Volkswagen is Not Merging With Fiat Chrysler, and Here’s Why

Photo: Wall Street Journal

Photo: Wall Street Journal

The source of this rumor is Germany’s Manager Magazin, which reported last week that Volkswagen Chairman Ferdinand Piëch approached Fiat. Note that the principal named was Piëch, and not Volkswagen CEO Martin Winterkorn. Piëch is a member of the Volkswagen’s founding family, but Winterkorn is the strategic head of the company. Here now are our reasons why this isn’t happening:

Production would become a nightmare

Think of it like that old board game about global domination, Risk. FCA is a union between the U.S.’s Chrysler Group, Fiat’s Italian base, and Fiat’s strong South American presence. That’s three continents. Volkswagen just began a massive investment in China. That makes four. Having to manage the correct level of production in all four centers with nary a hiccup would be highly improbable.

Volkswagen is trying to slim down

As Süddeutsche Zeitung pointed out: Toyota has 339,000 workers and sold 9.98 million vehicles in 2013; Volkswagen employs 573,000 people, and sold 9.73 million vehicles in the same time period. In the words of Zeitung, “Why does the German firm need more than 234,000 more people in order to produce fewer cars?”

Given that VW has already pledged to cut expenses by $6.8 billion by 2017, and given that mergers always yield redundancies that prompt even more cuts, this would be a bad time to take on even more employees and costs.

FCA has some things VW needs, but a lot it doesn’t

Volkswagen isn’t profitable enough, according to Winterkorn, despite high-margin brands like Porsche and Audi. Profitable acquisitions would be SUV and truck makers with huge brand recognition, like Jeep and RAM Trucks, which are popular in the U.S. and China. However, other models like sedans, minivans, and muscle cars, e.g. Chrysler, Fiat, and Dodge, would be dead weight. VW would have to axe them wholesale, which would prompt a massive public backlash.

Toyota would be bested, but what about the counterstrike?

Volkswagen’s goal is to edge past Toyota in global sales by 2018. Muscling past the Japanese company by injecting a massive dose of fast-growth bulk would work in the short term, but it would leave VW bloated and disoriented. Toyota, by contrast, would be lean, disciplined and free to plan its response on its own time and on its own terms. This could be the incentive needed to accelerate hydrogen fuel cell vehicle development, which, if realized, would make gasoline about as innovative-looking as the cotton gin.

Conclusion: A total absorption of Fiat doesn’t make sense for Volkswagen at this time. Individual brands that Fiat owns—Jeep, RAM Trucks, Ferrari, Alfa Romeo—would be good buys for VW, but Fiat wouldn’t sell those profit-makers unless they were bleeding cash, which isn’t likely to happen soon thanks to global demand for these exact model types.

Volkswagen is Not Merging With Fiat Chrysler, and Here’s Why was last modified: January 1st, 2015 by Leith VW Raleigh

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