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The disruption underway in the automotive industry, arising from new technologies and competitors, could trigger a wave of mergers among big car companies.

The automotive industry is one dominated by giants, with just four companies turning out around 10 million vehicles a year. Large companies like VW, Toyota and GM benefit from economies of scale, which is particularly important in the mass market segment. Now, many automotive executives believe that getting even bigger will help them survive in a shape-shifting industry. New competitors such as Tesla and tech firms including Google, Apple and Uber are certainly raising the stakes. “Everyone agrees on the rationale for big mergers, even if execution of deals has been extremely difficult up to now”, says an industry adviser.

Hard lessons from the history of automotive mergers, such as Daimler’s ill-fated acquisition of Chrysler in 1998, give some industry leaders pause. And yet General Motors’ recent move in the opposite direction – selling Opel to France’s PSA Group – has sparked renewed interest in consolidation. The trend, this time around, is to merge not so much in order to gain volume, but to focus on profit, which was a primary reason for GM’s selling Opel.

Various rumours are circulating as to who might merge with whom. For example, it was speculated that a mega-merger of GM and Italy’s Fiat Chrysler Automobiles (FCA) could form. The thinking is that with the American company dropping its loss-making European business, it might be interested in replacing it with a profitable one, i.e. FCA. The Italian firm’s Chief Executive, Sergio Marchionne, is a proponent; however GM CEO Mary Barra has not signalled interest.

There has also been talk of Volkswagen making a move for FCA. One motivator, Marchionne suggested, is the recent growth of rival PSA after it acquired Opel. VW could also be motivated by a desire to strengthen its position in the US following the diesel-emissions scandal. “FCA’s Ram trucks are hugely profitable in America and the Jeep brand is resurgent worldwide”, The Economist notes. Such a deal would not be of much use to VW in Europe, however, and it is not the only option. Acquiring Ford, for example, would better serve its American ambitions.

Regardless of which carmakers are involved, there are good reasons to form mega-mergers. Marchionne points to duplicate investments in kit, such as similar engines and gear boxes, which waste resources that could otherwise be returned to shareholders. Other executives say these funds should go into emerging automotive technologies. Still others favour loose alliances, such as that of Renault and Nissan, over full-scale mergers.

Mergers could stall, as automotive executives are generally risk-averse. But the industry will have no choice but to adapt to a landscape of electric and self-driving cars, and shift from selling machines to offering transport services. Software and electronics will only increase in importance. Absent drastic measures, carmakers run the risk of being swallowed up by the technology giants battling for the future of mobility.

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