Fiat Poised to Post Loss as Marchionne Sets Survival Strategy
Feb. 25 (Bloomberg) -- Fiat SpA Chief Executive Officer Sergio Marchionne says his company, Italy's largest manufacturer, is in a Darwinian battle.
``Species go through a relentless effort to fit with the environment,'' Marchionne, 52, said at an Oct. 13 conference in Florence, Italy. ``The struggle for survival never stops.''
Fiat, founded 106 years ago in Turin, is limping from credit line to credit line as costs outstrip sales. The flagship car unit is unprofitable, leading to 12 straight quarterly losses totaling 8 billion euros ($10.6 billion). On Feb. 28, Fiat may post a 400 million-euro loss for the most recent quarter, according to a Bloomberg survey of eight analysts.
Since he became CEO in June, Marchionne has fired half-a- dozen managers, including the head of Fiat Auto SpA last week. At the same time, he extracted $2 billion from Detroit-based General Motors Corp., ending a four-year alliance. Marchionne hasn't revived sales, or a stock that has lost three-quarters of its value in four years.
``The GM agreement was stuff for lawyers,'' says Corrado Berlenda, who oversees the equivalent of $850 million, including Fiat shares, at Euromobiliare Asset Management in Milan. ``Auto is a question of dealing with industrial problems that should have been dealt with years ago. That is the hard part.''
Fiat, Europe's largest automaker 16 years ago, now has just 7.6 percent of Western European car sales. Rivals, such as Toyota Motor Co., which is based in central Japan's Aichi prefecture, are gaining market share. In Italy, Fiat's market share has fallen to 28 percent, from 60 percent in 1986.
Series of Flops
The company, whose brands also include Alfa Romeo sports cars and Lancia sedans, hasn't had a top-selling European model since the compact Fiat Punto in 1997.
Instead, it has had a series of flops, including the medium- sized Stilo and Bravo and the Multipla van.
Shares of the company, founded by Italy's Agnelli family in 1899, plunged as losses mounted. They closed at 5.76 euros yesterday. Worth 16 billion euros at its height in 1998, Fiat now has a market value of 5.4 billion euros.
Since 2003, Fiat has eliminated 12,000 jobs and sold 10 billion euros in shares and assets, including Toro Assicurazioni SpA, an insurance company. Job cuts and plant closures helped return Fiat's CNH Global NV agricultural unit, second worldwide behind Deere & Co., to profit last year. Marchionne has said that Fiat's Iveco SpA truck unit, second in Europe to DaimlerChrysler AG, is also profitable.
`Needs to Sell Cars'
What Fiat needs to do now is to produce cars that consumers want to buy, says Paolo Wenk, who manages $400 million in assets at Banco di Sardegna in Milan. Fiat Auto accounts for 40 percent of the company's sales.
``Fiat has sold what it could sell, it got the GM cash, now it needs to sell cars,'' Wenk says. ``Fiat cannot get the next two or three models wrong.''
Even with 15 new or redesigned models last year, Fiat only sold 39 more cars in Western Europe, its largest market, than in 2003, bringing the total to 1,055,962. Wolfsburg, Germany-based Volkswagen AG, Europe's largest carmaker, sold 2.6 million cars in the region in 2004.
Fiat will introduce three large models at the Geneva International Motor Show next week: the Fiat Croma station wagon, the Alfa Romeo 159 sedan and the Alfa Romeo four-wheel-drive Brera coupe. In September, it will start selling a remodeled Punto, its Fiat model that is Italy's best-selling car.
The $2 billion agreement last week with GM, the world's largest automaker, put an end to an alliance formed in March 2000, when GM bought a fifth of Fiat Auto and Fiat got the right to force GM to buy the rest from Jan. 24 of this year.
Marchionne since then has taken charge of Fiat Auto, ousting Herbert Demel, and regrouped the unprofitable Maserati luxury brand with Fiat's Alfa Romeo. He hired Karl-Heinz Kalbfell, 55, who worked for 27 years at Bayerische Motoren Werke AG, the world's second-largest luxury carmaker, to run the two. Modena, Italy-based Maserati had been part of Ferrari SpA, which Fiat controls with 56 percent.
