Fiat Chrysler and Peugeot maker PSA have struck a binding deal

Fiat Chrysler and Peugeot maker PSA have struck a binding deal to create the world’s fourth biggest carmaker, and now face the challenge of winning over regulators and delivering on a pledge to slash costs without closing factories.

Both tasks are likely to prove difficult, as two of the industry’s oldest dynasties try to combine Europe’s second and third biggest car manufacturers under the gaze of politicians and trade unions who have vowed to resist any move to cut jobs.

Success is vital to help both companies cope with a slowdown in autos demand and the cost of making cleaner vehicles to meet tougher emissions regulations.

In a sign of the pressures on the wider industry, Sweden’s Volvo AB (VOLVb.ST) agreed on Wednesday to sell its Japan-based UD Trucks business to Isuzu Motors (7202.T) for about $2.3 billion and share technology to help cut costs.

France’s PSA (PEUP.PA) and Italian-American Fiat Chrysler Automobiles (FCA) (FCHA.MI) announced a preliminary deal six weeks ago for an all-share merger that would create a company worth about $50 billion and unite brands such as Fiat, Jeep, Dodge, Ram and Maserati with the likes of Peugeot, Opel and DS.

The terms were little changed in the binding deal announced on Wednesday, including a target to cut costs by 3.7 billion euros ($4.1 billion) a year without closing factories.

However, analysts said the effective premium being paid by PSA to achieve the 50-50 split was slightly lower.

The companies sold a combined 8.7 million vehicles last year, but have potential manufacturing capacity of 14 million vehicles, according to forecasters LMC Automotive.

They have yet to say precisely how they plan to tackle that potential excess, and which car platforms - or underlying vehicle structures - they will focus on, only detailing that most production would be concentrated on two platforms.

NordLB analyst Frank Schwope said big challenges lay ahead.

“The merged group will have to make massive savings and probably also close plants, even if the CEOs’ choice of words is different,” he said, adding large investment would be needed as both PSA and FCA are “currently lagging far behind the competition in terms of technology and product range.”

The finance ministers of both France and Italy welcomed the deal, but also said they would closely monitor any impact on jobs in their respective countries.

The merged company will employ around 400,000 people worldwide, and unions have warned they will resist job losses.

FCA said it would meet unions on Friday to discuss the deal.

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