Stellantis
“Fix It Again Carlos?”
By Jonathan Pitkanen, Head of Investment Grade Credit Research, EMEA & Asia at Columbia Threadneedle Investments
With the dawning of a new star, Stellantis last week, Groupe PSA’s merger with Fiat Chrysler Automobiles (FCA) has propelled them to become the fourth largest global automakers with sales of over €150bn and production in 30 countries. Over the past two weeks the ratings agencies have upgraded FCA NV, as part of the formation of Stellantis, resulting in over €6bn of Euro-denominated bonds leaving the High Yield Index and entering the Investment Grade benchmarks in February this year.
The rationale in an industry experiencing incredible change through unheard of levels of sales decline, digitalisation, and ferocious emissions regulation, is clear. Cutting costs to offset the increased financial burden of transitioning out of a carbon-heavy industry in a very short space of time. The merger need was compelling before COVID-19, it is even more so now.
The merger highlights the problems the industry is facing. Uncertain sales volumes, increased emissions regulation, and changing consumer behaviours. Scale and cost management are key in order to meet these challenges.
The human and financial impact of a once in a lifetime event that is COVID-19 has been immense, it has also been an opportunity for companies to carry out restructuring of their operations. We have seen severe cost-cutting as evidenced by major layoffs, carried out by industrial companies, in addition to working capital management. Mergers between car makers will not however be as successful as they could be, when political considerations over-ride efficiency. This obstacle is likely to be evident in a number of European markets that have ‘national champions’, who might be considered politically untouchable and strategic by politicians.
While closing factories and reducing headcount may seem unpalatable, they are necessary of the longer term health of the auto sector. Some automakers need also to address the production imbalance, with over-capacity in Europe, and an under-representation in China, which has been the least impacted major auto market. In 2020 for example, European car sales fell 24%, while they only fell 1.9% in China, and are predicted to grow 4%* in 2021. For a large scale automaker, a viable business in China is a very distinct advantage, especially when all other markets are markedly worse.
Stellantis is unlikely to be the last merger of large-scale automakers. Increasing emissions regulations, coupled with those already mentioned changing consumer tastes, will result in cost increases. The example set by Stellantis will be the most likely way to manage these headwinds.
* China Association of Automobile Manufacturers
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