Alert Proposed merger of FCA

and Renault

30 May 2019

Executive Summary

• Reports that Fiat Chrysler Automobiles (FCA) and Renault are in talks relating to a full merger have now been confirmed by both parties.

• LMC Automotive believes that there is a strong commercial and strategic logic for pursuing such a merger.

• An FCA-Renault merger would create an entity with annual production of over 8 million Light Vehicles per year. If the Renault-Nissan-Mitsubishi Alliance (RNM) were included, this number would rise to 15 million units/year.

• Currently, high levels of R&D costs – in electrification and other technologies – are expected to continue over the next decade, pressuring OEMs to consolidate. Others may follow.

• The destabilisation of RNM, which began with the arrest of Carlos Ghosn in 2018, has likely contributed to Renault’s engagement with FCA and the acceleration of discussions.

• RNM itself need not unwind as a result of the merger, though Nissan’s position is yet to be clarified. Note that Renault still owns 43.4% of Nissan.

• If the compelling reasons for consolidation on this scale were to be extended, RNM should remain intact, but other factors may come into play, particularly with respect to Nissan’s desire for independence.

• Continued sharing of key electrification, vehicle platform and other technologies currently used by Renault within RNM are critical to the success of the merger.

• Not all mega-mergers are successful and execution risks associated with a complex marriage are significant.

© 2019 LMC Automotive Limited, All Rights Reserved. 2

© 2019 LMC Automotive Limited, All Rights Reserved. 3

Background

Revenue (2018)

€110bn

€57bn

Net Income (2018)

€3.3bn €3.5bn

Note that RNM Alliance Light Vehicle production for 2018 was 10.5 mn units

199,000 employees

4.75mn vehicles produced in 2018

183,000 employees

3.75mn vehicles produced in 2018

FCA + Renault: Why?

A key motivation for the proposed 50/50 merger between FCA and Renault is to

achieve greater scale, and control, than currently available to either company. Under

RNM, globally significant scale has, of course, been possible. However, as the

months since the arrest of Carlos Ghosn have shown, that relationship is under

significant stress and it is unclear how fundamental issues of corporate control and

strategic direction will be resolved. Steering the company, and coordinating its

activities, was difficult before Ghosn’s departure, which is why a move towards a more

formal marriage appeared to be developing, but it has now become more problematic.

Financial and competitive pressure has been growing for all OEMs as high levels of

R&D spending – in new technologies, especially electrification, but also automation –

have coincided with a dip in global Light Vehicle demand. The latter issue may be

transient, but the financially draining consequences of the forced electrification –

driven principally, in this case, by EU CO2 emissions reduction policy (though it is

clearly a global issue) – are taking on a near-permanent aspect.

FCA has, in the past, made a choice not to invest as heavily as some competitors in

new technologies now seen as being essential. The proposed merger should provide

some access to such technologies, though it is not yet clear to what extent this can be

achieved with technologies developed under RNM. There is an assumption that the

FCA part of a merged entity can just be granted access to any useful RNM

technology, from EVs to vehicle platforms to Autonomous Vehicles, but there may yet

be devil in the detail.

FCA has been keen to suggest that factory closures to address chronic overcapacity

in Europe would not be a necessary consequence of a merger. While such statements

appear to be a requirement for negotiations to be allowed to run their course, the

notion that the future of unproductive plants would not be examined is questionable at

best (see Capacity section). Assurances can no doubt be provided at this stage, but

they will likely be time limited and subject to caveats.

For Renault, the benefits are strategic in different ways. Clearly, pooled activities on a

larger scale can, ultimately, generate savings in R&D and procurement. Such

historical gains under RNM might begin to look shaky if that relationship appears at

risk of weakening or even unwinding completely. After the Ghosn scandal, the ultimate

destination for RNM, and the means for getting there, remain unclear. Renault could

be seen to be in a stronger position within the grouping after a merger with FCA than

before as not only would the stock holdings of both Nissan and the French

Government – both at 15% – be diluted during the merger, but its ability to have a

credible go-it-alone strategy would be enhanced.

Finally, FCA still retains, in its underperforming Alfa Romeo unit, a genuine Premium

brand, something that Renault has desired for many years.

