FCA's planned merger with PSA Group is a risky move, but it's probably less risky than not doing it.
For PSA, the deal looks like a no-brainer: It diversifies the company's geographic portfolio — giving it entree to the lucrative U.S. market and a well-established dealer network — as it adds a strong brand in Ram and a global powerhouse in Jeep. The combined company would be bigger than General Motors and have the purchasing scale to rival Volkswagen, Toyota and the Renault-Nissan-Mitsubishi alliance.
The biggest danger for FCA in the tie-up is expanding its exposure to Europe, a brutally competitive market where regulators demand ever-cleaner vehicles that are hard to sell profitably.
The world is demanding more electrification, and PSA Group can help FCA get there. FCA has made inroads to reducing its industry-worst fuel economy and CO2 emissions, but not quickly enough to avoid costly remedies, like pooling credits with Tesla. FCA will benefit from PSA's technology to find a globally economical — and truly sustainable — solution faster.
The late Sergio Marchionne spoke forcefully about the need for consolidation to spread out the steep costs of developing advanced powertrains, but this is not the deal he wanted. Marchionne's vision was to marry up FCA with one of its Detroit rivals, if possible, or Volkswagen if it wasn't, to protect and expand profits and spread development costs efficiently.
Any deal with Ford or GM would've raised significant antitrust complications — particularly regarding pickups — and a regulatory remedy could have spoiled the value of the combination. Blending with one of the bigger domestics also would result in chaos at the dealer level. More importantly: Neither Ford nor GM was interested at the time. They likely didn't want to join forces with Marchionne when he was alive and may now be wary of the messes he left behind — including EPA violations, the SEC's investigation of sales practices and the Justice Department's prosecution of union corruption involving FCA officials.
FCA Chairman John Elkann and CEO Mike Manley turned to France in search of a partner, got close with Renault and may end up with PSA. They will team up with another top-flight CEO in Carlos Tavares — and they may not be done growing.
The path ahead will not be easy, but it is worth a try.