The two moves are expected to boost Maserati and Alfa Romeo sales, while making Ferrari more attractive for an initial share sale, says Roberto Brasca, head of equities in Milan for Anima SpA. It manages $8.5 billion, including Fiat stock. Fiat hasn't commented on its plans for Ferrari.
Ferrari, whose models include the F430 and the 660,000-euro Enzo, sold 4,900 cars last year and had sales of 1.5 billion euros. Fiat and Ferrari Chairman Luca Cordero di Montezemolo today will present the company's Formula One car for the 2005 season in Maranello, Italy, where the company has its test racetrack.
Designers of BMW Mini
Marchionne on Feb. 21 hired Ferrari's Frank Stephenson to head the design of the Fiat, Lancia and commercial-vehicle brands. Stephenson, 39, drew up plans for Ferrari's F430. With Kalbfell, he also worked on Munich-based BMW's new Mini model.
Marchionne says market share may decline this year as the company cuts discounts and promotions. Fiat has said it sold some cars at a loss to protect market share as recently as 2003.
``Fiat will be a challenge for Marchionne, but the company needed someone like him,'' says Alessandro Frigerio, who helps manage the equivalent of $621 million, including Fiat shares, at Pigoli Consulenza SpA in Milan. ``He's shown in the past he could handle difficult situations. He's the right man in the right place.''
The extra yield, or spread, that investors require to buy Fiat's bonds instead of safer government debt has narrowed since Feb. 10, according to Unicredit Banca Mobiliare prices on the Bloomberg, indicating buyers perceive a reduced risk in owning the company's debt.
Turnaround Track Record
The spread on Fiat's 1.7 billion euros of 5.75 percent bonds due in 2006 tightened by 42 basis points to 1.94 percentage points, the prices show.
Marchionne previously was chief executive at Geneva-based SGS SA, the world's largest goods-inspection company. He cut jobs and expenses in most of its 850 offices and more than halved the number of management layers.
Under his tenure, shares of SGS, whose businesses range from grading gold samples to certifying potato-growing standards, more than doubled. SGS returned to profit in 2002, Marchionne's first year there, and net income doubled to 227 million Swiss francs ($194 million) in 2003.
Marchionne also tripled net income at Basel, Switzerland- based Lonza Group AG, the world's No. 3 maker of drug ingredients, of which he's still chairman. Lonza's profit rose in each year Marchionne was CEO from 1997 through 2001.
No More `Easy Promises'
At Fiat, where he's the fifth CEO since 2002, Marchionne plans to return the company to profit in 2006, with net income of 500 million euros after a loss this year, he said in January. The auto unit will become profitable in 2007, he said.
Marchionne, a Canadian-educated Italian, is a refreshing change, says union member Giorgio Caprioli.
``The style has changed, becoming much more direct and careful not to make easy promises that can't be kept,'' Caprioli, secretary general of the Fim metalworkers union, said at a Feb. 3 conference of Fiat union representatives in Turin.
Marchionne's family moved to Canada when he was 14. He has a law degree from the Osgoode Hall Law School at York University in Toronto and a master's in business administration from the University of Windsor in Canada. He also worked as a chartered accountant in the 1980s in Canada for auditing firm Deloitte & Touche LLP.
`Do the Impossible'
Marchionne launched into his parallel between Charles Darwin's evolution theory and capitalism at the Oct. 13 Florence conference, whose theme was ``Business Renaissance: Storms Are Not Forever.'' First, he apologized to a member of the clergy in the room filled primarily with chief financial officers, analysts and executives at the XXXV World Congress of International Association of Financial Executives Institutes.
He included in his slide show a series of photographs depicting the face of a monkey gradually transforming into that of former U.S. President Bill Clinton, saying ``I think these come from the Republican Party.''
Fiat failed to adapt to increased competition and fell to sixth place in Europe last year. ``Fiat Auto allowed that to happen,'' Marchionne said. ``One or more leaders have fallen asleep at the switch.''
Then turning back to Fiat Auto, he said that if he couldn't return the unit to profit by 2007 he should be fired.
``At Fiat, there's a core of people who for years had to put up with bad leadership,'' he said. ``The bedrock of recovery at Fiat Auto is the ability of these people to do the impossible.''
In my opinion, the bottom line is that if the new cars don't sell, Fiat is done for.