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Marchionne sees mergers creating new top carmaker

Sergio Marchionne, Fiat’s CEO and the architect of its merger with Chrysler, see potential to form a new No. 1 in the auto industry as carmakers grapple with low returns on the growing amount of money needed to develop new cars.

“There is room to create one guy which will be bigger” from the outset than current leader Toyota, Marchionne said in a joint interview for Bloomberg Businessweek with Chairman John Elkann at Fiat’s Balocco test track in northern Italy.

“The industry needs it, as it’s still very fragmented” for the amount of capital required to develop and produce new vehicles.

Marchionne is one of the few executives to pull off a recent merger in the auto industry. Chrysler’s former partner Daimler sold the U.S. automaker at a loss after culture clashes limited the extent of the savings generated from the combination. Similar issues scuttled plans by Volkswagen Group and Suzuki to work together. The two have been in arbitration for years as the Japanese carmaker tries to force VW to sell a 19.9 percent stake.

Willingness to combine could increase as the auto industry gets even more competitive. Regulators are requiring ever cleaner vehicles, while consumers demand more gadgetry such as voice control, in-car Internet and self-driving features. Those burdens combine with modest growth expectations. IHS Inc. forecasts that car sales will increase globally by about 3.5 percent a year on average through 2017.

The level of competition, capital needs and cyclical nature of the auto industry should force more mergers and acquisitions, said Richard Hilgert, a Morningstar Inc. analyst in Chicago. “These companies strive for economies of scale to keep prices down,” he said.

Fiat Chrysler Automobiles NV, the entity being created from the merger with its U.S. unit, “will be ready to participate” in the consolidation process that might take place over the next five to 10 years “if it makes sense,” said Elkann, 38, who hired Marchionne in 2004, when the Turin-based manufacturer was near bankruptcy.

FCA shares will start trading on the New York Stock Exchange on Oct. 13.

Marchionne and Elkann said FCA, the world’s seventh largest automaker, doesn’t need a deal and will look opportunistically at combinations with peers that have operations outside Europe’s overcrowded car market. Neither identified likely participants in the industry’s consolidation.

Fiat premiered the Fiat 500X crossover at the Paris auto show last week. The model, which shares engines, transmission and other key parts with the Jeep Renegade, is an effort to show that the combination has the firepower to compete with larger global rivals like VW and General Motors Co.

Even without a deal, Fiat says it aims to climb to sixth place in the global ranking by expanding sales with vehicles like the Renegade and a series of new Alfa Romeo models. Fiat Chrysler has said it will deliver 7 million cars in 2018, compared with last year’s 4.4 million. That was less than half  Toyota’s sales.

Elkann, who also runs Exor — the holding company of the Agnelli family, which founded Fiat and still owns 30 percent of the company — plans to back the carmaker for the long term. “I’m not a seller,” said Elkann at a separate meeting in his Turin office, which was previously occupied by his grandfather, former Fiat Chairman Gianni Agnelli. The family’s stake could be diluted in a deal “if there will be the case to make the company stronger.”

Fiat Chrysler’s board will meet at the end of October to evaluate the company’s finances for its  €48 billion expansion plan. If fresh capital is needed, Elkann said he’s ready to support the carmaker’s implementation of its five-year plan, which will be Marchionne’s swan song. “I’ll undoubtedly do something else” after 2018, Marchionne said. “I am not going to do any more turnarounds. I’m done.”