On the face of it, Fiat Chrysler Automobiles NV (NYSE:FCAU) CEO, Sergio Marchionne, comments for consolidation in the automobile sector might suggest desperateness. However, he is not desperate in selling the company. During a recent interview, he even told the second quarter results will suggest who is desperate. The company is slated to announce its results on July 30. There are enough reasons for him to feel confident about the company he is running. He was credited for bringing Fiat and Chrysler together to boost sales besides upgrading the neglected Chrysler. However, no one can ignore the two key points that he has thrown in his capital junkie presentation.
Two Key Issues
Fiat Chrysler Automobiles NV (NYSE:FCAU) CEO has made it clear in the presentation that the objective is to provide transparency on two issues that the company raised publicly. One was that the industry has failed to get its cost of capital during a cycle. That is a serious issue because, in any downturn of economic activities, the automobile sector is the first one to get the unfavorable impact. That will spread from small cars to mid-sized cars or SUVs or Jeeps. Similarly, in any economic recovery, the automotive sector is probably the last one to react. For seven straight years, the economy in the United States has shown an uptick thanks to the historically low-interest rates. Once the interest rates increase, there is every possibility of slowing.
The second point is a solution to the first issue. Marchionne believes that the solution lies in the consolidation of the automobile sector. He also made it clear that he is not excusing himself for the current ranking of Fiat Chrysler Automobiles NV (NYSE:FCAU) or putting the company for sale. The CEO is confident and committed to the current five-year plan, which will be revised later. He also does not believe that it is a matter of life and death for the automaker. Then, what is worrying him? He is convinced that the product development costs are eating away the value at a much quicker pace than the other industries.
The time has come to reinvent the enterprise value as far as product development is concerned, i.e. capital, as well as, R&D. Higher operational power strengthens the profitability resulting in less volatility in returns. The most important aspect that he believes is that one solution resolves in slashing the active platforms and at the same increases the scale. Fiat Chrysler Automobiles NV (NYSE:FCAU) CEO sees big potential for savings that cannot be ignored through execution and best-of-best approach to commonality. It is under these contexts that Marchionne pitches in for the industry consolidation.
Confident Of Fiat
There are enough reasons to believe that the CEO is confident about the company and its performance in the coming quarters. In the first quarter, the company earned a net profit of Euro 92 million on net revenues of Euro 26.4 billion. Its Jeep brand continued to witness volume growth of 11% and sales uptick of 22% on YOY basis. The automaker also repaid Euro 1.5 billion FCA notes in February from the existing liquidity.
Aside from these, most recently Fiat Chrysler Automobiles NV (NYSE:FCAU) beat Ford Motor Company (NYSE:NYSE:F) sales in the month of June for the first time ever. Of course, that is at the retail level only and excluded the fleets of corporate. None-the-less, it is a worth achievement considering that Ford is a domestic company with more than a century-old brand name. The company’s Jeep brand witnessed sales growth of 25% powered by a 39% upside in mid-sized Cherokee sales. Its Chrysler 200 sedan model climbed 153% in June fueled by rental agencies’ purchase. On the whole, its sales were up 8% in June. The CEO also appears to be expecting the results to be better in the June quarter.
During the first quarter release, the company also maintained its global shipments of 4.8 – 5.0 million range with net revenues of Euro 108 billion. Net profit guidance was also confirmed at Euro 1.0 – 1.2 Billion. The net industrial debt will stand reduced to Euro 7.5 – 8.0 billion from Euro 8.6 billion recorded at the end of the first quarter.
Not Desperate
The figures and the recent performance of Fiat Chrysler Automobiles NV (NYSE:FCAU) might justify that the CEO is not desperate for merger or selling itself. He has a concrete plan and is going on accordingly. The fact that he is not willing to approach General Motors Company (NYSE:NYSE:GM) for the second time this year suggests that he might also have some other options to pursue. Earlier this year in March, he wrote an email to the CEO of GM, Mary Barra, proposing a merger. However, the proposal was rejected by the biggest American automaker. In 2012 also, Fiat approached the American car maker with a possible partnership, which was also turned down.
However, the CEO is not ready to give up his campaign for the industry consolidation. He believes that there is a better option to manage the business. Marchionne is willing to wait.
Conclusion
Given the performance and the outlook, Fiat Chrysler Automobiles NV (NYSE:FCAU) CEO’s statement for consolidation cannot be termed as desperate. The June auto sales figure clearly suggested that its sales were growing and exceeded Ford Motor Company (NYSE:F) in at least one metric. He might be waiting for the second quarter results and based on which he might start another round of campaign for consolidation. He is searching for the right kind of merger and waiting for it to happen. In any case, he is confident that he will get it done. That will undoubtedly help the company’s shareholders too.
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