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Fiat-Chrysler; Best To Start With Low Expectations

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Marchionne’s Underlying Aim To Spin Off Fiat Auto

“Fiat-Chrysler probably won’t make a new car; maybe sell 100,000 to 150,000 500s and lose money on every one”.

The last obstacles have been cleared and Fiat looks set to join up with Chrysler. But anyone who expects the deal to rejuvenate either Chrysler or Fiat looks like being disappointed.

“Small cars won’t save Chrysler; the U.S. government is misinformed about the auto business,” said John Wolkonowicz, Senior Market Analyst, with IHS Global Insight’s North America Automotive Group.

And sales volumes projected will be too small to make much difference to Fiat.

Wolkonowicz expects Fiat sales in the U.S. via Chrysler to reach about 50,000 a year, led initially by the tiny Fiat 500 and followed by the Alfa Romeo MiTo.

Fiat Groupe Automobiles of Italy owns the Alfa Romeo and Lancia brands. It also controls the super car makers Ferrari and Maserati. The U.S. government has cleared the way for Chrysler to become a new company majority owned by the UAW health care trust, 20 per cent by Fiat, with the U.S. and Canadian governments controlling the rest. Fiat would earn an increasing stake, up to 35 per cent, by transferring more of its small car technology to Chrysler, and might eventually own over 50 per cent.

Mark Fulthorpe, CSM Worldwide’s director of European vehicle forecasts, expects Fiat to sell about 25,000 500s and 15,000 MiTo’s a year, and later 20,000 Alfa Romeo Milanos perhaps rising to 40,000 a year. The Milano is slightly bigger than the MiTo and has yet to be launched in Europe.

Not game changing
“Initially, these models will be shipped from Europe, but part of the whole attraction is the hope of building them locally. That’s got to take 18 to 24 months,” says Fulthorpe.

“These volumes are not game changing, and there is the possibility of building Chrysler vehicles on that (Fiat) engineering, but these vehicles are not yet ready to come out of the shoot, it’s going to take some considerable time and will need much effort,” Fulthorpe said.

Adam Jonas, auto analyst with Morgan Stanley in London, doesn’t see the Fiat-Chrysler alliance achieving much, and says Fiat CEO Sergio Marchionne has bigger things on his mind; the eventual spinoff of Fiat Autos from the Fiat Group. The Fiat Group includes Iveco trucks, CNH agricultural machinery, and media companies.

Marchionne’s magic number
Fiat recently lost out in its bid to take control of GM Europe’s Opel and Vauxhall subsidiaries, which would have taken care of about one third of the annual volumes of 5-1/2 to 6 million that Marchionne has said is needed to be a viable producer of mass market cars, and allow competition with the likes of Germany’s Volkswagen and Toyota of Japan.  Chrysler, which produced about 2 million cars last year, combined with Fiat, would have got close to Marchionne’s magic number.

Fiat-Chrysler will probably sell a few 500s, and that will be it.

“Fiat-Chrysler probably won’t make a new car together and won’t do anything significant together, possibly just making the 500 as part of the Obama administration’s plan; maybe sell 100,000 to 150,000 and lose money on every one,” Jonas said.

Jonas said following the failure of the Opel talks, Fiat might seek to do a deal with Peugeot of France (which includes Citroen) and will talk to Daimler, Ford Europe, Tata of India, and BMW.

“I don’t know if he (Marchionne) will succeed. Fiat has limited financial resources. To play you have to pay. In Fiat’s case it can’t afford to pay but still wants to play. That limits it to the most desperate players. It’s not a coincidence that Opel and Chrysler were the two most desperate auto companies in the world,” Jonas said.

Separate Fiat Auto
According to Jonas, Marchionne’s number one priority is to separate Fiat Auto from the Fiat Group.

“Fiat Auto is a potentially unlimited liability (for the Fiat Group). By carving it out into a different entity, he is attempting to cap Fiat Auto as a limited liability.” he said.

CSM Worldwide’s Fulthorpe reckons that Marchionne’s search for volume might involve a deal in which it couldn’t dominate.

“Do they (Fiat) need to the dominant partner? They might be prepared to accept the logic in reverse. If Fiat was in an alliance that helped him gain access to higher scale would he be prepared to do it?” Fulthorpe said.

Fulthorpe said Chinese companies might be interested, but it made more sense for the likes of Opel or Peugeot to ally with Fiat because they were roughly the same size, operating in the same markets, and with the same suppliers.

Long-term industrial logic
Gregor Claussen, auto analyst with Commerzbank in Frankfurt, Germany, liked what he called the long-term industrial logic of a deal between Fiat and Chrysler, with the big bonus of U.S. access for Fiat. He though U.S. buyers would go for the Fiat 500 and Alfa MiTo. A deal with Peugeot made sense to him.

“Without Opel or Peugeot, the goal of 5-6 million units is not reachable in the short-term. However, I would not rule out a closer relationship with Peugeot. Peugeot recently stressed the necessity for cooperation. A merger might be unrealistic for the time being, but a closer joint-venture, why not? Fiat and Peugeot know each other and already produce LCVs (light commercial vehicles) together,” Claussen said.

Claussen also agreed with Fulthorpe, that Fiat could go for a partnership that made sense, even it could not be the dominant partner.

Whatever Fiat’s long-term strategy might be, most agree that Chrysler’s future looks decidedly shaky.

Morgan Stanley’s Jonas warned that Chrysler might not survive in the way Washington plans, if overall U.S. car sales stay at the chronically weak level of around 10 million cars a year.

No demand for small cars
Global Insight’s Wolkonowicz said Marchionne will find it difficult to succeed in the U.S. with a new brand like Fiat, given the quality of the opposition like Lexus, BMW, Mercedes, Infiniti, and Audi, and the fact that little cars aren’t attractive

“U.S. buyers are not risk takers, they like to make a safe choice, and it will be coming up against a lot of well established premium brands. There is essentially no demand in the U.S. for small cars, except when gas prices spike,” he said.

Chrysler’s future is clouded, Fiat’s less so.

“The U.S. auto market won’t improve until mid-2010. How does Chrysler survive until then? It’s hard to be optimistic about Chrysler; much easier to be positive about GM. Fiat may be able to survive without Opel or Chrysler,” Wolkonowicz said.


Neil Winton – June 15, 2009

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