ibid.
[4] Ibid.
[5] James D. Thompson, Organizations in Action: Social Science Bases of Administrative Theory (London: Routledge, 2003).
