Fiat Chrysler-Renault Merger Is A Sign Of Things To Come In The Auto Industry

Fiat Chrysler Automobiles (NYSE:FCAU) is seeking to woo the French government to back its bid for a merger with automaker Renault by offering a special dividend and stronger job guarantees. The French government is involved because it is Renault's largest shareholder with a 15 percent stake and thus can sway the merger decision.

If this deal goes through, the company will be headquartered in France, with the French government given a seat on the board of what would become the world's third-largest carmaker, behind only Volkswagen and Toyota Motor Corp (NYSE:TM).

Meanwhile, the proposed merger discussion between FCA and Renault could lead to more such collaborations within the industry. Automakers the size of FCA and Renault merging is essential for the industry, as consolidation brings more stability to companies, while also scaling up their research and development budgets to pursue innovation. When combined, FCA and Renault will have over 8.7 million vehicle sales annually and a more expansive geographic footprint.

Across the world, merger and acquisitions (M&A) discussions and partnerships abound. In February, Daimler and BMW entered into a collaboration in the mobility segment, with the companies jointly investing $1 billion in five different verticals within the market. The joint venture will help the companies develop services revolving around ridesharing, charging and parking spots, navigation and car-sharing.

Original equipment manufacturers (OEMs) are now on the receiving end of various regulations enforced across several countries, mostly centered around reducing their carbon footprint and sustainable manufacturing. Then comes the pressure of consumer interest, which is tilting towards electric vehicles (EVs), with the market share of EVs steadily increasing over this decade.

Today, the EVs in the market are almost exclusively built with lithium-ion batteries. These batteries are composed of several rare earth metals – metals that are found in traces across certain parts of the world. This forces battery manufacturing firms to source materials globally. Critical metals like cobalt (that are used in all lithium-ion batteries) is mined in Congo, an economically weak and politically unstable country – making the sourcing process unreliable. The fact that Congo holds 60 percent of the world's cobalt resources does nothing to help the cause of EV manufacturers.

Lithium resources are predominantly found in China, with the country controlling roughly two-thirds of the world's lithium-ion battery production. With crisis situations like trade wars and bad blood between countries, there could be trade embargoes and tariff increases that might render sourcing materials globally both impractical and expensive.

This can have a direct bearing on auto companies' mergers, acquisitions and industry partnerships, as companies would have to determine a way to stay relevant in niche segments like EV production, ensuring constant supply even in times of volatile trade situations. Research and development wings would need a greater infusion of capital to come up with solutions that are both innovative, easy to source and cheaper to produce en masse.

That apart, there has been a tectonic shift in the way the industry and consumers look at vehicles today, expecting them to not just act like machines, but interact with users and remain connected to the cloud to continually improve services. Data analytics and machine learning play a vital role in bringing this to fruition. Companies collaborating on these tasks would advance service quality as data would be democratized and help bring more hands on deck.

Autonomous driving technology, widely expected to be mainstream in a decade, would require several billion dollars in investment and many million miles of testing on public roads before it can be commercially deployed. In many ways, autonomous driving technology is erasing the line separating software companies and auto manufacturers, as the technology demands a perfect mix of both the verticals. Cross-sector collaboration will become more frequent going forward, as evidenced by the partnership between the Renault-Nissan-Mitsubishi alliance and Google's (NASDAQ:GOOG) self-driving vehicle startup Waymo.

The automotive industry is witnessing a global vehicle sales dip after several years of robust growth, mostly stemming from the declining demand in China this year. It is imperative for incumbent OEMs to plan for their futures, and collaborate to create an environment that is conducive to innovation and create the means to fast-track economies of scale within the futuristic verticals.

Image sourced from Pixabay

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