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Scale Of Ambitions For Fiat/Chrysler Worry Investors

But Marchionne’s 2004 Fiat Plans Once Looked Over-The-Top
Alfa Romeo, Back From The Dead, Has Lead Premium Role

“Ambitious is a word that hardly does this plan justice. It implies Fiat overtaking Ford, GM, Renault and the VW brand”

Investors were impressed with the sheer scale of Fiat CEO Sergio Marchionne’s new strategic plan, but had their doubts about its likely success. The plan included targets for Fiat and Chrysler so ambitious that some investors thought them almost laughably unachievable, particularly the lead dog role set for troubled Alfa Romeo.

Marchionne surprised investors by spinning off the tractors and trucks part of the company rather than the cars, but the end result was the same; Fiat Auto will be a separate company by the end of the year.

Another nagging question was also answered; would shaky Alfa Romeo survive? The answer was a “yes” so resounding, that its targets were met with some vigorous head-shaking.

But sceptics quickly comforted themselves with the thought that Marchionne’s targets in 2004 for Fiat were thought to be in cloud-cuckoo land and have been more or less achieved.

The new Fiat car company, New Fiat, is tasked with increasing revenues to €51 billion in 2014 from €26 billion in 2009, while vehicle sales double to 3.8 million.

New Fiat, which will include the cars business, the 20 per cent stake in Chrysler, Ferrari and Maserati, plus the parts of Fiat Powertrain linked with car production, will generate trading profits of up to €3.8 billion. CNH and Ineco will form a new company Fiat Industrial.

According to J.P.Morgan analyst Ranjit Unnithan, Fiat reckons that revenue per car will rise to €13,400 by 2014 from €12,000 in 2009.

Execution risk
“Indeed Fiat appears to be making a conscious effort to improve its mix with over half the expected increase in unit sales from 2009 to 2014 driven by the Alfa Romeo/Lancia/Jeep brands and LCVs – a strategy not without execution risk,” said Unnithan.

Unnithan was not convinced by the plan, heading his report on Fiat “Intriguing Medium-Term Potential, But Considerable Near-Term Headwinds”.

Max Warburton, analyst with Bernstein Research, called Marchionne’s targets “extraordinary”.

“’Ambitious’ is a word that hardly does this plan justice,” he said.

“For the plan to work, Fiat has to achieve massive volume growth and market share gains in Europe – Fiat expects 64 per cent growth in a European market that it only expects to rise 15 per cent (including cars and light commercial vehicles). We cannot see how this can possibly be achieved. It implies market share goes from the current 9.2 per cent to almost 12 per cent – overtaking Ford, GM, Renault and the VW brand in ther current standings,” Bernstein said.

Alfa Romeo
“The plan calls for ….. a 260 per cent leap in Alfa Romeo….. We can’t see Alfa finding 250,000 new consumers in Europe by 2014. The plan also calls for massive gains in emerging markets – you never know, but Fiat has a patchy record outside Brazil and sudden gains in China and India seem far from certain,” Bernstein said.

Marchionne said in his day-long presentation in Turin that Alfa Romeo would launch seven new models from 2010 to 2014, adding that Fiat wanted to transform the brand into a “full-line premium car maker”. This would include a Chrysler built compact SUV based on the Guilietta, and a larger SUV based on the Jeep Liberty. Alfa would also sell a mid-sized car and estate car called Giulia in the U.S., built in Italy to replace the current 159. A five-door version of the MiTo would be sold in America.

Marchionne said North America would account for 85,000 Alfa Romeo sales in 2014 out of a total of 500,000 for that year.

That is five times more than Alfa Romeo sold in 2009. Alfa sales are expected to rise to about 120,000 this year, compared with a peak of 207,000 in 2001. Alfa has lost between €200 million and €400 million a year for the last 10 years.

Chrysler mid-size and large vehicles will be badged as Lancias in Europe, including the 300C sedan and Voyager minivan. Lancia/Chrysler sales in Europe will hit 300,000 by 2014 compared with 123,500 in 2009.

Thanks to Chrysler
Morgan Stanley analyst Adam Jonas said the separation into cars and industrials would please investors in the original company who felt threatened by the greater volatility of the auto sector. Jonas also thought the auto business had more of a chance of survival now that it was allied with Chrysler.

“We believe the announced de-merger of Fiat would not be possible without the Chrysler tie-up. Chrysler enables Fiat Auto to be of sufficient scale, growth, profitability and geographic balance to help Fiat Auto stand on its own,” Jonas said.

Marchionne has said that to be viable, mass car manufacturers need production of at least 6 million vehicles a year, and this figure would be reached by Fiat-Chrysler by 2014. Fiat sales should double to 3.8 million by 2014, while Chrysler’s would jump to 2.8 million from 1.3 million, giving a total of 6.6 million, but which is cut to six million when double counting of component parts is eliminated.

Not much hope
Deutsche Bank also liked the idea of the spin-off, but didn’t see much hope for 2014 targets.

“We regard these targets as much too ambitious, but note that if Fiat could even come close to this performance, it would result in significant upside to the current share price,” said Deutsche Bank’s Gaetan Toulemonde.

In his presentation in Turin, Marchionne, seeking to persuade his audience of the crucial importance of scale, said that other Europeans will suffer if they don’t make similar moves. This was taken by the Financial Times’ Lex column as a swipe at family controlled companies like Peugeot and BMW, who recently have shown more interest in doing short-term and narrow deals on engines and components.

“Mr Marchionne’s comment that other European groups “don’t get it” seems a none-too-subtle hint to the Peugeot family and the Quandts at BMW,” Lex said.

Neil Winton – April 25, 2010   

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