Stellantis Benefits From Scale and Manufacturing Efficiencies As Merger Integration Progresses

Senior Equity Analyst

Richard Hilgert

Stellantis was formed by the merger of Peugeot and Fiat Chrysler, which closed on Jan. 16, 2021. In 2022, chip crisis-affected total unit volume was 6.0 million, while revenue and adjusted operating income were EUR 179.6 billion and EUR 23.3 billion, respectively. Unit sales volume in 2022 makes Stellantis the fifth-largest global automaker behind Toyota at 10.3 million, Volkswagen at 8.0 million, Hyundai/Kia at 6.8 million, and the Renault-Nissan-Mitsubishi alliance at 6.4 million.

Management had targeted about EUR 5.0 billion in annual run-rate cash flow synergies from the merger, 80% of which to be realized by the end of 2024 on a one-time cost estimated at EUR 4.0 billion. Seventy-five percent of the synergies were targeted for technology, platform and product convergences, optimizing research and development investment and manufacturing processes, plus procurement; while all other functions like logistics, supply chain management, quality, and aftermarket account for 18%; and 7% from selling, general, and administrative.

However, management has said that, as of the end of 2022, the firm has already achieved EUR 7.1 billion in cash flow synergies, exceeding the original target two years ahead of schedule. We expect additional synergies to emerge during the next three years. Because it takes between 18 months and three years to develop and launch a new vehicle, widespread adoption of common vehicle architectures and parts across Stellantis' product portfolio has yet to occur.

Stellantis' Dare Forward 2030 strategic plan sets targets for electrification, revenue, and profitability. In 2022, the firm had 23 battery electric vehicle nameplates and sold a total of 228,000 BEVs. Stellantis targets 75 BEV nameplates and 5 million BEV sales volume by 2030, of which management aims for 100% BEV mix of EU passenger vehicle sales and 50% BEV mix of U.S. passenger car and light-duty truck sales. Management targets EUR 300 billion in 2030 revenue while maintaining double-digit adjusted operating margin during the plan period. While we are skeptical of Stellantis' revenue and margin targets, we expect greatly improved results from merger integration.

Business Strategy & Outlook

We have assigned Stellantis a no-moat rating. In general, automotive manufacturers are no-moat companies that participate in a highly competitive industry and make products that are easily substitutable by consumers. Automakers are capital-intensive, causing significant swings in economic profitability on relatively moderate changes in demand, and they experience cyclicality that can destroy economic value for a year or more. Even though the automobile is a modern-day technological marvel that requires enormous engineering talent, complex software coding, considerable regulatory compliance, and immense organizational skill to design, develop, and bring to market, substantial global industry overcapacity (41 million units excess capacity of 124 million units 2021 global light-vehicle capacity according to IHS Markit) would seem to indicate limited barriers to entry despite substantial capital requirements as well as complex regulatory safety and emissions compliance.

Given the industry's highly competitive nature, mass-market manufacturers must consistently and frequently execute in design and development of both product and assembly process. Owing to the competitive landscape, we liken auto sector companies to a swimmer who vigorously treads water with an extra 50 kilograms tied around his waist. That extra 50 kilograms of weight results from substantial light-vehicle overcapacity with only roughly 75% to 80% peak utilization worldwide. As soon as the swimmer stops treading, he immediately finds himself frantically struggling just to get back up to the surface.

Hard-fought market share is won, and temporary economic profits are achieved by three typical routes. First, automakers seek to introduce a radically new design that defines a new vehicle niche (Chrysler's introduction of the minivan in the 1980s and Toyota’s RAV-4 crossover in the 1990s). Second, original-equipment manufacturers race to be the first to market a dramatically differentiated technology (Toyota's introduction of the Prius hybrid in the early 2000s and Tesla’s electric vehicles in the late 2000s). Finally, some firms maintain a younger product portfolio through frequent new vehicle introductions and substantial redesigns. The Japanese in the 1980s and 1990s had a competitive advantage by cutting their time to market in half relative to other manufacturers.

Even though Stellantis enjoys premium pricing with Alfa Romeo, DS, Jeep, and Maserati brands, competitors have been able to achieve the same or better perceived brand value. Wealthier consumers of these products view their vehicles as extensions of themselves and are willing to pay a premium for a machine that exudes a certain image. While Stellantis’ brands represent premium sportiness, rugged off-road capability, and luxury, consumers can easily switch to competitors' vehicles like Audi, Bentley, BMW, Land Rover, Mercedes-Benz, Porsche, or Rolls-Royce. 

In price-conscious, high-volume markets, fickle consumers can switch among competing brands, and quite often, they do. The latest fads, hottest styles, coolest technologies, high-profile recalls, cost of financing, trade-in value, high dependability ratings from consumer publications, and utilitarian needs can all influence consumers' buying decisions. For penny-pinching educated shoppers, dependable transportation at an affordable price is all that's required, and it doesn't matter which manufacturer's vehicle they buy, just as long as it's the best deal they can find. In this instance, consumers can easily switch from Chrysler, Citroen, Dodge, Fiat, Opel, or Peugeot to Buick, Chevrolet, Ford, Honda, Nissan, Renault, Skoda, Toyota, or Volkswagen, then back again.

None

Economic Moat

Stellantis N.V. 

Stellantis NV engages in the design, manufacture, distribution, and sale of vehicles. It offers its products under the Abarth, Alfa Romeo, Chrysler, Citroën, Dodge, DS, Fiat, Fiat Professional, Jeep, Lancia, Opel, Peugeot, Ram, and Vauxhall brands. It operates through the following segments: North America, South America, Enlarged Europe, Middle East and Africa, and China, India and Asia Pacific. The company is headquartered in Hoofddorp, the Netherlands.

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Stellantis NV engages in the design, manufacture, distribution, and sale of vehicles. It offers its products under the Abarth, Alfa Romeo, Chrysler, Citroën, Dodge, DS, Fiat, Fiat Professional, Jeep, Lancia, Opel, Peugeot, Ram, and Vauxhall brands. The company was founded on April 01, 2014 and is headquartered in Hoofddorp, the Netherlands.

AMSTERDAM, June 7, 2023 - Stellantis N.V. (“Stellantis” or the “Company”) announced today that pursuant to its Share Buyback Program (the “Program”) announced on February 22, 2023, covering up to €1.5 billion (total purchase price excluding ancillary costs) to be executed in the open market with the intent to cancel the common shares acquired through the Program and following the completion of the first tranche of the Program as announced on May 18, 2023, Stellantis has signed a share buyback agreement for the second tranche of its Program with an independent investment firm that makes its trading decisions concerning the timing of purchases independently of Stellantis.

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