When Groupe PSA — the French manufacturer of Peugeot, Citroën, Opel and Vauxhall automobiles — and Fiat Chrysler Automobiles (FCA) announced a binding agreement to merge last month, FCA CEO Mike Manley said the move would execute what has “only been theorized many times before, which is smart industry consolidation.”

Whether it ends up being smart is, of course, a judgment for the future. But what is clear already is that the merger is just one of several possible models for consolidation in an industry struggling with enormous change.

A newly formed PSA-FCA company — as-yet unnamed — promises complementary strengths and certain efficiencies, not to mention the creation of the fourth-largest automaker in the world. The company will encompass workhorse brands like Jeep and Ram, as well as the sportier Alfa Romeo, Maserati, and Peugeot.

But brand diversity and popularity are not enough to ensure survival in an era when the traditional auto sector is facing threats at every turn, most notably perhaps from a tech sector nipping at its heels.

All automakers must figure out a way to advance their capabilities and progress in electric, autonomous and connected vehicles and devices — while at the same time continuing to operate their legacy business of selling traditional internal combustion engine vehicles to individuals for personal use, says Wharton management professor John Paul MacDuffie.

“On the R&D side, this takes lots of capital, and lots of expertise and access to technical talent,” says MacDuffie, director of the Program on Vehicle and Mobility Innovation (PVMI) at Wharton’s Mack Institute for Innovation Management. “The tech companies have some natural advantages in attracting capital and talent. The auto companies have all of their accumulated knowledge about designing and building a wide variety of vehicles, managing a complex global supply chain, meeting regulatory requirements and holding legal responsibility for quality and safety, etc. So, one way for an automaker to meet these new challenges is with a merger, and that is what [late Fiat CEO Sergio] Marchionne kept emphasizing — and seeking — in his years of running first Fiat and then FCA.”

Given the pressures on the industry and what is known about the merger so far, it’s a move that appears to make sense.

“If you look at the industry, the whole general direction is to create larger and larger companies that can gain economies of scale,” says Paul A. Eisenstein, publisher and editor-in-chief of The Detroit Bureau.

“The tech companies have some natural advantages in attracting capital and talent.” –John Paul MacDuffie

But it is also the case that mobility companies are being buffeted by challenges of unprecedented proportions and trends whose ultimate direction is uncertain. “Not only must they remain competitive in traditional product segments, but they are facing a massive and increasingly global shift in what consumers buy — away from traditional passenger cars to SUVs and, especially in the U.S., pickups. And that is not an inexpensive transition,” says Eisenstein. “Beyond that, they have to cope with the push for what some call CASE — Connected, Autonomous, Shared and Electric. They will be dumping tens of billions of dollars a year collectively on technologies for which it is not yet clear the consumer really wants them, or if these technologies will ever generate real profits. So, size does seem to matter at a time when the industry is spending unprecedented amounts of money on transitions that nobody can say for sure will result in benefits for the industry as a whole.”

More Than Getting from Here to There

The PSA-FCA merger comes at the very time when a vehicle is being redefined in radical ways. It is still, of course, about getting from here to there, and in a particularly personal style. But customers are telling both auto and tech companies what they want, and cars today are listening — literally. Increasingly, vehicles are being equipped with cameras, microphones and sensors. The connected car can help find parking spots or a place to have dinner. Cars are now able to “speak” to one another and share information about driving conditions, or to feed data about driving habits to an insurance company to consider in assessing rates.

​The connected car also collects and sends off data to be monetized. So far, tech companies have been ahead of automakers in harnessing data. Apple’s CarPlay and Google’s Android Auto software interface directly with smartphones rather than cars. But companies are becoming smarter about harnessing and exploiting data themselves.

​The question of how to effectively make investments in new technologies is the most powerful driver in the industry right now, says MacDuffie. An outright merger is one approach. But because there have been so many troubled or failed mergers, many companies are cautious.

​Says MacDuffie: “Volkswagen and Ford have an alliance to work on electrics. Honda and Cruise (a GM subsidiary) are working on autonomous together. Mercedes and BMW are working on things together having to do with mobility services and autonomous development. So, those are other ways that are a little more nebulous than an outright merger. These alliances are not so visible, and they also fall apart and disappear in ways that mergers usually don’t. Some just quietly abandon alliances from the past.”

​If, on the other hand, some of these companies are able to develop successful new product lines through alliances rather than full-out mergers, this model might become more appealing in the future, MacDuffie says.

​In a merger, finding synergies is a critical factor for success. “The fact that PSA has done a good job taking over [German automaker] Opel is a good sign that they have some skills in that area,” says MacDuffie. “And there is a little bit of product-line differentiation. Europeans don’t have Jeeps, big SUVs and pickups which provide high margins and profits that kept Chrysler out of trouble. On the other hand, Fiat Chrysler covers a lot of mass market segments, and so do PSA and Opel.”

