Sergio Marchionne, CEO of Fiat Chrysler Automobiles, said major automakers need to stop wasting billions developing the same products and start working together.
And if automakers won’t consolidate voluntarily, then the capital markets should force change upon them, the FCA boss said during a marathon conference call with analysts on Wednesday.
“There is a fundamental problem that can’t be ignored,” Marchionne said from Brazil, where FCA just opened a plant to build the Jeep Renegade and up to two other models.
He said the industry -- excluding manufacturers in China -- is burning 2 billion euros a week developing vehicles and components that are largely similar. Those costs could be shared, and the capital saved and returned to shareholders, through consolidation within the industry.
“We need to find a way to abandon this path, and effectively go straight,” Marchionne argued.
Marchionne singled out Toyota and Volkswagen Group as being the most effective among mass market automakers at returning value to shareholders through effective use of capital. But he said even the performance of those companies pales next to other industries, which is not a long-term trend that the industry can endure.
“The capital consumption rate doesn’t deliver value to the consumer, and in its purest form, is pure economic waste. It’s just bizarre,” Marchionne said.
In an analysis he titled Confessions of a Capital Junkie, Marchionne said automakers could potentially share 40 percent to 50 percent of vehicle development costs, returning 2.5 billion to 4.5 billion euros of capital every year.
To illustrate his point, he noted four-cylinder engine development, which costs each automaker billions with a negligible effect on buying decisions.
“Consumers could not give a flying leap,” about whose four-cylinder engine is in a vehicle, he argued.
Marchionne has been loudly courting potential global partners for FCA for several months, without success. But he ran into a stiff headwind from analysts on the call when he suggested that the capital markets could force automakers to change their ways or consolidate.
“The capital markets are not going to be able to do anything like this,” argued analyst Max Warburton, of Sanford C. Bernstein & Co., a respected industry analyst in Singapore who issued a report on FCA’s low profit margins last month. “There are probably five or 10 men [in the auto industry] that are able to do this, and you probably have them all on speed dial.”
The extended exchange between Marchionne and Warburton grew testy at times.
Marchionne said: “Don’t shy away from your obligation. Your obligation at the end of the day is to direct the flow of capital. That’s what you do for a living. I make cars, you direct capital. Own the responsibility, Max."
“I think the capital markets need to take responsibility for forcing capital in a responsible way. In the way you wrote it, you’ve relegated us to a valuation that is obscene,” Marchionne added. “How far down the food chain do we need to go to be embarrassed?”