25 March 2019
Having achieved a strong earnings recovery in recent years, Fiat Chrysler is in a strong position to negotiate with potential bidders. Photo: Bloomberg
Having achieved a strong earnings recovery in recent years, Fiat Chrysler is in a strong position to negotiate with potential bidders. Photo: Bloomberg

Acquiring Fiat Chrysler won’t be a cinch for Chinese carmakers

Several Chinese automakers are reportedly interested in acquiring Italian-American company Fiat Chrysler.

Great Wall Motor (02333.HK), Guangzhou Automobile Group (02238.HK) and Dongfeng Motor Group (00489.HK) are said to be some of the potential bidders.

They are probably keen to copy the success of Geely’s US$1.3 billion purchase of Sweden’s Volvo Cars in 2010, which has catapulted the Chinese carmaker’s brand image and technology.

But since the situation is quite different now, will the same strategy work?

Fiat Chrysler was established in late 2014 through a merger between Fiat and Chrysler. Headquartered in London, the group owns several brands including Jeep, Maserati and Alfa Romeo.

Chrysler filed for Chapter 11 bankruptcy reorganization in 2009, and emerged from the bankruptcy proceedings with the United Auto Workers pension fund, Fiat, and the US and Canadian governments as principal owners.

Fiat completed the acquisition of a 100 percent stake in Chrysler for US$4.9 billion in January 2014.

At the time the Italian carmaker was grappling with stagnant sales and mounting losses. But it made the risky bet in the hope that a merger with Chrysler would result in cost savings and economies of scale.

Last year, the company reported a net profit of 1.81 billion euros (US$2.13 billion), almost double the level two years ago.

However, the group has made little progress in exploring new revenue streams. Sales rose less than 20 percent to 111 billion euros last year, but that’s largely due to a weaker euro.

In particular, Fiat Chrysler has failed to make big strides in tapping into the China market.

Last year it sold 176,000 cars in China, which only represented a 0.8 percent share of the entire China market.

The contribution of China market remains marginal given its global sales volume of nearly 4 million units.

At such a pace, hitting the company’s 2018 target of selling 850,000 cars seems highly unlikely.

As a result, its share price has not been performing well.

The stock’s closing price last Friday was down more than third from its value two years ago.

But following reports that a number of China automakers are eyeing Fiat Chrysler, the shares jumped 8.5 percent on Monday.

“The Chinese make a lot of sense” as a prospective buyer, said Kristin Dziczek, director of labor, industry and economics at Center for Automotive Research. “Chinese automakers have made no secret that they’ve got their mark set on the US.”

Zhejiang-based private carmaker Geely acquired Volvo in 2010 and vastly improved the Swedish automaker’s lineup with an infusion of cash. The deal has enabled Volvo to expand its presence in China as well.

Last year, Volvo sold 91,000 cars in China, up 11.5 percent from the year before. Its profit jumped 66 percent to 11 billion Swiss francs (US$11.4 billion).

Also, Geely’s share price has soared 2.4 times over the last 12 months, propelling its market capitalization to HK$170 billion (US$21.7 billion).

However, Geely’s success cannot be easily copied.

The Volvo deal happened in the wake of the 2008 financial crisis, and Volvo’s parent company Ford was struggling at the time. The situation enabled Geely to strike a good deal.

Things have changed dramatically in recent years.

First of all, Chinese firms are hungry for foreign assets, which creates a far more competitive bidding environment.

Second, Fiat Chrysler is not exactly in a crisis situation; it’s in a strong position to ask for a premium.

Finally, it took Geely years of hard work to achieve closer cooperation between the staff of Volvo and those of Geely in order for the buyout to bear fruit.

Whoever bags Fiat Chrysler will have a lot of work to do to make the acquisition work.

This article appeared in the Hong Kong Economic Journal on Aug. 16

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist

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