Sergio Marchionne gambles big-time to acquire Chrysler.Now his bigger problem is Fiat
SERGIO MARCHIONNE LIKES t0 beat the odds. When he became Fiat CEO in 2004, the autos division was faced with a €1O billion debt and motoring commentators writing the group’s obituary — but he turned it around. In 2009, with Chrysler heading f0r bankruptcy, Marchionne seized the opportunity to acquire Detroit’s minnow, soon to be rinsed of its crippling overcapacity and punishing union agreements. Again commentators were sceptical, but on 1 February, Fiat published its full-year results, the first incorporating Chrysler. Marchi0nne could indulge himself in a moment’s vindicati0n:
Fiat-Chrysler’s full—year pr0f1ts reached €1.65 billion, compared with €222 million in 2010.
The group hit or exceeded all Miarchionne’s targets for revenues, cperating margin, net debt and liquidity. Chrysler made a massive contribu- tion: it was the big money—spinner along with the group’s Brazilian
operation, which has sewn up 22% 0f the market. Bankruptcy has made Chrysler a leaner, me aner business, which can make m0ney on far fewer car sales. In 2007, Chrysler was bleeding money with 13,% 0f a 16 milli0n US vehicle market; in 2011,
it had 10.5% o fa 13m market, yet posted a trading pr0i:1t 0f €1.3 billion over the seven months its accounts were pooled with Fiat’s. Not had for a company which cost $2 billi0n (plus tech costs and management time) to acquire.
‘Marchiorme had the insight and guts to move For Chrysler in the trough he spotted potential that the rest of the industry failed to see,’ says autos analyst Max
Warburton of Bernstein Research. ‘We all overlooked that massive government intervention would dramatically lower Chrysler’s costs and slash [US] industry capacity. Combine controlled costs with high-priced vehicles like the Dodge Ram pick-up and ]eep Grand Cherokee and you have a profitable business' Chrysler`s positive results paper over the cracks at Fiat’s European operations. While Europe provides 37% ofthe group’s revenues, it accounts for just 6% ofthe operating profits.
The mass market car brands-Fiat, Lancia, Alfa Romeo - dug a half-billion euro hole. ‘In Europe, there are too many brands, there’s too much
capacity, price-cutting has gone bananas-so no-one is making any money,’ says a Fiat source. Ford is in the same boat: its European operation lost $19om in the final quarter of last year, offset by big profits in America.Whereas Detroit’s implosion cut capacity by 13,% to 14.5m units, only two plants in Europe GM’s Antwerp and Eiat’s Termini Imerese facilities-have been shuttered since 2008, although Mitsubishi plans to close its Dutch factory. According to Harbour Report’s manufacturing analysis, GM and Eiat’s actions barely made a dent on Europe`s annual capacity, which still stands at 24.61'1'LAS Marchionne admits, the European industrial machine still needs fixing.
While overcapacity and Euro crises affect all makers, Fiat is espe cially vulnerable because of its reliance on the slumping Italian market,and its addig;ti0n t0 small cars and their ‘small profits,’ to quete Edsel Ford’s withering adage. Warburton estimates that Chrysler earns double Fiat’s average revenue per unit. ‘It’s pretty simple because Chrysler sells bigger vehicles at higher price points; the difference in build cost between small Fiats and bigger Chryslers is not as substantial as the price peint difference'Fiat needs to gain a foothold in the Golf segment, and then push upwards. Citroen has launched the DS brand in an attempt to boost its desirability - and prices- while Nissan’s crossovers are conquering market share across Europe.
Fiat doesn’t need any more brands, but it will almost certainly explore crossover bodystyles like the Qashqai or DS 5, vehicles that ht neatly in the US market as jeeps or Dodges. ‘We are only going to come out of this mess if I have products that are successful for Fiat in segments
where we’ve historically been uncompetitivef Marchionne told topCarbefore Christmas. ‘Look at the Bravo: I think it’s a great car but the Fiat brand has no credibility in that space. I have to go and find a credible basis on which to build
an intrusion into German territory.
a The Americans give me an industrial platform to get that done.’
And the partnerships may not
end with Chrysler: Marchionne promises t0 continue working with Suzuki following the implosion
of its Volkswagen alliance —-“and with others’. He is determined to push Fiat Group to 5.5m units a year to generate full economies of scale — in 2011, Chrysler took it to 4m. One matter high up the in-tray:
Fiat needs a small car partner to replace General Motors for the next- generation Punto. If he pulls off another seismic roll ofthe dice, maybe the car industry won’t be so surprised this time. After all, he’s got form.
