A breakthrough in the automotive industry? Implications of a FCA-Renault Merger

The automobile industry is riding through the biggest changes in history

First, the rise of companies like Uber and Lyft has led to the question of car ownership. People in most cities are considering the need for owning a car if hailing them is cheaper and more convenient. Second, the rise of electric vehicles like Tesla has changed the direction of the industry (we recently talked about these company in this post regardingfuture trends).

Why Tesla Stock is Down 20% This Year

In the past, these vehicles were slow, inefficient, and ugly. However, with Tesla, the cars are faster than combustion-engine vehicles, efficient, and sexy. As a result, most companies have announced that they are investing in electric vehicles.

More countries have also announced that they will prohibit the sale of combustion engine vehicles in the next few years. Third, additional technologies like autonomous driving has led to a change in R&D costs.

Another major fact in the automobile industry is that it reached a peak in 2015. This growth was caused by the improving global economy and the low interest rates environment. In fact, in the past few years, the total auto loans have risen to more than $1.2 trillion.

Further, the strict emissions standards have led to major changes in the industry.

Therefore, global automakers must reshape their operations. One year ago, Ford announced that it will exit the small car market as it favors the highly-profitable SUV cars. Recently, the company announced that it will lay-off more than 7K people.

General Motors on the other hand has announced its exit from the UK market and last year, it laid off more than 15K people.

Find out more tips about what to watch in year’s second quarter

The Big Deal: FCA-Renalut

Over the weekend, it was announced that Fiat Chrysler Automobiles were in talks with Renault. The report was revealed by Financial Times and confirmed by other papers like Wall Street Journal and New York Times. Today, in a statement, Fiat confirmed that it was proposing a merger of equals with Renault.

The combined business will be owned 50% by FCA shareholders and 50% by Renault Shareholders. Fiat is based in Italy while Renault is based in France.

Another interesting fact is that such a merger will bring into play Japan’s Nissan and Mitsubishi. This is because Renault owns 43.4% of Nissan while Nissan owns 15% of Renault. The combined company will be the third largest automaker in terms of volume after Toyota and VW. It would have more than $37 billion in annual revenue.

The two companies would have annual synergies of more than 5 billion euros. In M&A, synergy is a simple term for layoffs as different parts are consolidated. In the statement, the company said that the synergies would come from moreefficient investment in common global vehicle platforms, architectures, powertrains, and technologies.’

As a trader, this is an important announcement that you should use for your advantage. With DTTW, you can trade the shares of Renault and Fiat. In addition, you can trade shares of other automobiles companies like GM, Ford, and VW in hopes that the new deal will spur more consolidation.

Therefore, there is a likelihood that the stocks in the automobile industry will see increased gains and volatity this week.

 

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