There is a painful historical echo in the €33bn merger of Fiat Chrysler Automobiles and Renault proposed this week by FCA. The deal would be almost the same value in nominal terms of the industry’s worst deal failure — the $37bn combination of Daimler and Chrysler in 1998.

Like many unions, DaimlerChrysler was a triumph of hope over experience and was followed a year later by the Renault-Nissan Alliance, led by Renault’s Carlos Ghosn. DaimlerChrysler was dissolved in 2007, to everyone’s relief; Mr Ghosn faces charges in Japan of enriching himself with company money, having accused Nissan executives of “plot and treason”.

That carmakers still aspire to marry is a tribute both to the success of FCA under the late Sergio Marchionne, and to desperation. “Confessions of a Capital Junkie” was the title of his plea for consolidation in 2015 and the auto industry’s addiction to investing huge sums for low rewards remains. Indeed, the need to create electric and autonomous vehicles has made it greater.

As Mark Wakefield, a managing director of the consultancy AlixPartners, observes, “there is a lot of investment to be done, and not a lot of profit in the short term”. That is why FCA hopes to combine Italian, French and US carmakers under a Dutch holding company. The fact that it would take such a cultural risk shows three things about the industry’s new priorities.

First, technology matters more than brands. Brands such as Renault and Fiat have enormous value, of course — they convey principles, such as Volvo’s devotion to safety, to consumers. But it is noticeable how little of the FCA proposal focuses on Renault’s historical brand resonance compared with the opportunity to share the escalating costs of hardware and software.

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The most vital hardware is the “platform” — the base of the car, to which elements such as the wheels, suspension and transmission are attached. A new platform can take several years, and between $500m and $2bn, to develop and carmakers need to spread costs by using each one for various models and brands, fixing the body of a sport utility vehicle or saloon on top.

As the technology built into cars becomes more sophisticated and expensive, the only way to remain profitable is to reduce the number of platforms while placing more “top hats” on each. FCA envisages cutting the number of platforms made by the merged group by 20 per cent, and the number of engine “families” by 30 per cent. Both would conserve scarce capital.

Software costs are also rising as carmakers have to build more self-driving capability into cars. The global industry plans to invest $61bn in autonomy on top of $255bn in electric vehicles by 2023, AlixPartners estimated last year. It is impossible for each one to finance this alone and some, including FCA, are linking with autonomous technology groups such as Waymo.

Second, scale is more important than nationality. Virtually every carmaker started out as a national enterprise and often a regional one: Fiat is still identified with the northern Italian city of Turin. Renault could not be more French, having been founded in 1898 as Renault Frères, and the French government holds a 15 per cent stake.

A marque often sells best in its country of origin, and governments will fight to keep domestic plants open, but nationality has fading significance within the industry. No European company can stay within its borders, and even a US one would struggle — Ford’s US sales of 2.5m light vehicles last year were far below the 8.7m global sales of a combined FCA-Renault.

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Amalgamations of nationalities, with varying traditions of engineering and design, are very difficult to make work, but they offer the chance both to share costs and combine brand loyalties. The only country with a big enough market to go it alone may be China, where 28m vehicles were sold last year, but competition there is intense.

Third, mergers are stronger than alliances. It is easier to agree alliances, or to pool some technology in, for example, electric vehicles. That is how Fiat and Chrysler started in 2009 before merging in 2014, and Volkswagen and Ford are dipping their toes in the waters of co-operation with a “global alliance”.

But alliances that look solid to outsiders often conceal unresolved tensions and factionalism, as Mr Ghosn’s downfall illustrates. Mr Ghosn and Mr Marchionne managed to make theirs work for a while by force of personality but charm only compensates for structural tension temporarily. Being urged to co-operate is one thing; working for the same company is another.

FCA hopes that self-interest, along with a good relationship between John Elkann as chairman and Renault’s Jean-Dominique Senard as chief executive of the new group, will make the merger’s logic inescapable. It is a gamble but a calculated one, given that both companies would be vulnerable if it failed in the manner of DaimlerChrysler.

Ultimately, there is little choice. The industry is fragmented and nationally divided, more so with the entry of Chinese companies, but the cost of independence is prohibitive. Mergers are hard, but isolation is harder.

Via Financial Times