Fiat Chrysler (FCA) and Peugeot (PSA) are negotiating a merger that could create a €45bn behemoth or the fourth biggest car manufacturer by number of sales in the world. According to Wall Street Journal, FCA President John Elkann will preside over the new group while Carlos Tavares will be the CEO.

Markets in Milan, Paris, and New York reacted positively to the news, with significant gains in valuation for both the French and the Italian conglomerates. The PSA stock saw its sharpest single-day rise in a decade. The deal would bring under one roof global brands such as Alfa Romeo, Citroen, Jeep, Opel, Peugeot and Vauxhall.

In 2-18 the two groups sold a combined 8,7 million cars, behind Volkswagen, Toyota, and Renault/Nissan, each of whom sold approximately 10 million units. As the auto industry is racing to transition from internal combustion engines to low-emission electric vehicles and the industry braces for an autonomous driving environment, there is a sense in scaling up the size of industrial conglomerates, creating scope for a bigger investment in research and development.

This is the second attempt by Fiat-Chrysler to merge the non-German European champions in Europe, creating a Franco-Italian conglomerate with global outreach. Negotiations for a merger with Renault failed in June after the French government stepped in to frame the deal politically. The French government owns 15% of Renault and wanted to ensure that the merger would not diminish its weight in the new conglomerate. Moreover, Renault was more focused in cemented its longstanding alliance which, at the time, was strained. Therefore, the emergence of the second-biggest car manufacturer in the world was averted.

A merger with between FCA and PSA is equally ambitious and it is likely to meet political, financial and regulatory obstacles.

First of all, the French government owns a 12% stake in PSA, which means the new merger could face similar challenges as Paris seeks a political seat on the board of the new company. But there is an additional challenge, namely that the Chinese government owns an equivalent share of the PSA group. That means that two national industrial policies will have to merge in a global corporate vision amid a global economic slowdown and a Sino-American trade war.Jo