Opinion

The Great Debate

Fiat’s over-ambitious expansion strategy

By Paul Taylor
April 24, 2009

paul-taylor
– Paul Taylor is a Reuters columnist. The opinions expressed are his own –

Could Italy’s cash-strapped Fiat, Europe’s sixth auto maker, build a workable alliance with Chrysler and Opel to become be a profitable global player? Or would it be a marriage of losers, doomed to fail?

Fiat CEO Sergio Marchionne has made clear that his interest in Opel, the European arm of ailing General Motors, is more than just a well-timed tactic to get better terms in the alliance he is negotiating with troubled U.S. number three Chrysler. Chrysler faces likely bankruptcy if a deal is not clinched by April 30.

The troubleshooter who turned around the Italian group seems to want both deals. “It is quite possible for Fiat to engage in both of those transactions and to execute them properly,” he said on Thursday. Marchionne sees a wave of consolidation coming in the automobile sector and is determined to gain critical mass to survive. But his strategy looks over-ambitious.

Fiat has little cash and 4.8 billion euros in debt to repay this year, so Marchionne needs deals that cost little or nothing. That means he has to target companies in a weaker position than his.

Fiat would not take on any of Chrysler’s debts, and GM seems willing to give away a 51 percent stake in Opel free to anyone who will invest in it as a going concern, with the U.S. auto maker keeping a minority holding. GM needs Opel’s technology to produce the smaller, greener cars which are the condition for a U.S. government lifeline.

But even if the financials were to add up, which is a big “if”, the challenge for Fiat of turning such an alliance into a viable, profitable group looks daunting.

Germany’s richer, fitter Daimler bought Chrysler in better times and failed to turn the Detroit dinosaur around despite sending in its best managers and engineers, which also had the effect of causing Mercedes’ quality to decline at home.

Marchionne has made clear Fiat would need German state aid to restructure Opel. Since the two firms have lots of overlap in small and mid-range cars, it would have to close plants and lay off thousands of workers, with pain in both Germany and Italy. But Berlin would want guarantees on jobs and production sites in return for its aid, crimping Fiat’s room to make synergies.

Making all this work is a tall order, even for a turnaround maestro like Marchionne, and could be a dangerous distraction from Fiat’s own recovery, as Daimler found with Chrysler. Fiat’s controlling Agnelli family, which brought him in in 2004 to rescue Fiat, should be having an anxiety attack at his strategy.

(Editing David Evans)

Comments
17 comments so far | RSS Comments RSS

With some forty percent over-capacity in car manufacturing worldwide and with Chrysler not being used to producing advanced fuel efficient cars, how could this merger of second ranked manufacturers survive? There will be a lot more taxpayer’s money spent by the rich countries before this is all (dis)solved and we buy small well designed fuel efficient cars from India, China, Brazil or Mexico.

Good luck.

Posted by henk wevers | Report as abusive
 

In this article 0% reflects the reality

Posted by Max | Report as abusive
 

Fiat was a basket case not to long ago, “rescued” by a $5 billion dollar “put option” from the ultimate of bonehead car companies, GM. With that cash Fiat made it’s comeback via a one one hit wonder the fiat 500. Fiat is over concentrated in it’s home market of Italy, it is plagued by unions that make the UAW look like sissy’s and a meddlesome Government.

In this global economy, with at least 30% too much car manufacturing capicity in Europe and the U.S., we need companies and their factories to be disappearing, not merging. The rise of new entrants such as Hyundai, Tata and Geely signals more crowding to come.

Three merged midgets does not constitute a whole globally competative car company. Heck you can throw in Saab and Volvo, and still not have a fighting chance.

Posted by nyongesa | Report as abusive
 

Fiat is just another endangered auto maker looking for government handout to bail itself out of the current economic crisis; after all, Fiat-Chrysler deal would be impossible without the US government shelling out more dowry money for the marriage, courtesy of the American tax payers.

By aligning with Chrysler and Opel, Fiat’s CEO, Sergio Marchionne, is betting that the treasury chests of the US, German, and Italian governments would make sure that whatever the business deal he concocts would survive the current economic condition, courtesy of the taxpayers of those countries.

Posted by George S. | Report as abusive
 

I am an italian user and I don’t write do defend the deal between Fiat and Chrysler but I would remember some important details about the automotiva industry and the US macroeconomy.
First, the automotive industry is not like tertiary where firms born and die every die: if you fail, you’re out forever.
Second: the US most economic aggressive competitors, like China, don’t follow the market’s rules: therefore and aid from US government to automotive industry should’t be blamed so hardly.
Finally US must keep an automotive industry within the country because it’s a strategic sector and import autos from Asia or somewhere else would make the US current account deficit even deeper.
Therefore I think that if a marriage between Chrysler and Fiat is usefull to keep the automtive industry in US, it’s an american interest to support it. Cheers

Posted by federico | Report as abusive
 

You are possibly living in the past. There is no longer a sound USA car-making industry. And FIAT is not cash-strapped, to the contrary the company is gaining market share all over the orld. More than this, unlike the USA car industries, FIAt makes good and nice looking cars.
In a few years you will only find Toyota, VW-Porsche and FIAT.