© 2019 LMC Automotive Limited, All Rights Reserved. 4

Footprint

The chart below illustrates the importance of Europe to both FCA and Renault,

not just now, but especially if the merger completes. It also shows how the

complementary nature of FCA’s US presence comes with essentially zero

competitive overlap risk.

Competition within the merged entity’s largest market could, potentially, lead to

value-destroying cannibalisation. However, careful brand management could

mitigate such risks. Furthermore, in some European markets important to each

company, strong positions are held; for instance, Fiat in Italy, Renault in France

or Lada in Russia. However, increased production efficiencies in Europe would

likely be a point of strong focus.

More concerning, however, is the lack of strong presence in the Asia-Pacific

region, notably China. In any face-value assessment of a global OEM, an

absence in these markets would be seen as a serious drawback. In a rapidly

electrifying and hypercompetitive Chinese market, what will be the merged

company’s strategy to defend its newly acquired scale?

© 2019 LMC Automotive Limited, All Rights Reserved.

19%

12%

22%

1%

8%

0%

5%

10%

15%

20%

25%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Europe NorthAmerica

SouthAmerica

Asia-Pacific MEA

Millio

ns

Regional Light Vehicle Sales Footprint, 2018,

FCA Renault Combined Market Share (RHS)

5 Source: LMC Automotive

Capacity

Initial comments from FCA have suggested that the proposed FCA-Renault

merger need not require a reduction in overall capacity in Europe, where

overlap between the two entities is likely at its most intense. As our information

below suggests, overcapacity in Europe and South America is an issue for

FCA. It may be politically expedient to sideline discussions of plant closures or

job losses at this point, but this does not make the commercial pressure to

examine the issue more closely disappear. Initial assurances may therefore be

time limited, or subject to caveats about future operating conditions.

© 2019 LMC Automotive Limited, All Rights Reserved.

Notes:

• Capacity utilization calculated at Renault and FCA plants. Where plants have

other non-Renault RNM activity, utilisation is calculated for all models at plant.

• Non-Renault RNM plants are excluded from calculations.

• Renault activity in the Middle East is excluded.

FCA, Renault and merged FCA-Renault

Capacity Utilisation, 2018

6 Source: LMC Automotive

38%

64%

89%

49%

92%

65%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Asia

-Pa

cif

ic

Eu

rop

e

No

rth

Am

eri

ca

So

uth

Am

eri

ca

Oth

er

Wo

rld

FCA

Renault

FCA-Renault

Electrification

© 2019 LMC Automotive Limited, All Rights Reserved.

The ongoing, and accelerating, shift to electrification is a clear driver of the

proposed merger. The sheer level of resource required to support conventional

technologies through ever-tougher exhaust emission standards, while at the

same time preparing for the expected electrification revolution, is putting even

the largest OEMs under pressure. Fallout from this activity is already beginning

to emerge in the form of cost savings: rationalisation of model complexity and

the removal of layers of management. FCA may simply not regard itself as big

enough to survive this unprecedented level of change.

FCA must see opportunity via this proposed merger, particularly in the field of

battery electric vehicles (BEVs). To date, the group’s activity in this area

consists mostly of the Fiat 500e, a loss-making car only built to fulfil compliance

needs for the Californian market. Sales of FCA BEVs at the moment are near-

zero.

Renault has done better. Although the market for BEVs has not developed as

quickly as was originally expected by Carlos Ghosn, Renault has continued to

develop and market BEVs and achieved global sales of 40,000 cars in 2018.

Sales of BEVs across RNM in 2018 were 130,000.

So, there is a big imbalance of technical ability, understanding of the BEV

market and product pipeline between the two groups. Fiat is now developing a

new generation of BEVs based on the 500 range, but achieving profitability will

be far easier (and quicker) if development costs can be shared. At the moment,

it is not clear whether the 500 BEV project is too far advanced for it to benefit

from potential synergies, but future generations of BEVs could certainly do so.

From the Renault side, the attractions are broadly similar in terms of higher

volumes for its electrical architecture, but it may also gain access to the US

BEV market that is effectively off limits today.

