Tavares: Keeping PSA, FCA merger on track an 'incredible' achievement

PSA Group CEO Carlos Tavares already had a busy 2020 ahead of him when the COVID-19 pandemic hit. He and his teams were preparing for a merger with Fiat Chrysler Automobiles to create Stellantis, the world's fourth-largest automaker by volume, and to roll out a full slate of electrified models to meet the EU's new emissions standards. But Tavares was able to navigate these stormy seas, keeping the merger on track, growing PSA's electrified sales substantially -- and also outperforming rivals by recording an operating profit in the first half despite lockdowns around the world. Tavares spoke with Automotive News Europe Associate Publisher and Editor Luca Ciferri and News Editor Peter Sigal via video chat about how these challenges were overcome and what is ahead for Stellantis.

You have said that the COVID-19 pandemic has boosted the rationale to create Stellantis. Have there been any side effects from the crisis on the agreement?
It has been a very long process with a lot of hard work. From the signing [of the memorandum of understanding] to closing, it's roughly 15 months of work in terms of preparing filings related to all the different takeovers and administrations, the bankers and antitrust authorities. But the most incredible part of this process is that we are on time and that the teams kept the pace under COVID lockdowns. We have been able to work remotely and collaboratively. We have had more than 600 people working intensively on this process since December 2019, which was the signing date, and now we are preparing for the closing in the course of the first quarter of 2021. And while we are doing this, both Mike Manley on the FCA side and myself on the PSA side have been managing our companies to make sure that we overcome all the challenges of those lockdown periods, so that we can start Stellantis with a good financial position. 

PSA and FCA each operate with a very similar three-dimensional matrix: brand, function, region. What can we expect from Stellantis?
A three-dimensional matrix is the basic organization of any global carmaker nowadays. It's all about interacting in a cross-functional way. In the first axis, we show the vision for each brand -- as well as consider each brand's strong history -- then build their future and destination with a clear positioning. Then, we have the functions, where we need to have very precise expertise regarding the best practices, the most efficient processes, the best techniques to be a benchmark in the worldwide industry --  in engineering, in sales and marketing, in manufacturing and supply chain, in any other function that you could imagine. Last but not least, we have the regional axis, which is the place where operationally you create the value. You create that by using the brand portfolio to cover the market and profit pools, and maximize the value that you create, both on product and on service, making sure that you make your customers happy while using the brand portfolio in a thoughtful way. Stellantis will have a 14-car-brand portfolio plus two mobility service brands and aftersales.  So, we have a lot of things to do, a lot of things to imagine. That makes it very, very exciting.

Volkswagen accounts for roughly a quarter of sales in Europe with just three volume brands.  Stellantis, which year to date is at a combined 21 percent share, will have Citroen, Fiat, Opel/Vauxhall and Peugeot. Will you have too many brands in the volume sector?
Stellantis will be very strong in Europe -- not exactly the size of the Volkswagen Group, but quite close. I have a huge amount of respect for Volkswagen because they are doing a fantastic job. They are taking many bold decisions and moving forward very strongly on electrification, which makes them a fantastic rival for us and a very good reference against whom we can compete. We understand that they will be ahead of us in Europe, but we will not be very far behind, and we will try to compete in the most efficient way, with a different approach to our business model, but also with a double-digit brand portfolio, as they have.

PSA has signed an agreement with FCA ahead of the merger to help them begin working on PSA platforms and powertrains for small cars. How much will this technology transfer agreement count in the increase of expected Stellantis synergies to 5 billion euros ($6 billion) from the 3.7 billion euros originally estimated?
It's not the most significant part [of the increase], although it will certainly contribute a certain amount. So, how did we move from 3.7 billion euros to 5 billion euros of synergies on a yearly run rate? Very simply. By listening to the proposals of the 25 cross-company teams we created to prepare for the merger, within a strict legal frame. The most exciting sign [for the success of the merger] is that on a bottom-up basis people were getting along very well, were very excited about the prospect of creating a larger family, were offering proposals. So, for me, the most important part is not the amount of synergies. Obviously 5 billion euros of synergies on a yearly run rate -- it's roughly $20 to $25 billion of value creation from this deal. It's a big amount of value creation, as you can imagine -- if we execute properly, of course.

