Why FCA-PSA merger is no quick fix for their China problem

Fiat Chrysler and Peugeot owner PSA's merger is unlikely to provide a quick fix to their problems in China, as both companies have long struggled to find the right products at the right price for the world's top car market, analysts say.

The companies said on Thursday they aimed to reach a binding deal in the coming weeks to create the world's fourth-biggest automaker by production volume.

But scale alone will not make Italian-American Fiat Chrysler Automobiles (FCA) and France's PSA Group more competitive in a market where they have been slow to adapt to trends and win over consumers, leading their sales to lag far behind foreign rivals such as Volkswagen and General Motors.

PSA does not have enough competitive SUV models, and neither company has enough electric and plug-in hybrid vehicles, or enough cars packed with hi-tech features for Chinese tastes, analysts say.

In a market where 28 million cars were bought in 2018, FCA sold just 155,215, while PSA sold 257,723, according to consultancy LMC Automotive. At the end of September, FCA had a market share of 0.5% in China's passenger car market, while PSA's was 0.6%.

Analysts say they have been squeezed by Japanese and local brands, which have product line-ups better suited to Chinese tastes at cheaper prices.

"Both companies are very home-market centred and have failed to adapt to shifts in Chinese market preferences," said Bill Russo, head of Shanghai-based consultancy Automobility Ltd and a former senior Asia-based Chrysler executive.

"Neither company has recognized and delivered on the trends of shared, connected and electric vehicles," Russo said.

That makes them ill-prepared to deal with further shifts in the Chinese market, which saw annual sales contract for the first time since the 1990s last year and is expected to see another drop this year.

"China's overall market is experiencing a transmission and adjustment period," said Alan Kang, a Shanghai-based senior analyst at LMC Automotive. "It is very hard for these two companies, which do not have enough competitive up-to-date products, to quickly recover with the merger."

FCA has a partnership in China with Guangzhou Automobile Group, which said on Thursday it backed the merger.

PSA has been trying to reboot its operations in China. In September, it said it had hammered out a plan with its Chinese partner Dongfeng Group to restructure their joint venture, slashing costs in the short term and aiming to boost annual sales to 400,000 vehicles by 2025.

A document seen by Reuters in July showed the joint venture planned to halve its workforce and drop two of four shared assembly plants in China.

It was not immediately clear whether FCA and PSA's merger would affect that restructuring. Dongfeng Group also holds a 12.2% equity stake and 19.5% voting stake in PSA.

One banking source told Reuters Dongfeng would be able to sell its stakes, which could help ease the deal's passage through U.S. regulators, given U.S.-Chinese trade tensions.

Dongfeng declined to comment on FCA and PSA's merger plan.