Sunday, 19 November 2017
News Tech

Why Fiat Chrysler Automobiles Isn’t Likely to Sell Jeep to China


Will the next owners of the all-American Jeep brand be Chinese? 

Automotive News reported on Monday morning that the CEO of Chinese automaker Great Wall Motor Company (NASDAQOTH: GWLLY) confirmed that her company is interested in buying the Jeep brand from Fiat Chrysler Automobiles (NYSE: FCAU) and expects to begin negotiations soon. 

FCA’s shares rose almost 7% in the wake of the report on Monday, suggesting that investors are taking the idea seriously. Here’s what we know about the potential deal, and why this deal could turn out to be a lot more complicated than a simple sale of Jeep. 

SUV sales are white-hot in China, and at least one Chinese automakers thinks Jeep would be a perfect acquisition. Image source: Fiat Chrysler Automobiles.

What we know about Great Wall’s interest in Jeep

As Automotive News first reported on Aug. 14, there have been signs that at least one Chinese automaker has been exploring the idea of an acquisition of all or part of FCA. 

That report apparently led Wang Fengying, Great Wall’s CEO, to confirm her company’s interest in buying the Jeep brand in an email to the News. A Great Wall spokesperson clarified that while Great Wall has indirectly expressed its interest in buying Jeep to FCA, it hasn’t yet made a formal offer or met with FCA’s board of directors. 

FCA issued a statement on Monday morning that said much the same thing:

In response to market rumors regarding a potential interest of Great Wall Motors in the Jeep brand, Fiat Chrysler Automobiles confirmed that it has not been approached by Great Wall Motors in connection with the Jeep brand or any other matter relating to its business. 

FCA is fully committed to its 2014-18 plan, having achieved each one of its targets to date and with only 6 quarters left to its completion. 

(FCA’s statement is referring to its current five-year business plan, first presented to investors in May of 2014. FCA plans to present a new five-year plan next spring.) 

So will FCA’s board be willing to agree to a sale of the Jeep brand to Great Wall? I don’t think so. As I said above, I think any deal that happens here is going to end up being considerably more complicated. 

Why FCA is unlikely to sell Jeep by itself

It’s hard to tell exactly how much money Jeep brings in for Fiat Chrysler. FCA reports global financial results for its Maserati luxury brand, but it doesn’t break out financial results for its other brands. And the profitability of specific vehicle models is a closely guarded secret, at FCA and most other automakers. 

But that said, we can look at FCA’s most recent quarterly results and get a pretty good idea as to how important Jeep is to the company’s overall bottom line. 

For starters, we know that FCA’s NAFTA region (the U.S., Canada, and Mexico) accounts for a disproportionate share of its 1.87 billion euros of “adjusted EBIT” (its operating profit minus one-time items) — about 70% last quarter. 

Data source: Fiat Chrysler Automobiles. Chart by author. Chart excludes a loss of about 70 million euros that FCA attributed to “other activities.” 

And we know that Jeep is the best-selling brand in FCA’s NAFTA region, accounting for about 35% of the just over 619,000 vehicles FCA sold in the region in the second quarter. 

Data source: Fiat Chrysler Automobiles. Chart by author. The chart reflects sales data for the U.S., Canada, and Mexico for the second quarter of 2017 as reported by FCA. 

While we don’t know the specifics, it’s likely that Jeep accounted for significantly more than 35% of FCA’s profits in the NAFTA region last quarter. On a per-sale basis, the Jeep brand is almost certainly far more profitable than FCA’s global mass-market Fiat brand. And some Jeep models, like the Grand Cherokee, are among FCA’s most profitable products anywhere. 

Long story short: Without Jeep, FCA would be a lot less profitable, both overall and (almost certainly) in terms of profit margin. 

Jeeps are very profitable products. The Jeep Grand Cherokee is probably one of FCA’s most profitable products anywhere in the world. Image source: Fiat Chrysler Automobiles.

What FCA’s board is likely to tell Great Wall

Unless Great Wall makes a very rich offer for the Jeep brand, I suspect that FCA will respond by saying that Jeep isn’t for sale by itself. Great Wall may want only Jeep, but FCA will want to sell the whole company (with the likely exceptions of the Alfa Romeo and Maserati brands, which could be spun off as Ferrari was in 2015.) 

FCA still lags many of its global rivals in profitability, and it has more debt than most. If U.S new-car sales start to slide (and they will at some point), FCA-without-Jeep could have a tough time staying in the black. It would be likely to fall below breakeven very early in a recession, long before rivals like General Motors (NYSE: GM) or Ford (NYSE: F) start to swing to losses. 

Simply put, I don’t think FCA can afford to sell Jeep, unless the purchase price is very rich — or unless selling Jeep puts it in a position to sell most of the rest of the company to another buyer. We’ll see.

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