Conversely, the one-time implementation cost for achieving the synergies has risen from 2.8 billion to 4 billion euros. Is this related to write-offs in revised FCA and PSA business plans ahead of the merger?
Well, if that happens, you will see it in the financials of both companies, and of course, of Stellantis at one point. If something has to be done in that area, the CFOs will make it clear and transparent in the financials of the different entities. But, of course, the implementation costs are real. The magnitudes are something that we will be eager to optimize at any point in time, which is in the mindset of the people both on the FCA side and the PSA side. I think efficiency and effectiveness are something that I can feel on the two sides of the Stellantis family. I can feel that there is this great business sense that has been the result of the leadership from Mike Manley and, prior to Mike, from [the late former FCA CEO] Sergio Marchionne, and I think it has also been the DNA of PSA over the last few years. I feel the fact that people understand the economic impact of what they do, what they decide, what they spend, and I feel that there is eagerness to optimize the way we are spending our money and to make sure that we get more out of each buck for everything we do, and that is good. 

With the very strong and highly profitable presence you will have with Stellantis in North America because of FCA, is there still a need to bring the Peugeot brand there?
First, as long as we are competitors, which means up to the closing, my answer will be, yes, of course our plan is to bring Peugeot to North America. This being said, our [PSA] North American team in Atlanta that is preparing for the comeback of Peugeot in the U.S. market is bringing us many ideas in terms of logistics, in terms of maintenance, in terms of the distribution model, in terms of marketing communication, as we have no legacy. Whatever we decide in the Stellantis world, all of those ideas will improve the way we go to market and the way we run the business. I was working in the United States for a while [as head of Nissan North America], and I know how competitive the market is, and I am very humbled vis-à-vis the level of competitiveness it takes to grow a profitable presence there. This is exactly what FCA has been doing, so my hat is off to the FCA team for that. 

The U.S. has been FCA's profit driver, focusing on pickup trucks and the Jeep brand. Is there room for this part of the organization to benefit from the success that you have brought to your businesses in Europe?
The first answer to your statement, which is very true, is simple: If it's not broken, don't try to fix it. But we know that in our industry when you have the sense that everything is going well, it's exactly the moment where you need to challenge yourself and look for additional efficiencies and achieve a better performance. And the fact that we are bringing the two companies together may also be an opportunity to be challenged on the things that we could even do better, and this is true for the Americas as much as for Europe. PSA has been very successful in Europe, but that does not mean that we are doing everything very well. I think Mike [Manley] would say the same for North America.

As CEO of Stellantis, where will you spend most of your time?
After closing, the fair answer is hopefully not in a plane. But of course there would be some travel -- mostly to Turin, Amsterdam, Paris, Detroit, Sao Paulo, Russelsheim. All of this is part of a global company. Of course we would have significant digital interaction, that is for sure, but human interaction would also have a significant role to play. This is about management, about expressing some kind of direction and convincing people that what we are doing makes sense, inspiring people to go in one direction or the other direction, and that means human interaction. We have learned through two successive lockdowns in Europe that we can run a car company in a crisis mode using digital tools. As long as a sense of team spirit is created by having human interactions -- you can have dinner, you could have a drink, you can have arguments or discussions -- then digital communications tools are appropriate, and that is going to reduce the burden of travel, jet lag and time differences.

This is an important year for emissions in the EU, with a 95 g/km CO2 target. Overall, are you happy with PSA's emissions performance?
What makes me happy is that my electrified-vehicle sales mix is going up quite fast, which means that we are in a "pull" mode in terms of selling electrified cars, which is important for the profitability of that kind of technology. We are the No. 1 carmaker in terms of CO2 emissions reduction rate in Europe, which means that we were able to bring the right technologies and the right pace to the market to support this very important trend that is requested by the societies in which we operate. I'm also happy with the strategy that we put in place years ago. All the technologies and the products that we are selling right now, whether pure EVs or plug-in hybrids, were decided in 2014. At the time we were coming from a year [2013] when our operating profit margin rate was minus 2.8 percent. So, in the first year of the turnaround, we were able to decide relevant investments on our core technology that brought all the electrified technologies and multi-energy platforms that we are using successfully now. Now we are preparing a dedicated EV platform, which we call eVMP, that will be used from 2023 or 2024 onward. We recognize that from that period the sales mix will be such that purely electric vehicles deserve a dedicated state of the art platform.