Posted by Fabio De Rosa | Report as abusive
 

A lot of risk in the strategy Fiat is pursuing, but it seems to me this is very cleverly thought out.

I couldn’t disagree more with the remarks above. The two guys running the Fiat empire are the best in the business, hands down. Marchionne is a hard numbers guy who has proven he knows how to cut fat quickly and put people in charge who will make a real difference. That is something neither Chrysler or GM has yet to realize, or had the stomach to carry out.

Montezemolo is a very charismatic leader that will help secure the financing and support necessary to make this happen. I suspect it is already in place or close to it, otherwise they wouldn’t even bother with all the investment in time and resources.

This is certainly the best option for Chrysler to exist in some form for the future, and as far as Opel goes, I doubt there will be many other takers from any country. The German unions need to realize they just don’t acknowledge the competitive landscape today, and need to get their priorities right.

As far as the remarks about Indian or Chinese companies, Fiat has a close relationship with Tata of India, was involved in their acquisition of Jaguar in some way and has a joint manufacturing deal with a large Chinese firm.

If these deals happen, and they pull it off, it will restore my faith that people can still innovate and change the rules of the game. If not, Fiat would probably have had to seek a merger with an Asian firm anyway, so they are just accelerating the process….

Hats off to a couple of real entrepreneurs and best of luck.

Posted by Robert | Report as abusive
 

Remember those years when anyone with a negative criticism of gas hog SUV’s and inefficient vehicles would be targeted of brutal zealot laissez-faire as to how un-American and anti-business their stance were on what the consumers wanted? They laughed at us for seeking more fuel efficient cars while they didn’t shy away from labeling us environmentalist kooks.

Posted by slinox | Report as abusive
 

I agree with Robert April 25th, 2009 7:13 The management teams at GM and Chrysler have not shone in any way. Marchionne and his team are the best in the business, turning Fiat around in a matter of months. Getting this type of technology and expertise are the best options for both Chrysler and Opel. Good luck

Posted by Nick | Report as abusive
 

GOOD

Posted by HSSN | Report as abusive
 

GM and Chrysler failed to recover for long time, the last 10 years to get to this point, unable to take the market, Mr President are you sponsoring these loosers with our money? we (drivers) are buying the best tech and economical cars on the market, the area that needs support is the developing of new technologies so put this money into the education for new experts on car bussines, helping these big elefants will delay any progress in the car industry for America.

Posted by Giovanni | Report as abusive
 

I’m italian and the defence of Fiat by compatriots seems to me a little bit patetic. Paul Taylor is right, Fiat is cash strapped and the story of this automaker has been always the same: go where the cash (subsidies by states) is. Marchionne should do something with Chrystler if, and only if, the US Administration put on the table some help in billions of dollars

Posted by john terrone | Report as abusive
 

@ john terrone

we are delighted that u are not in the business. your comment is pathetic, be serious please

Posted by Max | Report as abusive
 

No one has asked the question — If Mercedes cant fix Chrysler, what the heck has Fiat got thats so much better? Better executives? doubtful. Better finances? Nope. Better engineers? wrong again. Better quality? no way. …… so what is Fiat bringing to Chrysler when Mercedes has already tried, and failed??? oh, and prior to that Renault.. and prior to that……

Posted by Driven | Report as abusive
 

driven…u don’t know what u are talking about….please

just 1 word: chrysler and fiat are complementary ok ok 2 words; the second is Multiair.Stop

Posted by Max | Report as abusive
 

one thing which i fail to understand is how did it started?? gm,chrysler,ford u can call them as Autolords but they still can’t survive a year of downturn..are the margins so low??? one year of negaive outlook and BAaM!!! they r facing the blackhole.

 

I think there might be a bit too much overlap. Perhaps if Chrysler and Lancia became esentially the same thing (like Opel and Saturn were) since they aren’t sold in the same markets, then maybe it would work. That could go for Dodge/Peugeot too. Jeep would be able to sell with either Peugeot or Fiat dealerships in Europe.Chrysler/Lancia as lux, Dodge/Peugeot as common, Jeep to serve as SUV’s and trucks, Fiat as niche vehicles, Alfa Romeo as sporty exotic, and Citroen as near lux? Do I smell another GM? Only if they learned from their mistakes could this even work! Maybe trash Lancia and combine Chrysler/Citroen instead? :confused:
http://www.usedtruckstogo.com

Posted by suzie.dsouza | Report as abusive
 

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