(Bloomberg) -- CEO Sergio Marchionne has been talking for months about merging Fiat Chrysler Automobiles with a giant like General Motors or Ford Motor Co., a sign that he’s panicking, some industry observers say.
Fiat Chrysler sales are growing quickly and the U.S. division has been gaining market share faster than rivals, but the company is boosting discounts on many models and selling unpopular sedans and compacts to rental-car companies and corporate fleets. That’s depressing profit margins, meaning Marchionne will generate less cash to develop the next generation of vehicles and technologies on his own.
“What Sergio is panicked about is how much sales are growing while profit margins are falling,” said Maryann Keller, an independent consultant in Greenwich, Connecticut. “He should be making piles of money right now.”
Marchionne floated the idea of creating a new global auto giant last year. He has repeatedly complained about steep development costs for new cars. In an earnings call on Wednesday with analysts, he said weak profits across the industry argued for consolidation.
This isn’t about putting FCA up for sale, a matter of “life and death” for the company, or Marchionne’s “final big deal,” he said.
Sanford C. Bernstein analyst Max Warburton said in a note after the presentation: “In reality, it is all of those things.”
Marchionne said he wants consolidation that helps cover development costs for costly investments in engines, advanced technologies and parts. If companies can merge and defray those costs over more sales volume, they can boost returns, he said.
Warburton said on the call that he and other analysts largely agree with Marchionne’s premise that the industry’s high capital costs make for low returns, but he added that CEOs at other car companies don’t seem to be heeding the call for a more mergers: “I don’t think your colleagues are as embarrassed as you and that’s the problem, right?”
Marchionne has told Bloomberg that rival CEOs aren’t exactly beating a path to his door. Ford and GM have little interest in combining with FCA, said people familiar with the thinking at each company.
If GM, Ford and other automakers don’t want to merge up with FCA, Marchionne told analysts on the earnings call on Wednesday that he wouldn’t rule out an overture to tech giants Google or Apple.
Other automakers are not lining up because Marchionne needs a deal more than his competitors do, Keller said. While first-quarter profit surged 22 percent, margins lagged far behind FCA’s Detroit rivals. Ford made $924 million on $31 billion in revenue in the first quarter, GM $900 million on $35.7 billion in sales. Fiat Chrysler earned $92 million on $26.4 billion.
Last year, Fiat Chrysler’s margin before interest and taxes was 3.3 percent. GM reported a 4.9 percent EBIT margin. Thanks partly to sluggish economic growth, FCA lost $131 million in Europe. That’s far less than in 2013, but it still hurts the bottom line. Ferrari and Maserati are money makers, but Marchionne is spinning off Ferrari to generate cash.
That leaves the U.S. business, which generated more than half of last year’s profit, to carry the load. It’s hard to see how Marchionne can take FCA U.S., formerly known as Chrysler, to the next level.
In the first quarter, the company handed out an average of $3,300 a vehicle in discounts, up 4 percent and the most of any mass-market automaker. Fiat brand discounts have almost doubled from a year ago. GM and Ford are actually pulling back on incentives. As a result, FCA U.S. now spends an average of about $200 a vehicle more than GM and almost $500 more than Ford, according to Autodata Corp. The gap with Toyota and Honda exceeds $1,400 per vehicle.
FCA U.S. is also offering bonus cash to dealers who manage to sell the company’s slow-selling cars, including the Chrysler 200 family sedan and Dodge Dart compact.
“Jeeps and trucks are selling,” said Mark Snethkamp, who runs a Chrysler-Dodge-Jeep store near Detroit. “I think that’s why they are pushing the 200 and Dart so much.”
Boosting sales to car-rental companies and corporate fleets is another telling sign of weakness because such transactions typically command lower margins than sales to regular consumers. While FCA US’s reliance on fleet sales fell last year and has been declining since 2009, more than a third of Chrysler 200 sales are going to fleets, according to a person familiar with the situation, who asked to not to be identified discussing private information.
The company declined to comment on its incentive strategy or which models are ending up in fleets.
After FCA announced earnings, Evercore ISI analyst George Galliers wrote in a research note that North American margins remain weak and that the company burned $1.1 billion in cash and ended with $9.2 billion in debt, based on exchange rates at the end of the first quarter. That’s about $1 billion more than it had three months ago.
Despite some weakness in its strongest market, Fiat Chrysler isn’t in serious trouble. Against long odds, Marchionne revived Chrysler and combined it with Fiat to create a global automaker. The redesigned Jeep Grand Cherokee and Cherokee are both hot sellers and now make up about 7 percent of the U.S. market for SUVs. The Ram lineup, now a separate brand, is growing along with a strong pickup market and is a big moneymaker.
But with profits coming from a relatively small number of vehicles, it’s easy to see why Marchionne may be looking for a partner to help with investment in new technology or to help get more scale in passenger cars, where the company is weak, said Richard Hilgert, a Morningstar Inc. analyst in Chicago.
With no obvious partner, Marchionne took his case to shareholders in hopes they’ll pressure his rivals to cut a deal. “This state of affairs, it’s almost embarrassing,” he said. “The capital markets need to push for change.”