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As Fiat Struggles, Could Chrysler Make The Difference?


Fiat’s Huge Losses In Europe Could Be Mitigated By U.S. Profits

The one product they have is the Fiat 500. The rest you can forget about. The new Panda is not a really a big seller overall. If you look at the economy and then the products, we think it will be very difficult for Fiat to breakeven (by 2014)

If Italy succumbs to the financial turmoil generated by the travails of the euro single currency zone, maybe there would be a silver lining to that cloud for Fiat.

What if Italy followed Greece out of the euro, wouldn’t that (after some initial aggravation) offer Fiat a get-out-of-jail card? Fiat, which now owns 53.5 per cent of Chrysler, would get an instant boost to its business plan from what would be a huge currency devaluation, allowing it a massive price advantage as it reverted to the lira, and turning its Italian manufacturing into a huge profit maker at a stroke. Fiat’s Italian manufacturing would become a jewel in CEO Sergio Marchionne’s crown, lending instant credibility to his plan to breakeven in Europe by 2014, rather than its traditional role as a drag on the company which needs to be moved to some more benign location at the earliest opportunity.

The short answer is; no chance, although every day’s shock-horror newspaper headlines suggest the unthinkable could happen.

Italy’s exit from the euro zone is still unlikely, and Fiat will have to find some other way to breakeven by 2014. Few think it has much chance to do that either, given its chronic shortage of new products, and a lack of money to design new ones.

Fiat hasn’t disclosed the extent of its European loses and doesn’t breakdown results by region, but the company lost about $1.4 billion last year there, according to stockbroker Sanford C. Bernstein. This year European losses are said to be a bit less at $1.1 billion. Fiat Europe is effectively kept afloat by profits from its Brazilian operation, which, according to Bernstein analyst Max Warburton, generates about 150 per cent of its annual EBIT (earnings before interest and tax). In Western Europe, Fiat sales, including its Alfa Romeo, Lancia, Chrysler and Jeep brands, fell 11.6 per cent to 724,900 in the first nine months of 2011, according to Automotive Industry Data. Western European market sales overall slipped just under one per cent.

Slash forecasts
Forecasters are scrambling to slash their forecasts for European car sales in 2012 as Europe’s financial meltdown makes the idea of buying expensive things like cars seem like an act of bravado. So this is not an ideal time to declare that a company like Fiat is going to wipe out its losses in Europe.

Fiat has some ace cards though, with Chrysler given the unlikely role as saviour with its return to profitability. Recently bankrupt Chrysler could make the difference between life or death for Fiat. The Financial Times of London’s Lex column put it this way.

“A valiant soul dives in to save a drowning man only to be pulled under himself. Rarely, the initial victim gets his second wind and rescues the would-be saviour. Italy’s Fiat finds itself in the latter position. Having been the only global carmaker willing to take a gamble on Chrysler, it is now clinging to it,” said Lex.

Escape from the euro zone is not likely for Italy, according toProfessor Ferdinand Dudenhoeffer of the Center for Automotive Research (CAR) at the University of Duisberg-Essen, Germany.

Lira won’t return
“I don’t believe Italy will go back to the lira, (German Chancellor Angela) Merkel and (French President Nicolas) Sarkozy will fight against that. Italy really needs a government after (Prime Minister Silvio) Berlusconi that has the ability to bring strength to Italy. It would be a big risk to Italy to go by itself and leave the euro,” Dudenhoeffer said.

Dudenhoeffer doesn’t think Marchionne’s plan to break even by 2014, expressed about six weeks ago, has a chance.

“I don’t believe it. By 2014 Italy will not have solved its problems. Meanwhile there will have to be big cuts in government programmes, increase in taxes and the car market will be weak in Italy. The same is likely to apply in France and Spain and other European countries,” Dudenhoeffer said.

Fiat has been suffering from a dearth of new products in Europe, and the company has been postponing new car launches because buyers are staying away. The one big success has been the fancy little 500 minicar, now on sale in America via a factory in Mexico. Fiat recently unveiled its new Panda, another car the same size as the 500, but aimed at a more utilitarian market.