40

1

130

0

50

100

150

Renault FCA RNM

Global BEV Car Sales, 2018 (000s)

Source: LMC Automotive 7

Strengths Weaknesses, Risks and

Opportunities

© 2019 LMC Automotive Limited, All Rights Reserved.

Strengths

• Solid market positions in relatively

stable mature markets

• Innovative model concepts, albeit

ageing in some cases

• Strong SUV credentials with Jeep

• Strong position in Light Commercial

Vehicle markets

• Solid track record in low-cost or

economy product offerings

• Renault’s strong global position in

electrification, within RNM

Weaknesses

• Excessive dependency on

European and US markets

• Key markets also have relatively

low growth potential

• Unbalanced technology portfolio,

reliant on one side of merger

• Ongoing political

stakeholding/interference

• Concerns over low levels of

capacity utilisation in some

locations

• Deficient in Premium segment

share relative to European average

Opportunities

• Scale-related savings: new global

giant with over 8 million units of

Light Vehicle volume, or over 15

million if RNM were considered

• Gain share in under-represented

regions/markets, such as China

and other emerging markets

• Revival at Alfa Romeo?

• Rebadging of products in non-

competitive markets or segments

• Expansion of SUV range through

Jeep models/platforms

Risks

• Clash of entrenched cultures and

systems

• Acrimonious breakdown of RNM, if

triggered by merger

• Refusal of full sharing of platform,

electrified and other technologies

from RNM to the new entity

• Political interference in decision

making on capacity reduction

measures

• Cannibalisation in Europe, if future

products converge too much

A new FCA-Renault Group would inherit a number of features from the existing

entities, in addition to new aspects created by the merger.

8

Further Comment …

What does the proposed FCA-Renault merger mean for RNM? At this point, nobody can be sure and key decisions will not likely be taken quickly – the merger itself could take the rest of the year, at least, to arrange. What does appear likely is that the balance of power within RNM would shift decisively in favour of the newly merged entity. It would still retain its 43% share of Nissan, while simultaneously diluting Nissan’s share in the company. FCA-Renault would also gain stand-alone scale advantages that would be valuable across RNM: a 15 million-unit entity would become by far the largest OEM group in the world, with huge resources (potentially) at its disposal. The Ghosn scandal threatens the future of RNM, with both Renault and Nissan seeking to reposition within it in the aftermath. Nissan may have regained some independence during this time, but it may ultimately come at the cost of loss of influence over RNM with what may soon become a more dominant partner. Again, it is too early to judge whether this situation will be satisfactory for Nissan, or whether RNM will be critically destabilised by the merger.

Will FCA-Renault be a prelude to an FCA-RNM merger? It may be somewhat premature to give this development deep consideration, though it is a clear possibility. One of the key risk features to the proposed FCA-Renault merger is its international complexity. Furthermore, the establishment of a new and stable governance structure, while simultaneously managing the convergence of national and corporate cultures, must be undertaken. This is no small task. For this reason alone, we think that progressing quickly to a full RNM-based merger, before stability emerges from an FCA-Renault marriage, would be highly risky.

Will an FCA-Renault merger have implications for competitor OEMs? The biggest threat to the new entity’s competitors would likely be if RNM were maintained and began to thrive once more. This new grouping would command a global Light Vehicle market share of around 16%, providing for unprecedented scale. Renault and Fiat, and Nissan (through Datsun) have solid track records in creating economical products in markets where pricing and value for money are the primary offers. The new entity would be well positioned for a future assault on entrenched emerging-market competitors. In more traditional volume segments also, scale could support strong competition from the group. The financial challenges of high R&D spend could also be more easily managed. The implication, therefore, is that pressure for other OEMs to consolidate would increase. However, this would all require sound execution of a hugely complex set of ongoing transactions.

How should we consider the affected OEM groups now? For the time being, until completion of the FCA-Renault merger, we will continue to show the groups separately, and RNM as one entity. Users of LMC’s Compass platform can readily combine groups and brands in order to immediately analyse and visualise the implications of consolidation.

© 2019 LMC Automotive Limited, All Rights Reserved. 9

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