TURIN/LONDON -- Fiat Chrysler Automobiles has been angling for a combination with another automaker for years, and its latest attempt -- for a 50-50 merger with Renault -- could address some of the main weaknesses of both companies, sources told Reuters prior to Monday's overnight announcement.
FCA said on Monday that it has made a "transformative merger" proposal to Renault in a deal that would generate 5 billion euros ($5.6 billion) in annual savings.
But its vast Mirafiori plant in Turin, Fiat's former hometown, illustrates a major reason why no deal has happened before, and the challenges for a tie-up that could face Italian political and labor opposition to any factory closures.
Like most of FCA's European plants, Mirafiori is running below 50 percent capacity. Workers have been working seven days a month on average since January, union representatives told Reuters, after sales of the Maserati Levante slumped.
The luxury crossover is the only model built at Mirafiori, and it was intended to power the plant's rebirth, bringing back thousands of assembly line workers who had been on temporary layoffs for years.
But three years after Levante's launch, those workers spoke of long waits between calls to do an extra day's work to top up their net pay of around 1,100 euros ($1,230) a month, having to put family holidays on hold and having mortgages refused.
"Every three to four years we are hoping that a new model will help us turn the corner ... but then after a boom we are back in furloughs or on solidarity contracts and our salary goes down by a third," said Giovanna Treccalli, a 54-year-old assembly line worker who has been with Fiat since 1987.
Furloughs are temporary leave with reduced pay, while solidarity contracts allow employers to reduce the hours of some staff.
Losses in Europe
Fiat Chrysler has highly profitable businesses in North America, with its Ram trucks and Jeep brand, but has been losing money in Europe where it may also struggle to keep pace with looming carbon dioxide emissions curbs.
Renault, by contrast, is an electric-car pioneer with relatively fuel-efficient engine technologies and a strong presence in emerging markets, but no U.S. business.
Like its rivals, FCA faces huge costs to develop cleaner, more electric vehicles to comply with tighter global emissions rules. To help shoulder those costs, it has said it could be open to a merger or alliance.
The company has previously been approached by at least one European suitor, PSA Group, it came to light earlier this year, but the talks came to nothing, according to two banking sources.
Any tie-up is however likely to face political and workforce hurdles, particularly in Italy, with layoffs and closures potentially required to boost European operating profit margins from last year's slender 1.8 percent.
The Rome government is resisting layoffs even at Alitalia, the money-losing airline that has been burning through government loans for the past two years.
Instead Fiat Chrysler, which has 58,000 workers in Italy, is using state-subsidized furloughs and solidarity contracts to cut costs and avoid the high political and social price to the company's controlling Agnelli family of shutting a factory.
Marco Bentivogli, head of the metal mechanic branch of the CISL trade union, told Reuters his organization was in favor, in principle, of a strategic alliance to strengthen the automaker.
But he called for discussions with Fiat Chrysler to rule out the possibility of plant closures and job losses.
Chairman John Elkann, the grandson of Gianni Agnelli who built Fiat into a global company, has said his family is open to accepting a smaller stake in a larger entity if that made the company stronger. But he does not want to shut down Italian plants and has been reluctant to embark on a collision course with Rome, according to three people familiar with his thinking.
Fiat Chrysler Automobiles combined Italy's national automotive champion with the Detroit-based owner of the most distinctively American vehicle brand, Jeep.
When the company was formed in a deal brokered during the 2008-2009 financial crisis, the American side was bankrupt and the new company's leader was Sergio Marchionne, the longtime CEO of Fiat.
The center of gravity for the world's seventh-largest carmaker has now shifted across the Atlantic. Fiat Chrysler's North American operations, which include the Jeep SUV brand and the Ram truck, accounted for 85 percent of profits last year.
Italy is now a central challenge for the company and its new CEO Mike Manley. Morgan Stanley values Jeep at 16.6 euros per share and RAM trucks at 6.6 euros per share, out of a price target for the whole group of 21 euros per share. That compares with a zero value for the Fiat brand and a negative one for Alfa Romeo.
Manley pledged Europe would hit 3 percent operating margins by the last quarter of this year, driven by ending costly retail practices and "a series of restructuring actions".
But Maserati and Alfa Romeo, two of the main pillars of the Europe revival plan, have failed to meet FCA's own expectations.
Mirafiori's 3,500 workers are hoping the arrival of an electric version of the Fiat 500 minicar and a hybrid Levante next year will revive profits.
They also hope any merger will secure jobs, said 56-year-old Giuseppe Pecorino, who has been with the company for 31 years.
He said: "They could even make us assemble bicycles as long as that will keep us working."