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Marchionne is so right and so wrong about consolidation

Standards for bumpers, headlights and other safety features vary from market to market, adding to engineering costs for automakers. Photo credit: BLOOMBERG

Fiat Chrysler chief Sergio Marchionne is absolutely right in his call for industry consolidation.

But he is absolutely wrong about what needs consolidating.

In a call with analysts last week to discuss Fiat Chrysler Automobiles’ first quarter earnings, Marchionne went rogue and launched into a discussion further pressing his case for automaker megamergers. Car companies, he believes, must make more efficient use of their capital.

It makes no sense, Marchionne argued, for dozens of automakers to spend money developing the same technologies.

My colleague Larry P. Vellequette listened to Marchionne’s entire 2½-hour spiel and reported: “Marchionne said automakers could potentially share 40 to 50 percent of vehicle development costs, returning 2.5 billion to 4.5 billion euros of capital every year. To illustrate his point, he noted four-cylinder engine development, which cost each automaker billions with a negligible impact on buying decisions. ‘Consumers could not give a flying leap,’ Marchionne said, about whose four-cylinder engine is in a vehicle.”

Actually, consumers do care about engines. More than 5 million new-car buyers cared enough to pay Ford a premium for the EcoBoost engines in their car or light truck. Ford has done a masterful job positioning its line of turbo engines, so much so that in just five years, the company has sold more turbocharged engines in North America than any other automaker in history.

Fiesta ST: More than 5 million new-car buyers have paid a premium for an EcoBoost engine in a Ford car or light truck.

And EcoBoost is now one of the industry’s most recognized subbrands. The Cummins diesel engine in the Ram pickup is another example of buyers willing to pay a fat premium for an engine. Look at the demand for the 707-hp monster in the Hellcat Challenger and Charger. Engines -- four-cylinder or more -- are the heart and soul of car companies. Would a BMW with some generic engine still have the same appeal? Would an Alfa Romeo?

Now, about consolidating, Marchionne could lead an industrywide effort to:

  • Harmonize global emissions standards. Ask any executive who runs a company’s powertrain operations -- be it an automaker or a supplier, such as Bosch, Mahle, FEV or AVL -- what one global emissions standard for gasoline engines and one for diesels would do to lower development costs. They’ll tell you it would save the industry billions. Right now, each engine needs a separate emissions package for each region. Sometimes, that can be done with software, but more often, the changes require different parts. The amount of manhours and money automakers spend on this redundant engineering is incalculable. The last time I checked, clean air is clean air, regardless of where it is blowing.
  • Standardize global safety regulations: Today, at least 58 nations are part of the World Forum for Harmonization of Vehicle Regulations, a United Nations entity charged with implementing best practices for vehicle safety, theft and other areas.

The United States and Canada are not part of this important body. If Marchionne could convince the industry to lobby Washington to join, then bumpers, headlights, crash standards and dozens of other rules that cause vehicles to be engineered differently for specific countries would disappear. The last time I checked, a safe vehicle that protects its occupants and minimizes injuries to pedestrians is important no matter what continent it is driven on.

  • Homogenize global fuel quality: Because additives, octane (cetane for diesel) and cleanliness (sulfur and lead content) of fuel varies by country and region, automakers must adjust engines and emissions systems. This drives up engineering costs and complexity and decreases manufacturing efficiency. Marchionne should invite automakers to a fuel summit to devise global industry standards acceptable to governments and refiners. The last time I checked, clean, high-quality fuel benefits an engine no matter where it is running.

To do any of the above is -- at first -- going to be disruptive. Change always costs money. But if safety, fuel and emissions regulations could be harmonized globally, the potential savings from the economies of scale would dramatically lower costs for suppliers, refiners and automakers. Sergio Marchionne could save the money he regrets spending on r&d and maintain the unique character of FCA’s vehicles.

Sounds like a win-win proposition to me.

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