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Fiat Plan For Chrysler Ambitious, Tough To Achieve

Chrysler Must More Than Double Sales, Make Hefty Profits By 2014
Are Fiat Products Good Enough To Make It In The U.S.? “Execution On Every Play Will Have To Be Flawless”

Fiat’s aggressive and ambitious plans for Chrysler, delivered with panache and brio by CEO Sergio Marchionne by all accounts, seems to have surprised investors who although impressed with the vision, think he might have bitten off more than he can chew.

The main points of the five year plan were –

  • More than double Chrysler global sales to 2.8 million.
  • Raise Chrysler’s U.S. market share to 13.7 per cent from 2009’s 8.5 per cent.
  • Roll out a dozen new Chryslers built on Fiat platforms.
  • Pay back debt to U.S. taxpayers.
  • Break-even in 2010 on operating basis, make net income in 2011. Reach EBIT margin of seven percent by 2014.
  • Raise foreign sales to 18 per cent by 2014 from eight per cent in 2008.

These big plans assume some less than certain outcomes. Chrysler market share must improve as the U.S. market stages a gradual recovery, while Fiat must find new foreign markets for Chryslers led by the Jeep brand.

Marchionne conceded that the plan look difficult to achieve.

“Some of you are going to walk out of here sceptical and some of you are going to be downright incredulous,” Marchionne said at the meeting in Detroit.

Fiat’s contribution to the plan is crucial, with half of Chrysler’s cars being built on Fiat platforms by 2014, and 40 per cent powered by Italian engines. Some Chryslers will also be badged as Lancias, including the Chrysler Voyager, Chrysler 300C and Chrysler Sebring. The Dodge Journey will replace Fiat’s minivan. Fiat’s Croma will be replaced by a Dodge, and the Fiat Sedici will be replaced by the Dodge Nitro replacement. Jeep will be the only Chrysler global brand.

Where’s Alfa Romeo?
The little Lancia Ypsilon will appear as a Chrysler. Perhaps surprisingly, Alfa Romeo doesn’t seem to feature much in the plan, with the next generation MiTo doubling as a Dodge in 2013.

Morgan Stanley analyst Adam Jonas was impressed, although Chrysler’s profit targets for 2014 outstripped his projection – 4.7 per cent versus seven per cent, by more than 30 per cent. Jonas believes Chrysler will be a big asset to Fiat.

“We believe the market grossly under-estimates the value of Chrysler to Fiat,” Jonas said.

Bruce Clark, Senior Vice President at U.S. ratings agency Moody’s described Marchionne’s projections as perhaps the most ambitious business plan in automotive history, anticipating an unprecedented pace of change. The plan needed time.

“(Fiat-Chrysler) is being asked to implement change and reach extremely demanding objectives at a breakneck pace – accomplishing in 12 months what would normally take two or more years. We also note that the automotive industry’s track record for harvesting the hoped-for synergies associated with international tie-ups, even under favourable market conditions, is not encouraging,” Clark said.

The Financial Times’ Lex column said Marchionne’s plan looks more attainable after considering Fiat’s own turnaround from a seemingly hopeless dead-end, which he orchestrated.

“Mr Marchionne’s goals for Fiat five years ago seemed similarly demanding. The fact he achieved them has given him some credibility,” Lex said.

Citigroup Global Markets analyst John Lawson expressed surprise at the extent of Fiat’s plan to involve its vehicles in Chrysler’s new products, wondering whether they would be up to scratch for the job.

“We have never regarded Fiat as one of Europe’s best-placed groups in this regard,” Lawson said.

But Lawson saw a big payoff if this plan worked.

“We can see a significant revenue opportunity in this for Fiat if it works. However, there are plenty of wrecks in a history of failed attempts to take European engineering into the U.S. in the past. Engineering costs borne by Fiat, and an exchange rate environment which is also unhelpful, are possible drags to any earnings benefits,” Lawson said.

Moody’s Clark liked the plan’s ambition, but pointed to the big challenges ahead for Team Chrysler.

Flawless execution required
“Coach Marchionne has put together a great game plan. And every member of the Chrysler team knows their assignment. But Chrysler has to cover more ground in less time than almost any other auto company has ever attempted. Execution on every play will have to be flawless, and the company must begin showing clear signs of progress quickly – particularly in the areas of market share, consumer perception of the company, and effective cooperation with Fiat,” Clark said.

Neil Winton – November 20, 2009

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