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Could Chrysler Be The Making Of Fiat Auto?

Chrysler Product Programme Looks Stronger; It’s Generating Cash Too

While some investors were contemplating the prospects for Fiat Industrial, others were trying to see what life would be like at the car making company, shorn of the protection provided by truck and tractor profits, and newly twinned with Chrysler.

Some were saying that recently bankrupt Chrysler, far from being a drag on Fiat, might be its long-term saviour.

In a report, Bernstein Research analyst Max Warburton asked the question “Fiat Auto – is it worth anything”, came up with the reply, “Yes – thanks to Brazilian and U.S. profits”.

Bernstein said that Fiat Auto may not have made a profit in Europe since 1990, although a bit of black ink may have been generated in 1997.

“Fiat Brazil, by contrast is highly profitable, although historically volatile business. Ferrari is a valuable cash generator. Chrysler’s future is uncertain, but there are strong signs that post Chapter XI (bankruptcy), and with a strong pickup truck franchise, it can be significantly profitable again. We’re increasingly convinced that if Chrysler’s turnaround works, Fiat will move to a 51 per cent stake early and will consolidate Chrysler’s earnings at the new Fiat Auto. U.S. pickup profits and Brazilian profits can subsidise European losses,” Bernstein said.

Luca Ciferri, reporter for Automotive News in Europe agrees, as he wondered how Fiat will finance its €16 billion investment programme over the next four years on the way to increasing sales to 3.8 million in 2014 from two million this year.

“The prevailing view is that Fiat is saving a badly struggling Chrysler, in which Fiat has management control and a 20 per cent stake. But I wonder if, after the spinoff, the opposite might happen. Could Chrysler save Fiat?” Ciferri said.

According to Ciferri, Chrysler’s product pipeline for the next couple years is broader than Fiat’s, Chrysler is generating cash flow even in a still weak U.S. market where it sells an ageing product range, while Fiat is burning through roughly €150 million cash a month. Ciferri also said Chrysler has a good relationship with the United Auto Workers union which would be useful if it needed to increase production quickly if there is a surge in demand.

At a meeting with U.S. dealers in mid-September, Fiat CEO Sergio Marchionne talked about new products in the Chrysler pipeline. These included the new Chrysler 200, replacing the Sebring, the new Dodge Durango, a reworked Jeep Wrangler, and an eight speed automatic gearbox for the redesigned Chrysler 300.

Deutsche Bank was also wary of the prospects for Fiat Auto after it was separated from the industrial companies, although overall it felt the move was a good one.

“We continue to see the de-merger as the right step for Fiat shareholders, and note that Fiat SpA has to immediately tackle productivity/profitability problems in its European business, given that a strong cash generative business (Fiat Industrial) will not support the mother company from 2011 onwards anymore,” Deutsche Bank said.

(Fiat SpA will hold Fiat’s car assets, its parts and engine segments).

Bernstein’s Warburton points out that Fiat won’t make the mistake that Renault made when it set up its alliance with Nissan.

“Fiat clearly struck a better deal with Chrysler than Renault did with Nissan – the latter is stuck at 44 per cent and can’t consolidate. While a consolidated Chrysler would result in huge minorities, it would also allow U.S. profits to be added to Brazilian profits, compensating for European losses – and give Fiat a good claim on Chrysler’s cashflow in due course,” Bernstein said.

Neil Winton – September 29, 2010

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