Fiat Chrysler Automobiles said Wednesday it is in talks with French rival PSA Peugeot in its second bid this year to reshape the global auto industry at a time of heightened uncertainty for the sector.
A merger would create the fourth-largest automaker, with a combined market value of around $50 billion, and the potential for big savings in Europe just as the industry struggles with slowing sales and the need to invest heavily in technologies like electric cars.
But a deal does not help either in expanding in China, the world's largest market, where both are weak, analysts said.
In a statement, Fiat Chrysler said the discussions are "aimed at creating one of the world's leading mobility groups," but gave no further details.
The timing of any deal is unclear, but the Peugeot board was meeting Wednesday, said a person close to the discussions, on condition of anonymity.
Shares in Fiat Chrysler shot up nearly 9%, just a day before it releases its third-quarter earnings, while Peugeot shares surged 6%.
Fiat Chrysler has long been looking for a partner to help shoulder investments in the capital-heavy industry, under the view that companies that fail to consolidate would inevitably struggle. The push is even more urgent given the transition across the industry to electric cars and autonomous driving — technologies where Fiat Chrysler lags.
"We view the combination of these two companies as reasonable, given global competition, high capital intensity and industry disruption from electrified powertrain as well as autonomous technologies," says Richard Hilgert, an analyst at Morningstar Equity Research.
Fiat Chrysler's talks this year with another French carmaker, Renault, to create what would have been the third-largest automaker broke down over French government concerns about the role of Japanese partner Nissan and criticism from Renault's top union.
Analyst Ferdinand Duedenhoeffer, head of the Center for Automotive Research, said the French government is unlikely to play the spoiler role again, both because it would be an unpopular move and because its role in Peugeot is weaker.
But he said they would insist that inevitable job cuts not be made in France, which will expose Opel, which Peugeot bought in 2017, as the sacrificial lamb in any merger deal. Opel is based in Germany.
The real problem the carmakers face will be in China, which represents the future for most automakers.
"FCA and Peugeot are both lousy in China, they just lose money," Dudenhoeffer said. "I think they have to find a solution but it will be a big challenge."
Possibly complicating things, the Chinese government has a stake in Peugeot through Dongfeng Motors. Dongfeng, the Peugeot family, and the French state investment bank BPI France each have 12.23% of capital and 19.5% voting rights in Peugeot.
A merger could see the Chinese government take a role in a company that includes Chrysler, a U.S. industry icon. That comes on top of Fiat Chrysler's joint venture with another Chinese company, GAC.
"The Chinese government doesn't want to have a strong connection with an American company," Dudenhoeffer said, due to economic damage brought by the Trump administration's tariffs.
Dongfeng had no comment on the talks, while a French Finance Ministry official said the government would be "vigilant" on maintaining Peugeot's industrial footprint in France.
The official, who spoke only on condition of anonymity, also noted that the operation speaks to the success of Peugeot's turnaround under CEO Carlos Tavares. The Italian government said it was monitoring developments.
Fiat Chrysler Automobiles was formed in 2014 out of a merger of Italy's Fiat and the American company Chrysler, which Fiat brought back from bankruptcy. The company is controlled by the Fiat-founding Agnelli family, represented by chairman John Elkann.
Both Fiat Chrysler and Peugeot have been controlled by families since their formation - Peugeot started making cars in 1896 and Fiat three years later - which could contribute to a climate of mutual understanding.
A merged carmaker would have combined sales of nearly 9 million a year, based on 2018 results. By comparison, both Volkswagen and Toyota sell over 10 million cars a year, while the Renault-Nissan-Mitsubishi alliance almost 11 million.
Fiat Chrysler has a larger global footprint than Peugeot, whose focus is on Europe, where it is the second-largest carmaker.
While Fiat Chrysler last year sold 4.8 million cars globally, it makes the lion's share of its profits in the United States and has been struggling in Asia and Europe. Peugeot sold 3.9 million cars last year and is looking to move into the United States.
Fiat Chrysler is making a concerted push into electric and hybrid vehicles, where it has lagged, focusing in particular on its premium brands Alfa Romeo and Maserati.
Peugeot, meanwhile, has performed a remarkable turnaround in recent years, going from one of the industry's sicker car companies to one of its more powerful. That's notably thanks to an unusual $4.1 billion bailout in 2014 in which Dongfeng and the French state gained stakes.
In 2017, Peugeot bought General Motors' Opel and Vauxhall brands for $2.33 billion, making it Europe's No. 2 automaker after Volkswagen.
French unions are already warning about job losses, and angry that they were not informed of the discussions.
"The goal of any merger is to increase profitability. And behind that, attacks are being prepared against the workers of PSA and FCA," Jean-Pierre Mercier, representative of the CGT union at PSA Peugeot's headquarters east of Paris, told The Associated Press.
"It's not just about job losses," he said. "It's also about collective rights and pay levels."
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Charlton reported from Paris. Joe McDonald contributed from Beijing.
