Fiat’s Merger With PSA Creates a Hefty To-Do List for CEO Tavares

(Bloomberg) -- To drive home just how relentless he is about PSA Group cutting costs and eking out better earnings from car brands including Peugeot and Opel, Chief Executive Officer Carlos Tavares calls himself a “performance psychopath.”

Now that PSA has taken another step toward expanding his empire to include Fiat Chrysler Automobiles NV, there are a few potentially substantial orders of business for Tavares to consider tackling. Here are a few:

Reconsider U.K. Plant

The Vauxhall factory in England’s Ellesmere Port that PSA took over from General Motors Co. in 2017 is in serious jeopardy now that U.K. Prime Minister Boris Johnson is poised to pull the U.K. out of the European Union.

Tavares has threatened to cease production of Astra compact cars at the plant if PSA can’t profitably make them there. Fiat Chrysler and PSA have plenty of small-car capacity in Europe that could be up to the task of making the model elsewhere.

The companies said Wednesday they can realize 3.7 billion euros ($4.1 billion) of synergies without plant closures “resulting from the transaction.” That caveat provides some wiggle room: Tavares could feasibly get away with shuttering this factory by blaming Brexit.

The value of the sterling, productivity improvements and strong orders for light commercial vehicles made at PSA’s Luton plant have improved business conditions in the U.K., Tavares told reporters on a conference call. “We want to keep it calm, we want to be very pragmatic,” he said. “For the last few years, we have been expecting the worst for the next month and it did not happen so far.”

Bail on the Fiat Brand

The Fiat brand has faltered in the U.S. after peaking at just 46,000 deliveries in 2014. The Ram division now sells more of its lucrative pickups than that most months of the year.

Production of the 500 minicar that led off the brand’s return to American shores in 2011 has been discontinued, leaving Fiat with only the stubby 500L and 500X and the Spider roadster, a re-badged version of the Mazda MX-5 Miata.

Pulling the plug could be costly -- Tavares would have to compensate dealers -- but there’s no sense throwing good money after bad. Besides, turning around less-neglected brands like Alfa Romeo and Maserati will be hard enough work.

Restore Alfa

It’s telling that when people talk about Alfa Romeo’s glory days, they often go all the way back to the 1967 film, “The Graduate.” The brand is synonymous with performance and Italian-flair styling, but it also ranks near the bottom of quality and reliability surveys conducted by Consumer Reports and J.D. Power.

Fiat Chrysler CEO Mike Manley has pared back Alfa’s product plan to just four models as of 2022, three fewer than his predecessor, the late Sergio Marchionne, envisioned by that year. While the Brit said in October that he fundamentally believes in the brand, he’s “not been happy” with its performance and refocused efforts on segments and markets where it’s succeeded in the past.

Tavares will want to prove himself with a brand like Alfa to justify bringing the French brand Peugeot back to America -- an ambition he hopes to achieve years from now. “Tavares thinks he has an enormous potential in the U.S.,” said Jean-Louis Sempe, a Paris-based analyst at Invest Securities. “There is strong interest for PSA to use Chrysler’s U.S. network to introduce the Peugeot or the Citroen lineup.”

Electrify Maserati’s Future

Fiat Chrysler’s other loss-making brand is staking its future on electrification. Manley has vowed to refresh or renew the entire product line by 2023. Each model -- starting with a sports car coming next year -- will offer a fully battery-electric powertrain.

Neither company is in particularly great position for the electric future -- battery-only and hybrid vehicles were less than 1% of PSA’s registered sales last year -- but Tavares was talking a big game about pivoting to plug-ins years ago.

“By uniting our two groups, we will be poised to compete and win in an industry that is undergoing transformational change,” Manley wrote in an email to Fiat Chrysler employees Wednesday. Maserati’s active product plan gives Tavares a path to meet tougher emissions rules in Europe and China.

China Challenge

The deal will leave PSA partner Dongfeng Motor with a 4.5% stake in the combined company, down from 12% now. The change could usher a revamp of strategy in the world’s biggest car market, where both PSA and Fiat Chrysler have struggled for years and are doing poorly.

What Bloomberg Intelligence Says

“The China overhaul could focus on cutting costs to minimize losses and stem a cash bleed at their respective Chinese partnerships with Dongfeng Motor and GAC Group.”

-- Michael Dean, European automotive analyst

The Dongfeng PSA venture’s shipments tumbled 56% in the first nine months of this year, while those for Fiat Chrysler’s venture with Guangzhou Automobile Group dropped 46%, according to Bloomberg Intelligence.

Rival Volkswagen AG has ratcheted up competition in China’s SUV market and Jeep could suffer under the country’s emissions rules. Figuring out China will arguably be Tavares’s toughest challenge.

--With assistance from Siddharth Philip and Melinda Grenier.

To contact the reporters on this story: Ania Nussbaum in Paris at anussbaum5@bloomberg.net;Gabrielle Coppola in New York at gcoppola@bloomberg.net;Daniele Lepido in Milan at dlepido1@bloomberg.net

To contact the editors responsible for this story: Craig Trudell at ctrudell1@bloomberg.net, ;Anthony Palazzo at apalazzo@bloomberg.net, Tara Patel

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