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Fiat Auto Free To Concentrate On Cars With Chrysler

Chrysler Profits Will Compensate For Big Europe Losses
Brazil, Marchionne’s Ambitious Plans Raise Doubts

As Fiat Auto starts its new life as an independent car manufacturer its short-term prospects look shaky, but the acquisition of Chrysler may be an unlikely but crucial factor compensating for its chronically loss-making European operations and creating a formidable global player.

CEO Sergio Marchionne’s long-term plans for Fiat/Chrysler are acknowledged as impressive but risky.

On January 1, the Fiat Group split in two. Fiat Industrial inherited Iveco trucks and CNH agricultural equipment.  Fiat SpA took the rest, including the Fiat, Ferrari, Maserati, Lancia and Alfa Romeo brands, Magneti Marelli components and engine making-subsidiaries.

After the historic split, CEO Sergio Marchionne, who retains control over both companies, said Fiat could raise its 20 per cent stake in Chrysler to over 50 per cent this year, if the formerly bankrupt U.S. company is able to float its stock on markets in 2011. Fiat has already agreed to increase its stake in Chrysler to 35 per cent from 20 per cent by providing technology and meeting sales targets. Last week, Fiat announced it had met the terms for the first five per cent increase, raising its stake in Chrysler to 25 per cent.

Although Chrysler has barely emerged from its near death experience with a bit of help from the U.S. and Canadian governments, the U.S. company is seen by some experts as an important new source of profits.

According to Bernstein Research analyst Max Warburton, Fiat’s core auto business looks precarious with huge European losses and what he called a “dangerous” dependence on Brazil.

€800 million Europe loss
“While Fiat’s U.S. affiliate Chrysler should make profit progress in 2011, can Fiat Auto deliver any improvement? We doubt it – in fact we think the risks are on the downside. We believe Fiat Auto lost almost €800 million in Europe in 2010, with Brazil making a profit of €1.4 billion,” said Warburton.

Warburton said Brazil’s car sales are peaking, and new entrants like Hyundai and Renault are costing Fiat market share.

“With Fiat’s small car focus and minimal gross margins, the problems are more complex and intractable than just excess capacity and inflexible labour (in Italy). Clearly Fiat management want to increase the Chrysler stake and move towards consolidation so that U.S. margins can subsidise European losses, but this may take some time to complete,” Warburton said.

Full merger
Citigroup Global Markets auto analyst John Lawson said the alliance with Chrysler could end in a full merger, and reckons that Fiat may well sell off some assets along the way to smooth progress, including Magneti Marelli and the Ferrari and Maserati subsidiaries. Lawson said the pace of change is likely to be slow, but didn’t say how long it might take to complete a merger.

Lawson described Marchionne’s long term growth plans for the two companies as extraordinarily ambitious – Fiat Auto sales of 3.8 million in 2014, that’s double 2009’s sales, with Chrysler contributing enough to make the total six million – and this includes 34 new models and 17 model refreshments. Even Alfa Romeo is charged with reaching 500,000 sales in 2014, compared with about 120,000 this year.

Lawson said this implies sales growth of 20 per cent in 2012 and 30 per cent in 2013.

“This rate of growth has never recently been delivered by a mainstream vehicle manufacturer in consecutive years. Unsurprisingly therefore, our forecasts for volumes in Europe and for global volumes are considerably more cautious than the plan. However, we can see that if several of these cross-product efforts can indeed be made to work for consumers in NAFTA and Europe, the shortcomings of the product profiles of Fiat and Chrysler might be permanently rectified,” Lawson said.

“From a Fiat perspective, this means finally getting right the frequently tried attempt to upgrade the mix; from a Chrysler perspective it means almost the opposite; reorienting much of the product line-up towards smaller and more fuel efficient vehicles,” he said.

Going may get hard
The Financial Times’ Lex column isn’t sure whether the plan will work.

“If Mr Marchionne can accomplish a significant fraction of what he has in mind for the car business – sharply lowering the European cost base, improving the company’s weak position in the top end of the market and turning around and eventually taking over Chrysler (just about doubling revenues) – Fiat will be worth substantially more than Industrial (the Iveco/CNH segment). If he fails the car company could find the going hard indeed,” Lex said.

Bernstein Research’s Warburton also expects Fiat to cash in some of the assets like Ferrari and Magneti Marelli, and perhaps even sell Alfa Romeo to VW.

“The sale of Alfa is probably the most significant since it would see the removal of a loss making business in exchange for valuable cash,” said Warburton.

But Warburton remains unconvinced about the viability of the liaison between Fiat and Chrysler.

“While Chrysler is in a better position that we would have ever envisaged 18 months ago, and may be able to make a decent margin by 2012, we remain unconvinced that there are large synergies with Fiat’s small car operations. We continue to see Fiat Auto and Chrysler as two separate businesses, as is still the case with (the) Renault and Nissan (alliance),” Warburton said.


Neil Winton – January 15, 2011

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