FIAT
Pixabay/ Jana V.M.

Italian automobile giant Fiat Chrysler and PSA, the maker of Peugeot and Citroën cars, said on Wednesday that they are in talks for a merger that would create Europe's largest and the world's fourth largest carmaker. PSA's board has already approved the merger.

Both the companies issued almost identical statements Wednesday confirming the development. If the deal falls in place, it would create a $50 billion company. News of the possible merger lifted investors' sentiment, which saw Fiat's share rallying 9% in early morning trading in Milan, while PSA's stock price jumped almost 6% in Paris.

Both the companies in the respective statements said that the aim is to create one of the world's large automobile companies to tackle a range of technological and regulatory challenges that is being faced by the global automobile industry. The announcement from Fiat comes a day before the company reports its third quarter results.

PSA

Automakers across the globe are facing a lot of challenges that includes tariff war and stiff competition for developing electrical vehicles. Both Fiat and PSA have been one of the biggest sufferers in this regard and a possible merger could somewhat release the pressure for both the companies.

President Donald Trump's tariffs have been hurting all major automakers with operations in the United States for more than a year now. The slowdown in China has been another major cause of concern for automakers in recent times, given that it is the largest market for new car sales. New car sales in China dropped almost 11% lately, owing to a weakening economy coupled with bitter trade relations with the United States.

China angle

Moreover, both Fiat Chrysler and PSA lack a strong presence in China and also are far behind in the race to develop expensive electric cars. Fiat has been long trying to go for a merger with a prominent global giant. Earlier in May, Fiat Chrysler initiated a merger proposal with French automaker, Renault. The deal if not of this scale would have created an automaker larger than general Motors. However, it quickly back out citing reasons that France's political scenario would not currently allow such a collaboration to proceed successfully.

If the deal falls in place, the new entity will create the fourth largest automobile company in the world, behind Renault-Nissan Alliance, Volkswagen and Toyota.