Citigroup Global Markets described Fiat’s new model programme as a “wilderness” in a recent report, but said it has undertaken a major product rethink after acquiring Chrysler to maximize commonality, economics of scale and plant use. Citigroup analyst John Lawson said in the report that there is potential, with the help of Chrysler’s bigger cars to improve its model mix, while Fiat can help Chrysler produce more fuel efficient vehicles. But the report makes clear that after the current launch of the Panda, the next new product is the Punto in 2014.

Fiat 500, and that’s it
CAR’s Dudenhoeffer isn’t impressed.

“The one product they have is the Fiat 500. The rest you can forget about. The new Panda is not a really a big seller overall. If you look at the economy and then the products, we think it will be very difficult for Fiat to breakeven (by 2014),” Dudenhoeffer said.

He doesn’t warm to the merger of Fiat and Chrysler either.

“It’s a combination which puts two things together that are very weak. Marchionne is a manager who has the ability to buy things for nothing. He bought Chrysler for nothing but hasn’t solved the problem of getting money to make new products. At the moment he is just driving two corporations out of their cash flow but I don’t believe cash flow will be enough in the medium term to invest in new products,” he said.

But Fiat-Chrysler does have supporters out there.

Big changes underway
“From an investor’s perspective, I do think the Fiat we see today will be vastly different than the one we’ll see in 2014. Fiat in Italy will benefit substantially from becoming fully integrated with Chrysler. There is a huge potential for cost savings by combining supply chain management, logistics, and engineering plus increasing the use of common parts as well as sharing architectures. Also, I believe we’ll see the workforce become more competitive, increasing operating efficiency of the Italian operations. So, even if volumes for Fiat Italy don’t materialize as planned I think the automaker stands a good chance of achieving breakeven by the end of 2014,” said Richard Hilgert, analyst with Morningstar Inc of Chicago.

Hilgert also believes Italy will stay in the euro, although to be fair to him, he made that comment two days ago. Dumping the euro and returning to the lira wouldn’t be much of an advantage either because Fiat’s costs wouldn’t change that much, he said.

Milan, Italy-based IHS Automotive analyst Pierluigi Bellini agrees, saying Italian exit from the euro would lead to a rapid spike in inflation of between 10 and 15 per cent, and would imply that the Italian economy was in a mess and that wouldn’t help Fiat either.

Bellini is more impressed with the new Fiat Panda, which is said by some to be vulnerable to competition from Volkswagen’s new small car, the VW Up.

“I’ve seen the Up and it doesn’t impress me too much. Yes it will take something from Fiat but I don’t think the leadership of Fiat (in the small car sector) will be under question,” Bellini said.

Under threat from VW
A report earlier this year from Deutsche Bank said Fiat’s leadership of the European small car segment with a current market share of around 30 per cent, almost three times better than its nearest rivals GM’s Opel-Vauxhall-Chevrolet, France’s Peugeot-Citroen and Renault, was under threat from VW. The bank suggested Fiat could lose up to $430 million in potential profit from Up encroachment.

Bellini doesn’t see much chance of Fiat meeting the breakeven target.

“It will be very difficult. Not many mass car manufacturers, aside from VW, make money in Europe. Marchionne will be betting more on Chrysler than Fiat to make money, with brands like Jeep making big inroads in emerging markets like Russia. Fiat is very weak in those BRIC countries (Brazil, Russia, India, China) except Brazil but it has sell decent volumes in those markets,” Bellini said.

Big Chrysler role 
Morningstar’s Hilgert is also looking to Chrysler to lead the way.

“With Chrysler, the team went to work launching 16 new or significantly redesigned models within 18 months, making for a spectacular turnaround. Now the team will focus its attention on integrating the entire Fiat/Chrysler group. The integration process will take at least through 2014. In the meantime, Marchionne knows that an automaker cannot cost cut its way to prosperity and Fiat will have to have good product to sell in Europe to be successful,” Hilgert said.

Neil Winton – November 15, 2011

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