Our last video featured Mohnish Pabrai, where he spent some time speaking about Sergio Marchionne and Fiat Chrysler (FCA”) in general. Sergio (who unfortunately passed away this summer) was quite remarkable and we have a still-ongoing quest to find out more about the man that turned multiple companies around (and the only person to have turned two car companies around, being Fiat and Chrysler). We are still building an understanding of the automobile sector, but thought this video was particularly interesting. Here, Sergio addresses several issues.
No one has disputed the validity of Sergio’s famous presentation (https://www.autonews.com/Assets/pdf/presentations/SM_Fire_investor_presentation.pdf)
There is a trade-off between integration efforts versus execution of FCA’s long-term profitability targets. When you consider how much time would be required of FCA’s management team towards integration of a merger candidate, the risk/return is heavily skewed towards focussing on FCA’s own targets. However, the overall rationale for further consolidation is undisputable – “I would challenge any CEO, other than a premium automaker, to argue otherwise. It is nonsense.”
Individual companies do not have the resources to develop all the requirements, whether safety, emissions, and other regulatory matters, so Marchionne views consolidation as inevitable. Having car manufacturers merge or create development alliances creates significant development cost savings – In his presentation he notes 20-40% savings in development of a new vehicle platform and 25-30% in development of a new engine.
On new technologies impacting the auto sector:
Likens the tulip and tech bubble to the market’s current “hype about connectivity, autonomous driving…as if all these things are going to come effortlessly and without a cost. And without recognizing that the end benefit of all this, is going to end up in a standardized solution.”
No one can recognize a car based on its autonomous driving software; it either drives safely or not safely. Marchionne views the amount of capital being spent on developing autonomous software as bizarre, because all automakers will all end up in the same place.
The supplier base will provide solutions to bridge the gap between manufacturers with and without autonomous software.
Marchionne therefore focused on focusing entirely on improving FCA’s operations such that it would be in a stronger position for the inevitable consolidation.
Labour relations, and how Chrysler’s Canadian and US unions acted differently during the 2009 crisis:
Marchionne stated the Canadian labour force was the “least engaged in contributing to the resolution of the problems facing Chrysler at the time. All the concessions that were made were in the US – the distinction between Tier 1 and 2 employees was unacceptable in the Canadian environment. That had consequences in how FCA allocated new product builds in the last 6.5 years, and the size of FCA’s commitment to Canada…[meanwhile, here in the US] we have doubled our workforce.”
Marchionne noted the notion of capital vs labour arguments miss the point, and instead it is more important to have buy-in from management and labour that an auto maker needs world-class manufacturing standards to grow the pie. He noted consolidation is likely to actually improve labour standards, because most of the cost-savings would be on the capital side.