Some mergers are about buying a rival's cutting-edge technology, with others aimed at opening new markets or acquiring lucrative patents.
Fiat Chrysler's proposed $48 billion blockbuster deal to join forces with Peugeot is about something much simpler: scale – a move designed not only to bankroll expensive new investments in electric vehicles and autonomous vehicles, but also to put the companies in the driver's seat to steer how cars, trucks, and SUVs will be built for the century to come.
The mega-merger between Fiat Chrysler ($FCAU), based in the Netherlands, and Peugeot's parent company ($PUGOY), based in France, would create the third-largest automaker by vehicles sold, behind Volkswagen and Toyota, and ahead of General Motors. But while Volkswagen, Toyota, GM, and even Ford in recent years have each invested heavily in hybrid, electric, and hydrogen fuel cell vehicles, as well as self-driving technology, Fiat Chrysler and Peugeot have only inched into the two markets.
"It's fair to say that Chrysler is coming from behind, certainly from the U.S. perspective," says David Keith, an assistant professor of management specializing in the automotive industry at the MIT Sloan School of Management.
The proposed merger in part reflects both a broader upheaval roiling the auto market, and a growing recognition of just how much money and infrastructure automakers will need to weather the transition to next-generation vehicles.
Already, traditional modes of car ownership that characterized the U.S. market for at least the last half-century are being replaced by car-sharing, ride-hailing, and an ever-expanding realm of electric scooters, mopeds, and battery-powered bicycles. Monthly vehicle sales haven't returned to the five-year peak of 18.4 million hit in August 2015 – let alone the 21 million vehicles sold in October 2001 or July 2005 – and they've slumped through the first half of 2019 amid tariffs, a trade war, and signs of a looming global recession.
But electric vehicles – and, eventually, autonomous cars and trucks – pose perhaps an even greater challenge, forcing automakers to upend long-standing supply chains and invest in a furious new technology race while still producing the cars and, especially, SUVs and trucks that American consumers want today.
"To get these technologies into a car that most of us drive, there is a lot of manufacturing technology that still needs to be invented to really make that feasible, and that's where having the larger base matters, because at the same time you have to keep doing what you're already doing," said Leo Kempel, dean of the school of engineering at Michigan State University. "So you can't stop the train, get it all right, and move again – you have to create the next car on the train while it's still moving."
That poses a particular challenge for the auto industry: Profit margins can be as thin as the single-digits. Simply refreshing a product as common as the Toyota Camry or Ford F-150 – let alone designing a new platform from scratch – can cost $1 billion. That's enough to strain even legacy automakers like Fiat Chrysler and Peugeot, despite their boasting revenues last year of $122 billion and $83 billion, respectively.
"The amount of engineering investment that's going to be required in these new technologies really is just so significant that it's sort of daunting even for these big balance sheets," Keith, of MIT, said. "These auto companies have 100 years of experience banging metal, but these cars now are as much silicon as they are metal, and it's as much about data services and technology as it is about designing a beautiful engine that sings as it goes down the road."
There remains ample uncertainty in the U.S. around the growth of electric vehicles and the development of autonomous vehicles, and analysts broadly disagree over the future growth of the market.
The Trump administration has fought state and federal efforts to increase fuel efficiency requirements. Meanwhile, SUVs and trucks dominate the U.S. market, especially as oil prices have held relatively steady at about $60 per barrel, producing an average U.S. gasoline price that hasn't climbed past $3 per gallon since 2014.
To be sure, electric vehicles sales are growing; last year sales boomed by 81 percent. But with more than 263 million passenger vehicles across the country, EV's small sliver of the market still represents nearly 3 million vehicles.
But markets from Europe to China are far more welcoming to EVs – and starting to pull American companies with it.
"They're looking at what's happening globally – when you look at what all the jurisdictions are doing outside of the U.S., many of them are starting to become very bullish on electric vehicles," said Carla Bailo, president and CEO of the Center for Automotive Research.
Peugeot, unlike Fiat Chrysler, has recently made considerable investment in electric vehicles, introducing a compact four-door and a small SUV in Europe, though it still lags behind other automakers. Still, a merger would allow the two automakers to share technology – and give Fiat Chrysler an opportunity to immediately begin producing an electric SUV that might compete with Tesla's popular Model X or its as-yet-to-be-released Model Y, or Ford's impending "Mustang-inspired" SUV, set to be unveiled later this month.
"I wouldn't say that either of them are leading in electrification, but PSA is doing a lot of work on EVs and introducing a lot of products – they can take the lead and share that technology with FCA," Bailo says, referring to the acronyms for Peugeot's parent company and for Fiat Chrysler Automobiles. "They're not powerhouses, but they have the technology, and they'll be able to have economies of scale."
But, they'll be playing catch-up: General Motors, like Tesla, has sold so many electric vehicles in the U.S. that it's hit a cap on the tax credits that it can claim. Ford meanwhile announced last month that it's investing in 12,000 electric vehicle chargers across North America – nearly three times as many as Tesla – and it plans to introduce 16 electrified vehicles starting next year. Both companies have invested in self-driving startups: GM in Cruise, Ford in Argo.
Fiat Chrysler has at least signaled that it has ambitions in electric vehicles and autonomous vehicles. Earlier this year it partnered with a self-driving startup of its own, Aurora. Last year, the company's then-CEO, Sergio Marchionne, announced that the company would release 30 hybrid and electric vehicles through 2022, although he later stepped down due to a terminal illness. Even then, a merger with an overseas counterpart was widely anticipated – and whether the proposed partnership with Peugeot goes forward, it's the latest in a trend that's sure to define the industry, experts say.
"We're seeing sales go down, and that's going to impact profitability, that's going to impact dollars available for development, so we're going to see more of these partnerships," Bailo says. "There's so much disruption and only so many dollars to do things with."