Financial Times Editorial Comment: A Lazarus option

Financial Times Editorial Comment: A Lazarus option
Copyright The Financial Times Limited 2009
Published: May 7 2009 19:21 | Last updated: May 7 2009 19:21
http://www.ft.com/cms/s/0/5b3220d6-3b2e-11de-ba91-00144feabdc0.html

Sergio Marchionne’s racy bid to take control of GM Europe and put it with Fiat Auto and Chrysler to create the world’s joint second biggest carmaker is the corporate equivalent of accelerating from 0-60mph in under five seconds. The history of putting car companies together is littered with models that did not work, but the sector has little choice but to consolidate.

Right now, Fiat is puny. As chief executive, Mr Marchionne returned it to profit in 2006, but that was after six years of losses, and the group still had €5.9bn ($7.9bn, £5.26bn) debt at the end of last year. Thursday’s news of a merger between Porsche and Volkswagen is a reminder smaller carmakers sometimes have to give up ambitions to take over larger rivals, but Mr Marchionne is still wise to seek to turn Fiat into a powerhouse while governments on both sides of the Atlantic feel generously disposed.

Having agreed an essentially cost-free alliance with Chrysler, Mr Marchionne is wooing German politicians to secure state credit guarantees for a Fiat-Opel tie-up. Berlin is setting out conditions for any such deal, including the future of Opel plants in Germany. Though it is appealing, especially in a downturn, for politicians to claim they have preserved jobs and factories, this approach is wrong-headed. They should not try to preserve jobs where they do not belong commercially. If they succeed in doing so, the result will be a group that is less efficient and so a weaker source of employment.

Politicians should avoid becoming emotionally attached to car industry jobs. A cursory glance at the fate of British Leyland should help. It was nationalised in 1975 and in 13 years of state ownership diverted large amounts of public money from better causes. MG Rover, its successor, went bankrupt in 2005.

Instead, the focus for governments in negotiating with carmakers should be distributing the risk so that it is not borne too heavily by the taxpayer. This applies not just to Germany but to other European governments. The UK, which has two Vauxhall plants, and Italy, for whom Fiat’s move is a source of national pride, are bound to be approached for aid if Fiat wins backing from Berlin.

Successful carmakers need to be extremely well managed and to produce vehicles that people want to drive. This requires scale. At the same time, the sector itself needs to shrink: there was over-capacity even in the days when consumers were readier to buy cars. The process will be painful, but for policymakers and car executives it is the only sensible direction of travel.