After Initial Scepticism, Stock Crash, Some Charge To Rescue.
Fiat Chrysler Automobiles’ long-term business plan was received with much incredulity, but as the dust settles experts are wondering how much of it might be achievable, and what are the consequences of failure.
The most common, positive reaction to the plan was “ambitious”, “pretty ambitious” or “extremely ambitious”. But critics like Nomura analyst Harald Hendrikse initially said Fiat Chrysler’s market forecasts were too high, its market assumptions unrealistic, and its profit forecasts unachievable. In short, a dud, and investors agreed.
After CEO Sergio Marchionne presented his plan to raise sales more than two million vehicles by 2018 to about seven million with China getting special attention, investors rushed for the exits, punishing the Fiat share price with a 13 per cent hit on the Milan Stock Exchange by the end of the week.
Marchionne also said earnings before interest and tax (EBIT) will increase from 3.5 billion euros ($4.9 billion) in 2013 to between 8.7 billion and 9.8 billion euros ($12.1 billion-$13.6 billion) by 2018.
Italian sports car manufacturer Alfa Romeo was assigned a leadership role to take on BMW, Audi and Mercedes in the drive for more premium sales with bigger profits. That didn’t sit well when investors considered previous failed plans. Alfa Romeo’s new target of 400,000 car sales in 2018 compares with its sales last year of 74,000. Under a previous ambitious but crashed plan, Alfa was supposed to sell 500,000 cars this year. Jeep was charged by Marchionne with raising sales to 1.9 million by 2018 from around 700,000 now.
With a bit more time to consider the implications, some found merit in the plan.
Richard Hilgert, analyst with Chicago stock-broker Morningstar, conceded that the “extremely ambitious” plan would be difficult to achieve, but felt that overall, the strategy stood a good chance of succeeding, even if some goals were not hit.
“While management may not completely achieve all of their targets, we think Fiat Chrysler will take the overly-cynical critics by surprise in an undeniable upset,” Hilgert said in a research note.
“Given the focus on premium vehicle expansion, moderate penetration in the Chinese passenger vehicle market, and at least a partial recovery from a protracted decline in European new light vehicle demand it’s reasonable and prudent to expect that over the next five years Fiat Chrysler will achieve at least some operating improvement relative to last year’s performance,” Hilgert said.
“Fiat Chrysler’s 55 billion euro ($75 billion) investment over the next five years will result in significantly improved economies of scale and a much more flexible manufacturing base, reducing capital investment for future product changeovers,” Hilgert said.
Hilgert said the overall strategy for Jeep was sound. Alfa Romeo’s target of 400,000 sales by 2018 might look unlikely, but he pointed to forecasts for the premium sector increasing by 1.7 million vehicles between 2013 and 2018 to 6.7 million. Alfa Romeo had a stab at capturing some of that. Hilgert conceded that if the plan for Jeep stumbled over less than expected sales in Europe and South America, this would stymie the Alfa plan, which relies on Jeep success to generate margins for its investment.
This is all too much for Professor Ferdinand Dudenhoeffer of the Center for Automotive Research (CAR) at Germany’s University of Duisberg-Essen, who thinks Marchionne’s plans are going nowhere.
“I don’t believe the numbers and the plan which Marchionne showed us. And it seems to be that also a lot of other analyst’s don’t trust his words. If it was so easy to succeed in the car business, everybody else would do that (go for volume),” Dudenhoeffer said.
Dudenhoeffer said a big weakness in the plan was the question of funding.
“Nobody knows how he will raise the money. That’s the problem,” Dudenhoeffer said.
Milan, Italy-based IHS Automotive analyst Pierluigi Bellini, describing the plan as “quite ambitious”, also wondered how it would be financed.
(Fiat, even before the plan goes into operation, has a big problem with debt, which is said to be costing it about $2.8 billion a year in interest costs. The Marchionne plan sees net debt being cut to less than one billion euros or $1.4 billion by 2018 from nearly 10 billion euros – $13.8 billion – in 2013).
Bellini said the plan to make and sell more Jeeps looked difficult, while a target of 250,000 would be more realistic for Alfa Romeo.
“This is the last chance for Alfa Romeo. If it doesn’t work maybe Volkswagen will buy it,” he said.
Volkswagen has expressed an interest in buying Alfa Romeo in the past.
Would the Marchionne plan work?
“It’s just partially credible. These are very tough targets, and it’s hard to believe the production levels. The best case scenario (for Fiat Chrysler) is that it will not achieve the whole plan, but something in between,” Bellini said.
John Wormald, analyst with British consultancy Autopolis, described the plan as “pretty ambitious”.
“The risks of failure are quite serious, and if targets aren’t met, people will start to ask themselves whether Fiat Chrysler can pull themselves out of the hole. By 2016 or 2017 we will begin to see the signs. Will new products succeed, particularly in the case of Alfa Romeo, and is Jeep really going to develop new markets,” Wormald said.
“It doesn’t help that all the big mass car manufacturers are doing the same thing. Last month Peugeot (of France) in its recovery plan was predicting big cost cuts and growth and moving upmarket. Everybody’s looking for growth; the European market is recovering but it’s not spectacular. I don’t see Europe recovering much or reaching previous levels soon. There are risks in China with the financial structure and worries about pollution leading to calls for curbs on car sales,” Wormald said.
Fitch Ratings describes the plan as posing execution risks, with “ambitious” financial targets, and points out that Alfa has failed to respond to previous resuscitation attempts. Among the targets are increasing U.S. market share to 15.8 per cent in 2018 from 11.4 per cent in 2014, raising share in China to 2.8 per cent from 0.6 per cent. Fitch sees a financing plus emerging in 2016.
“The planned removal of a ringfence around Chrysler’s cash in 2016 following the early repayment of Chrysler bonds (by Fiat) would be a significant step,” Fitch said.
For Morningstar’s Hilgert though, the glass is half full, not half empty.
“We believe Fiat Chrysler’s extremely ambitious 2018 targets are possible but being five-years away from the ultimate goal, it’s extremely difficult for us to say that full completion of the plan is probable.”
But if targets aren’t met, that doesn’t spell failure.
“We believe that the company does not need to 100 per cent achieve all of its targets for the five-year strategy to be deemed a success,” Hilgert said.