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Fiat Chrysler Plan Spurned As Unaffordable, Lacking Prudence

“Reality is a lot tougher than powerpoint presentations”.

Fiat Chrysler’s new business plan is more like an over-ambitious wish list than a believable blueprint for the future, according to some auto industry analysts.

The lead role allocated to storied but ailing Italian sports car maker Alfa Romeo was greeted with scepticism. Jeep’s SUV expansion trajectory seemed more believable.

The plan to raise vehicle sales by more than two million by 2018 raises questions about finance. The target for a big increase in profit by 2018 didn’t sit well with the parallel announcement that Fiat Chrysler Automobiles made a loss in the first quarter of 2014.

The call to move Fiat’s small cars upmarket, echoed a similar plan last month from France’s financially-troubled Peugeot. It seems every mass car manufacturer wants to move upmarket to fat profit margins by just saying the word. Only a few, like Hyundai and Kia of Korea, have managed to do it.

Alfa Romeo’s target of 400,000 car sales in 2018 with meaty profits, looks tough to say the least, against the proven competition like BMW, Mercedes and VW’s Audi. Last year Alfa Romeo sold 74,000 cars. Under a previous ambitious but failed plan, Alfa was supposed to sell 500,000 cars this year, with 85,000 in America.

Jeep is charged with raising sales to 1.9 million by 2018 from around 700,000 now. This aspect of the plan was received with a little more enthusiasm, given the global love-affair with SUVs.

But overall the plan didn’t go down well.

“Fiat’s massive plan – and the necessary capital spending and R&D – simply does not look affordable or prudent to us,” said Bernstein Research analyst Max Warburton.

Nomura analyst Harald Hendrikse wasn’t impressed either.

Forecasts too high
“Reality is a lot tougher than powerpoint presentations. We believe Fiat’s market forecasts are too high, its market assumptions are unrealistic, its EBIT (earnings before interest and tax) unachievable, and its investment forecasts too low to achieve the grand plans. Fiat seems to be ignoring the reactions and actions of competitors, again, and the fact that car markets can be cyclical,” Hendrikse said.

Hendrikse thought the Alfa Romeo plan was risible, pointing to the failed previous plan.

“Now we are told that by 2018, we will have eight new Alfa models, four new engines, and 400,000 annual sales, 20 per cent of BMW, for a total of just 5 billion euros ($7 billion). Quite apart from how this investment will be funded, we think the maths simply does not stack up,” Hendrikse said.

IHS Automotive was a bit more positive though.

“Overall, the plan presented has sound strategy. It positions brands logically and consistently with each brand’s history and context. Global resources are leveraged and markets are well-researched and being met with market-appropriate solutions,” an IHS Auto statement said.

IHS Auto liked Jeep’s role.

“The expansion of the Jeep brand, heavily dependent on emerging markets, should coincide with a global increase in demand for SUVs of all sizes,” IHS Auto said.

The timeframe for Alfa’s role looked optimistic, IHS Auto said, and warned about execution risk generally.

“It all comes down to excellent execution. That has not been the case with the most recent launches. (CEO Sergio) Marchionne’s willingness to put the brakes on a program rather than invest capital poorly can serve to keep the company healthy – but it also means that this aggressive plan could see delays in execution and may not meet aggressive sales targets as quickly as outlined,” IHS Auto said.

Bernstein’s Warburton had two words to sum up Marchionne’s plan which sees EBIT increasing 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.

“Yes, really.”

“Much as we admire the ambition and think elements are achievable – Jeep in China, improved European results – it is hard to find conviction on the financing of the plan. Fiat is weighed down with huge debt – almost uniquely in the auto industry right now, burdened by financing costs (said to be about two billion euros or $2.8 billion a year in interest costs) and is only thinly profitable. Its cost of capital is huge. Simultaneously with the launch of the plan, Fiat announced poor first quarter results with weak margins in the U.S., breakeven in Brazil and losses in Europe,” Warburton said.

George Galliers, analyst with International Strategy and Investment, described the Alfa Romeo plan as “lofty ambition which we believe isn’t supported by the overall market size”.

Nomura’s Hendrikse did find some parts of the plant to embrace, but thought, overall, it wouldn’t work.

“Even if we believed Fiat’s plan to be feasible, and there are parts we like – Jeep globalisation, Maserati – the investment needed to re-build Fiat is enormous. Fiat simply does not have the funding to re-invent itself, starting with its 10 billion euro ($13.9 billion) net debt and annual free cash flow outflows,” Hendrikse said.

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