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Business

Fiat's baffling gamble

Video by Nicolas GERMAIN

Text by Benjamin DODMAN

Latest update : 2009-05-04

Having spent the best part of the 1990s living on a drip, Fiat has embarked on a bold mission to resuscitate a bankrupt Chrysler and take over the European operations of its Detroit rival General Motors.

Rub your eyes and pinch your arm – this is no dream. After rushing to the rescue of ailing US giant Chrysler, Italy’s once moribund carmaker Fiat is about to prop up GM’s European subsidiary Opel. Or at least this is the plan set out on Monday in Berlin by chief executive Sergio Marchionne, the man credited with the miraculous turnaround of a company that had become a laughing stock around the world.

Marchionne, who joined the Turin-based carmaker in 2004, plans to spin off Fiat’s car manufacturing division from the parent group and place it at the heart of a global giant second only to Japanese behemoth Toyota. Based on figures for 2008, the new company would sell more than six million cars a year. It would also account for combined losses of $10.5 billion (Fiat was the only one to report a slender $460m profit last year). Marchionne has described the plan as “a marriage made in heaven”. On paper, however, the deal looks more like a three-way marriage made in hell.

Fiat’s polo shirt-wearing CEO says the company needs to attain a critical size if it is to survive in a cut-throat market. But there’s one problem: just like all its rivals, the Italian carmaker is broke. “Fiat didn’t spend a penny for Chrysler and they’ll be hoping to do the same with Opel,” says FRANCE 24’s Business Editor Douglas Herbert. “There’s going to be plenty of horse-trading, but just how Marchionne hopes to pull it off is anyone’s guess.”

A window of opportunity

For those used to wondering whether Fiat would live to see another day, the company’s daring expansion plans are hard to believe. That they should come in the midst of the industry’s worst-ever crisis, is stunning.

Yet, the crisis is precisely what has made all of this possible, explains La Repubblica’s Business Editor Paolo Griseri: “It all boils down to the fact that Obama needs to solve two problems in Detroit, namely Chrysler and GM.” Nor is money the key issue, he adds. “As soon as GM said it wanted to get rid of Opel, it was up to the buyer to set the price.” In this case, the price offered is zero.

Marchionne had little trouble persuading Washington that the Chrysler deal made business sense. Fiat would hand Chrysler badly-needed technology in return for shares in the US company. According to Mario Cianflone of the Italian financial daily, Il Sole 24 Ore, the alliance with Chrysler, owner of the Jeep brand, has also helped Fiat fill a huge gap in its product range: “All that talk about bringing the Cinquecento to the US was really a publicity stunt – the real prize, was marketing the Jeep brand in Europe”.

Cianflone says an alliance between Fiat and Opel could also be beneficial to the two firms, not least in helping GM’s European subsidiary improve the design of its models, which is “a little sad, to say the least; and could definitely do with some Italian taste”. But, above all, an alliance between the two European rivals makes sense because of its huge cost-cutting potential – hence also the problem. “What worries trade unions is the very strength of the operation: the fact that the merger could give birth to a leaner, more efficient company through large-scale cost cuts,” explains Griseri.

The Italian miracle

For Italy, where Fiat cars have long been as common a staple as pasta, Marchionne’s rampant offensive has been welcomed with a mix of vindication and apprehension. “The Chrysler deal was almost experienced as a Hollywood battle,” says Griseri. The Opel move, on the other hand, has raised alarm, because the two firms compete on the same markets. “Both companies know that there is one too many,” adds the journalist from La Repubblica.

Of course, none of all this would have been possible if Sergio Marchionne had not engineered a spectacular turnaround at Fiat. Griseri says the Fiat miracle can be traced back to two main factors. First, Marchionne – Fiat’s only top executive who was not “bred” internally – sliced through the company’s gargantuan bureaucracy, “making a firm out of what had previously resembled a ministry”. He then got about overhauling the company’s mentality. “As soon as people figured out that they could achieve things, they achieved them,” explains Griseri, “Obama-style”.

This time, Fiat’s miracle-man will have to overcome stiff resistance from unions both in France and Italy, as well as the German government’s scepticism. The country’s vice-chancellor and finance minister, Frank-Walter Steinmeier, has described the plan as “interesting”, but said Fiat would need between five and seven billion euros in support. In the end, however, the final decision lies neither with trade unions nor with the government in Berlin, but with the new president in Washington. And he has made it clear he wants a solution to Detroit’s problems by May 31.

Date created : 2009-05-04

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