MOTORSNEWS FIAT/CHRYSLER DEAL:WHEN CORPORATE executives brief Wall Street analysts, they can usually be counted on to put their companies' performances in the best light.
But Fiat’s chief executive Sergio Marchionne rarely minces words. After taking the wheel at the Italian automaker in 2004, he promised analysts he would do “radical surgery” because “we’ve got an organisational structure that needs to be snapped out of its stupor”.
Marchionne purged Fiat’s management, brought in outsiders and ordered snappier car models that helped double Fiat’s market share in four years.
He demonstrated skills as a deal maker, extracting $4 billion from General Motors to end a complex agreement with the Detroit firm. And he persuaded some of Fiat’s biggest lenders to accept common stock in return for slashing Fiat’s debt.
Now the Obama administration is wondering if Marchionne can do for Chrysler what he did for Fiat. Chrysler is struggling to avoid bankruptcy, and the president’s auto task force is weighing whether to pump another $6 billion into the firm.
The Obama administration has decided that Chrysler needs a partner, and it has put its hopes in Fiat and Marchionne. It has given Fiat and Chrysler until the end of the month to negotiate partnership terms.
A linkup could bolster Chrysler’s limited product line with Fiat’s small, fuel-efficient cars while giving Fiat access to the US through Chrysler’s established distribution network.
It would also dovetail with Marchionne’s strategy to expand Fiat and his assessment of the US auto industry. “US car companies have lived in a dream world,” he said. “Their financing activities covered up the sins on the industrial side.”
Fiat might not be among the world’s biggest car companies, but it made money last year. “I made 2.2 million cars last year and made [$1.3 billion], more than GM with eight million car sales,” said Marchionne.
The chances of a Fiat-Chrysler marriage are still remote. If it does happen, Fiat would get a 20 per cent stake in Chrysler in return for giving Chrysler access to Fiat’s line of small cars and international sales network.
Some of Chrysler’s brands would be eliminated and assembly lines retooled to produce Fiat 500s and Alfa Romeos. Chrysler would be better able to sell its most popular brands, such as Jeep, abroad. Fiat would re-enter the US market after a 23-year absence. If the arrangement works, Fiat may ultimately acquire 51 per cent of Chrysler.
Chrysler’s financial needs are immediate, whereas introducing Fiats will take time. Models will need to be reconfigured to meet US regulations and Chrysler assembly lines revamped; Fiats might not appear in US showrooms until 2011.
So Chrysler still needs to persuade unions and bondholders to accept deep cuts. Fiat, whose own debt rating was reduced to “junk” status by Standard Poor’s last week, said it does not plan to provide cash or to assume any of Chrysler’s debt.
"Getting this thing done by the end of this month is a Herculean task," said Maryann Keller, auto analyst and author of Rude Awakening: The Rise, Fall, and Struggle for Recovery of General Motors.
Fiat’s market share in Europe contracted to 5.8 per cent in 2005, from 9.4 per cent in 2000. That’s when Marchionne took over.
Like Ford’s Alan Mulally and Nissan/Renault’s Carlos Ghosn, Marchionne’s experience wasn’t in the automobile business.
A lawyer and accountant, he worked for Deloitte Touche in Canada and then at a packaging company in Toronto. He moved to Europe to run a Swiss chemicals company and then a Swiss inspection and testing service firm, gaining a reputation as a turnaround expert.
He was appointed to the Fiat board and took charge of the company a year later. He led the comeback. The Fiat 500 is a hit, especially in Italy, France and Spain, although sales have lagged in the rest of Europe.
This year, Marchionne told analysts, Fiat is expecting a 20 per cent drop in sales. Compared with declines for US automakers, that isn’t bad. Germany’s “cash for clunkers” programme, which pays people to trade in older vehicles for newer, more fuel-efficient ones, is boosting Fiat sales, analysts say.
The answer to tough times for the auto industry, according to Marchionne, is consolidation or alliances that permit shared investments. He predicts that in 24 months as few as six global auto companies will remain.
“The need to achieve large economies of scale — to share the huge investments in product and market development — will result in a new round of aggregations,” he said.
He told analysts in January that Fiat’s proposed alliance with Chrysler was “a first step. . . By far it’s not the last”.
A partnership with Chrysler could eventually give Fiat a 51 per cent ownership stake in the US carmaker.
Marchionne said that the auto industry’s fate is tied to mass-market vehicles.
“We are going to pay dearly if we delude ourselves that we are operating in the luxury end of the business,” he said. “We have to understand, this is a Wal-Mart industry.”
– Washington Post