​PSA at present does not have have much of a presence in the U.S., and “now they’ll have access to Chrysler dealers, and also a nice mix of overlap and differentiation that at least on paper looks promising in terms of making something good out of this,” MacDuffie says.

“Not only must [automakers] remain competitive in traditional product segments, but they are facing a massive and increasingly global shift in what consumers buy.” –Paul A. Eisenstein

​Still, he points out that it’s not so simple for a Chrysler dealer in the U.S. to start selling Citroëns just because they are under the same ownership structure: “Fiat sales through FCA dealers in the U.S. haven’t been great,” he notes.

Leadership Challenges

Of course, there is much still unknown about the PSA-FCA merger, which was set in motion with the signing in December of a memorandum of understanding, but which may not be completed until late 2020 or early 2021.

“The number-one question I would have is about the leadership there that will make it successful, because what’s needed is a very special kind of leadership,” says Wharton emeritus management professor John R. Kimberly, whose consulting portfolio has included work for Toyota. “The challenge is how you make or help two companies that have been competitors, and therefore have very negative perceptions of each other, all of a sudden be in love with one another. That’s a caricature, obviously, but when you look at the history of mergers of any sort you always run into this problem of how do we know who we are, and what is this new company? We have to push aside our previous perception of the other and jump into the hot tub together.”

Looking back on the Fiat-Chrysler merger, “it was a disaster on the front end,” Kimberly says, “and over time it was [Fiat CEO Sergio] Marchionne, who had the vision and force of personality to be sure the merger worked, to put the right kind of pressure on the right kind of places. It’s leadership.”

And then there is Carlos Ghosn, the former Nissan chairman who fled Japan while awaiting trial on charges of financial misconduct. He has denied the allegations and is now a fugitive from justice. Ghosn’s leadership is a case study that promises to be examined for meaning for years to come.

“He kept Renault, Nissan and Mitsubishi together through the type of leadership he exercised. And that obviously hasn’t ended well for reasons that are being hotly and publicly debated,” says Kimberly. “Did Ghosn overreach, or was he sabotaged by a Japanese cabal? So, in the post-Marchionne era at Fiat-Chrysler, how will the complicated cross-national, cross-cultural leadership challenge be met?”

In this, the PSA-FCA merger is fortunate to have PSA chairman and CEO Carlos Tavares, says Eisenstein. “One of the great things is, if Tavares continues to operate as he has, they’ll have one of the best CEOs in the industry,” he says. “He is truly a car guy in the classic sense, with gasoline in his veins. He races many weekends of the year; he is a serious driver; he has a collection of old and new cars. He is a real powerhouse. When he came into PSA, it was in absolute collapse. The founding Peugeot family finally had to sell off their controlling interest, and within a year he had this thing humming.”

More recently, he took the troubled Opel operation that the company bought from GM, “and while Tavares set a three-year target for operating in the black, they were operating in the black in barely 12 months” — its first profit in nearly two decades.

Tavares, Eisenstein says, is “someone who understands automobiles, but is also a tremendous businessman with a sense of what it will take to turn a profit in an increasingly competitive industry in the face of the massive transformation they are going through.”

“The number-one question I would have is about the leadership there that will make it successful, because what’s needed is a very special kind of leadership.” –John R. Kimberly

Low Visibility Ahead

The PSA-FCA merger announcement came with the pledge that no plants will close and no jobs will be lost, though many analysts and industry observers are skeptical. Also not clear is whether all 12 brands of the combined company will survive. And there are potentially other devils lurking in the details.

Before judging the merits of the merger, “I’d want to see if there are things [the combined PSA-FCA entity is] doing that do in fact accelerate this company into being in a good position for the future,” says MacDuffie. “If Fiat Chrysler continues to not do much with electronic or autonomous because they have other profitable lines right now, I would see that as less promising than if it is helping both entities advance in that way. Some of the details about manufacturing will probably matter. They still have to get approved by various governments. Any plant closures or setbacks for core manufacturing jobs are politicized and are being closely watched all over the world now.”

Also significant, MacDuffie says, is whether this ends up being a merger of equals as it has so far been portrayed. It’s sometimes hard to tell ahead of time how it will pan out. He cites the doomed merger between Daimler-Benz and Chrysler in 1998 as a case in point. “Whatever DaimlerChrysler said, it became clear Daimler’s attitude was, ‘We’re in charge here.’ So, what will the governance be? Allowing a little bit of independence from Renault in the Nissan agreement was looking like a positive thing, and right now it’s looking more like a negative.”

The dilemma: Integration is where the gains come from, but integration takes time and can be constraining.

“How much they forcibly try to integrate versus allowing independence is a balancing act,” says MacDuffie. “Perhaps there is some sweet spot – you can’t say what it is, but more often you can see when they miss it.”