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The grille of a Fiat automobile.

Fiat-Renault Deal Would Test Pledge to Keep All Plants Open

May 31, 2019
Despite years of belt-tightening, both Fiat and Renault have spare capacity close to home.

Fiat Chrysler Automobiles NV’s promise to deliver 5 billion euros (US$5.6 billion) of savings in its merger with Renault SA without closing plants looks audacious to some analysts, given the Italian carmaker’s surplus capacity in Europe.

The pledge goes further still, however. Asked Thursday whether job cuts will be needed, Renault Chairman Jean-Dominique Senard -- who would run the combined company as chief executive officer -- said the deal “doesn’t call for human sacrifice.”

The Italian carmaker has confounded experts before, under former CEO Sergio Marchionne. This time, there’s good reason for skepticism. Despite years of belt-tightening, both Fiat and Renault have spare capacity close to home. Almost one-third of Fiat’s global work force of 198,500 was based in Europe at the end of last year, even though the maker of Jeep SUVs and Ram trucks earns almost all its profit in North America.

Renault, which counts on Europe for more than half of sales, leans on its partnership with Nissan Motor Co. -- strained in the aftermath of the Carlos Ghosn affair -- to keep plants such as the Flins facility north of Paris busy. Making matters worse, demand in the region is sagging.

“I don’t know if Fiat will regret their statement, as both companies have plants that are heavily under-utilized in France and Italy,” said Kevin Kelly, a consultant at Frost & Sullivan who worked on Renault-Nissan’s powertrain strategy until October. “As a merged organization, it becomes even more likely that some plants will have to shut.”

Fiat is already facing hard times in Europe. Its Italian car production fell in 2018 for the first time in five years, shrinking 10% to 668,000 units, according to the Fim Cisl labor union. About 15% of the 65,000 workers in Italy were subject to temporary layoffs, more than double the number in 2017.

The company has been moving its Italian factories aggressively away from smaller, mass-produced vehicles. Fiat dropped the Punto hatchback last year, leaving its Melfi plant to focus on the Fiat 500X crossover and the Jeep Renegade SUV. Its Pomigliano site near Naples is slated to make a new Alfa Romeo SUV, though a transfer of the popular Fiat Panda to a plant in Poland has been halted.

By piggybacking on Renault’s product platforms, Fiat could return to making more subcompact and small cars, the mainstream so-called B segment it pared back under Marchionne. But for the no-cuts pledge to work, those new products -- and any electric entries -- will have to succeed.

“Only customers and future product line-up success will determine if Fiat and Renault can keep their existing production capacity in Europe,” said Stefano Aversa, chairman for EMEA of the business advisory and turnaround firm AlixPartners. “The key decisions will be on the allocation of the new, jointly developed cars to existing plants.”

Any suggestion of capacity constraints or workforce reductions would be a red flag to Italy’s populist government and the nation’s labor organizations. Attempts to close plants in France would run afoul of powerful unions there, too. President Emmanuel Macron’s government has already been shaken by the violent Yellow Vest protests over social inequality.

As Renault’s most powerful shareholder, France has made the preservation of jobs and local factories a condition for a merger. The companies must guarantee “industrial” jobs in France and pledge “zero” site closures, French Finance Minister Bruno Le Maire said Tuesday. Still, France’s CFDT union said it saw jobs at risk.

The stakes are high in France, where unemployment is 8.7% and Renault is one of the biggest employers, with 48,600 staff. As well as guaranteeing jobs, a deal might call for Fiat models to be made at the Flins plant. The Nissan Micra is made there, but sales have been disappointing, according to a person familiar with the matter who declined to be identified because the information isn’t public.

In Italy, Deputy Premier Matteo Salvini has said he trusts the deal “will safeguard every job in this country.”

That may be ambitious. According to Kelly of Frost & Sullivan, one carmaking facility in each country is likely to close, and potentially two in Italy.

Fiat’s premium and luxury brands, such as Alfa Romeo and Maserati, are likely to benefit from Renault’s strong commercial networks, said Roberto Di Maulo, head of the Fismic labor union. The Mirafiori plant in Turin could take on production of the fully electric 500 model with components provided by the French, he said.

"The combination of Fiat Chrysler and Renault is a good deal for Italy, even without expanding it to Nissan -- though with the Japanese on board, the benefits could increase further," Di Maulo said.

Fiat last year made 982,000 cars in European plants capable of producing more than double that number, according to LMC Automotive, a consultancy and research group. For Renault, including the Lada and Dacia brands, production was 2.63 million cars, compared with capacity of 3.76 million. As a rule of thumb, LMC reckons utilization rates of 70% to 75% are needed for profitable operation.

Job pledges to win over governments often don’t withstand the test of time. General Electric Co. this month said it plans to cut more than 1,000 positions at its beleaguered French power-equipment business, going back on a promise to create 1,000 net new jobs when it took over Alstom SA’s energy operations in 2015.

And there are ways to pare employment without shutting down a plant. Mirafiori last year made about 30,000 cars, one-tenth the total in its glory days, after shifting to production of luxury Maserati SUVs.

“Closures will likely have to be made equally, with both sides agreeing to shut down one place in France and then the next one in Italy, for instance,” said Frank Biller, an analyst at Landesbank Baden-Wuerttemberg. “It’s not realistic to shut factories in Eastern Europe -- the problems are concentrated at the Fiat brand and it’s out of the question there won’t be job cuts.”

Together, Fiat and Renault made about 8.7 million cars last year, which would put them third behind Volkswagen AG and Toyota Motor Corp. Combined with production from Renault’s existing alliance with Nissan and Mitsubishi Motors Corp., the total would be more than 15 million vehicles a year.

By Elisabeth Behrmann, Tommaso Ebhardt and Tara Patel

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