Why Volkswagen's plan of buying Fiat-Chrysler didn't come through.

If Volkswagen's plan of buying Fiat Chrysler Automobiles had come through, VW could have become the biggest carmaker in the world. Ferdinand Piech, chairman of Volkswagen's supervisory board, has long wanted to see the VW Group become the largest automaker in the world. They even had a name for it - Auto Union.

 

Earlier this year, according to sources at VW, company strategists had come up with a plan that could have seen the VW Group expand in size by around 50 per cent and become the unassailable leader in the global car market. The scheme was remarkably simple: it envisaged VW buying a controlling stake in Fiat Chrysler Automobiles (FCA) and folding the Italian and American brands into its ambitious global platform strategy. The resulting 17-brand conglomerate could have sold nearly 15 million cars per year. Volkswagen currently has 12 brands that manufacturers everything from city cars to heavy trucks. Toyota is the world's largest carmaker with 9.98 million sales, followed by General Motors at 9.71 million units and VW is third at 9.7 million units sold.

 

This ambitious plan, however, never got much further than the first stages of consideration. Insiders say that by the end of April this year, VW had started witnessing financial red lights within its Wolfsburg headquarters. Rather than being in a position to create the world’s biggest carmaker and execute probably the most ambitious merger plan in automotive history, VW Group management now has to peer back into its own books.

 

VW has been selling a huge number of cars and is making healthy profits, but its core VW brand that accounts for 5.9 million of the group's 9.7 million sales, saw its profit margins slide below two percent for the first half of 2014, with a chance of even lower margins next year. On the other hand, rivals like Toyota and Hyundai are raking in margins of over eight percent with their mainstream cars.

 

And now, Volkswagen's CEO Martin Winterkorn is now looking at cost savings of four billion pounds a year from 2017. These plans may see a number of low profit models simply chopped from the line-up. For example, the Eos (7,651 sold in UK in 2013) and Scirocco (23,400 in UK) could be axed. The Up city car family may also come under scrutiny because of its expensively engineered NSF platform is shifting less than 200,000 units per year in VW, Skoda and Seat guises.

 

The next two years will see VW struggling with rationalising its product development, production and production costs. It, clearly, is in no position to attempt any kind of further mergers or acquisitions.

 

AUTO UNION

 

It’s a pity, because it is clear that the plan to create the new Auto Union could have worked. According to the auto analysts at ISI in London, VW’s production in 2020 should hit 11.8m units. With Fiat-Chrysler rolled into VW’s production system (a tall order by 2020, says ISI), production could have hit 15.84m.

 

The logic of VW’s strategists was something like this: the merger between Fiat and Chrysler is about to be rubber-stamped, ahead of a massive injection of cash in FCA to develop new models, including a range of rear-drive Alfa Romeos as well as new Fiats and Jeep models.  So, rather than investing huge amounts in new Fiat-Chrysler products with no certainty of a profitable outcome towards the end of the decade, the logic went, FCA shareholders could cash in by selling up now to VW. The Agnellis may have almost certainly retained the Ferrari and Maserati brands, while happily letting go of the mass-market brands.

 

There would have been obstacles, though. The biggest bring the huge time and effort required on the part of the management team to merge the two sides, of course. The VW Group already produces around 65 model lines across its 12 brands. Integrating Fiat-Chrysler could add another five brands and perhaps another 25 model lines. Fiat’s successful South American operation may have to have been sold off. Fiat is currently the number one brand and VW number two in that market. What’s left of Italy’s car industry could also have been hit, because a future Alfa Romeo family could have been built in VW Group factories. The Seat brand, which has struggled to prosper, could probably have been wound down or sold.

 

Coming back to the here and now, the VW Group could yet pip Toyota to the title of biggest car maker in the world (it’s ahead of General Motors in the first half of this year, shifting 4.97m units against GM’s 4.92m). But it might achieve this while relying on two of its premium brands – Audi and Porsche – for the majority of its profits and with its core brand making dangerously slim margins. 

 

Volkswagen may have started the year with a plan to become the clear global leader in car making through the Auto Union mega-merger, but it is now going to spend the next few years working flat out to save its own skin.

 

How the merger could have worked

 

This is how we think strategists may have proposed merging Fiat-Chrysler into the existing VW Group. The business case for the expensively engineered NSF (Up) platform may have been boosted by using it to underpin the big-selling Fiat 500 family.  Alfa Romeo and Fiat 500 versions of the Taigun SUV may have also made sense. VW’s budget PQ26 family of platforms may have been the perfect home for the next-generation Fiat Panda and a revived Punto (a model that still sells in good numbers). Audi’s upgraded version of PQ26 is used for the A1 and could have underpinned an A1-based Mini rival for Alfa Romeo. The MQB platform could have absorbed the core of Chrysler-Jeep production – growing considerably in scale in the process – and Audi’s upcoming MLB-Evo platform could have been the ideal basis for high-quality Alfa executive models.