Next year's CO2 compliance will increase to 100 percent of all cars sold from 95 percent this year, and the low-emissions "supercredit" multiplying factor will decrease to 1.67 from 2. To remain compliant will PSA need to decrease its emissions by 10 percent?
Possibly more than that. If you look at 2030 versus 2021, the regulation is minus 37.5 percent [less CO2]. But to align with the European Green Deal [to be carbon neutral by 2050] that the EU is preparing, I believe there is a significant probability that the minus 37.5 percent will be made more stringent. I think the mindset is, Stop making internal-combustion cars; bring all of the mobility to a zero-emissions level, which means electrification; and make sure that you do it fast. The speed at which we can do it is going to create a huge stress in the industry. The companies who cannot adapt to these new conditions are taking the risk of disappearing or being consolidated with other companies. But it's not only a question for carmakers. In Europe, there are 14 million people working in the automotive industry, and we need to think about the ecosystem around us to see if it can move as fast as we are going to move. You often hear that carmakers look like dinosaurs, but it's not always the case. We are becoming a very sophisticated, very aligned, very focused industry that may surprise some of the stakeholders.

Do you see a future for the diesel, or would PSA's money be better spent on accelerating the electrification of gasoline engines?
We are doing what we need to do to continue to sell diesel cars because the customers are asking us to do so. Our sales mix is reasonably stable at about 30 percent diesel. A few years ago it was a little bit above 50 percent. I am sure in the near future we will have to wind down manufacturing activities for diesel engines to replace that with manufacturing activities for electrified components of our electric powertrains. So, as long as our customers are happy with an affordable mobility and we are compliant with the CAFE rules, it's just fine. But there is a point in time where the constraints will generate such a significant additional cost or engineering-resource consumption that we will decide to reallocate those resources.

We have recently seen a lot of recalls of plug-in hybrids and EVs because of fires. What can be done to ensure a smoother rollout of these technologies?
In engineering you always need some kind of lead time in the upstream part -- fundamental research, advance engineering, development and validation. You need a very significant flow of activities in terms of testing, calculation, component testing, system testing, vehicle testing, etc. to make sure that you have reached the right level of maturity. In the normal flow of action, your engineers will say, 'Now I need to make X million kilometers or miles to validate this component at this rate of durability.' Eventually, if you give them the time and the resources, they will do a fantastic job. At the end of the day you get the performance, durability, safety, and, eventually, you get the cost performance and your customers will be happy. If there is a point at which you want to challenge this process -- it can be a product planning strategy event in which you say, 'I have to change direction because the norm-driven market is going in another direction' -- eventually you are taking risks that you will disrupt this flow of action-related validations. You will end up creating a quality issue. 

At the last Frankfurt auto show, you publicly asked for the dialogue between the regulators and the industry to become better, in order to address what you just described. Has there been progress on this?
I will answer you from two perspectives, the PSA CEO from one side and the European citizen that I am from the other. As PSA CEO, we are leading the pack. We are quickly developing the technology that we need. We are vertically integrating the engineering and the manufacturing of the major [electrification] components -- motors, transmissions, battery packs, battery cells. We have completed the transformation. We have made the decisions. We have made money to invest on those activities. Now, let's see how we perform in executing all of this. From a citizen's perspective, I would not dare to think that we could impose the same thing on aircraft makers, for example. We would not say to an aircraft maker, 'You need five years to do this, but I will give you two.' Why? Because that creates an obvious safety issue for the consumers that are going to use those planes. If we transfer this to the automotive industry, we have to be mindful that we have to give the battery makers, carmakers and the engineers, who are managing the energy in the vehicle and all the safety devices, a reasonable timetable to do their jobs.

On the personal side, what have you missed most during the coronavirus lockdowns?
I'm a privileged guy. I can continue to run my car company remotely with my great team. Of course, living in France, not being able to see my grandkids in Portugal is painful. [Lockdowns were] something that needed to be done because it was the best solution we could have in our hands to fix the sanitary problem. The second lockdown is keeping the economy running at a certain rate -- not 100 percent, but much better than the first lockdown, which means that the social and economic consequences of the second lockdown will be much smaller. It demonstrates that we are learning, because at the same time we have a better knowledge to limit the effects of the pandemic. Overall, the most painful thing was not being able to see my grandkids and my kids during lockdown. Otherwise, I cannot complain.