Shares of Italian-American automaker Fiat Chrysler Automobiles (NYSE:FCAU) jumped more than 5% in pre-market trading in New York on Wednesday morning. But the rally only lasted a little while: The gains were gone before the market opened.
The catalyst for the jump was a report in the Milan-based Il Giornale newspaper suggesting that Chinese automaker Guangzhou Automobile Group (NASDAQOTH:GNZUF) was preparing an offer to buy a controlling interest in FCA. That report drove a surge in buying interest, one that just as quickly abated when a Guangzhou Auto spokesperson said there were "currently no plans" to make an offer.
Sounds crazy, doesn't it? It's not. Despite the denial, there may have been a basis for the report, and it's a connection that all auto investors should keep in mind going forward. Read on.
Could the Chinese really take over Fiat Chrysler?
While the idea of an unknown-to-most-Americans Chinese automaker buying Fiat Chrysler may seem implausible to many observers in the U.S., traders took the report seriously for good reason: Guangzhou Automobile, often referred to as "GAC", is FCA's joint-venture partner in China.
Get used to the name, as you'll be hearing a lot more about it in the next year or two.
Just last week, GAC Chairman Zhang Fangyou visited FCA's headquarters in Auburn Hills, Michigan -- and he brought some political heavyweights from Beijing with him, including a very senior Chinese government official and China's ambassador to the U.S.
That visit led to some speculation that a deal could be in the works. FCA and GAC have a close relationship. FCA was very late to enter the Chinese market, showing up years after rivals like Ford (NYSE:F) and General Motors (NYSE:GM) had established major presences. But it had a trump card in the Jeep SUV brand -- and GAC, as FCA's joint-venture partner, has helped the company make the most of it.
GAC has made no secret of its desire to expand its relationship with FCA beyond their joint ventures in China. Last month, GAC Motor brand chief Wu Song told a Reuters reporter in Beijing that the company is actively planning to enter the U.S. market. "Chrysler's development in China required our support," he said. "Now for GAC Motor's development in the U.S. we also hope for Chrysler's support and help."
It's payback time, in other words.
Why it could make sense for both parties
GAC doesn't necessarily need to buy Fiat Chrysler in order to enter the U.S. market. GAC has said it will have a big presence at the important North American International Auto Show in Detroit next January. That will quickly put its product lineup on the radar of U.S. dealers -- as well as the U.S. media.
If dealers and customers like its products, it's possible that GAC will be able to establish its brand in the U.S. on its own. But it's also possible that its executives have come to the conclusion that it would be easier to attract American customers if its small and midsize cars were badged as Dodges and Chryslers.
I won't be surprised if GAC turns out to be the partner that FCA CEO Sergio Marchionne has been seeking to build Dodge- and Chrysler-badged cars to replace the outgoing Dodge Dart and Chrysler 200. That's a deal that makes sense. But it's also very possible that Marchionne, who has talked at great length about the need for auto-industry consolidation and his desire to find a merger partner for FCA -- only to be rebuffed by GM and other rivals -- will conclude that a merger with GAC is his company's best available option. Keep an eye on this one.