Even if CEO Sergio Marchionne misses his bold sales targets, Fiat will have paid little for Chrysler's North American factories and dealer network
Sergio Marchionne, who serves these days as boss of both Chrysler and Fiat (FIA.MI), closed an eight-hour presentation of his fix-it plan for the crisis-stricken U.S. carmaker with a bit of candor. After his chief financial officer said Chrysler would more than double the company's global sales to 2.8 million vehicles, CEO Marchionne acknowledged the obvious: "Some of you will be skeptical. Some of you will leave incredulous." Many people left the Nov.4 presentation feeling that way. One analyst wondered aloud if Marchionne was crazy. The answer is yes, his sales projections are audacious, perhaps even aspirational. But Marchionne's not mad. The key to assessing Marchionne's plan is to focus on what he's risking. Fiat didn't pay cash to acquire its equity stake in Chrysler—20% now and potentially 35%. The Italian carmaker isn't plowing much, if any, money into developing new models, as Renault (RENA.PA) did when it invested $6 billion to revive Nissan (NSANY) a decade ago. "We'd Rationalize Capital Spending"
Marchionne's revival plan for Chrysler feeds on itself and adjusts for the results. Fiat donates some basic hardware to Chrysler, which will spawn a family of new models over the next couple of years. The plan is for those cars to be big hits, generating billions of dollars in profits to be plowed back into Chrysler for the development of further new models for 2013 and beyond as the plan gathers momentum. All told, Chrysler will spend $23 billion over five years engineering new cars, Marchionne says. That's an average of $4.5 billion a year, 50% higher than what the company spent under its onetime owner Daimler (DAI) and double the budget given by its last owner, nickel-shaving Cerberus Capital Management. But what if the first new cars—some revamped Chrysler models and Fiat-derived passenger cars—don't hit the Italian boss's targets? Then he will do what past Chrysler owners have done: ratchet down the spending plans. "We'd rationalize capital spending," Marchionne said. "The whole thing about us being able to generate the $23 billion is based on us being able to generate the cash flow." In other words, if the sales don't happen in the plan's early days, Chrysler won't have the funds for all of the new models. Fiat doesn't have the cash to make up the shortfall. Let's be clear: Marchionne will have to embody the second coming of Lee Iacocca to meet his sales goals. First, Chrysler says it will double U.S. sales to 2 million cars in five years, making up to $5 billion in operating profit in the process. New models can help, but Toyota made lots of new models over the past decade, when the economy was generally healthy. It took Toyota from 2000 to 2007 to boost sales by 1 million cars a year. I daresay the Toyota and Lexus brands are stronger than Chrysler, Dodge, Jeep, and Alfa Romeo—once it arrives on U.S. shores. Research firm IHS Global Insight (IHS) thinks Chrysler will grow by only half its target. A Realistic View of the U.S. Market
It's worth noting that former Chrysler CEO Dieter Zetsche said Chrysler would boost sales by 500,000 cars from 2003 to 2010. Instead they fell by 400,000 during Daimler's reign over the house that Iacocca built. At least Marchionne's staff is being somewhat realistic about the growth of the overall U.S. car market. His people say Chrysler can hit its targets in a market that sells 14.5 million vehicles a year in five years. Analyst consensus, on the other hand, expects the market to reach as much as 16.8 million units by 2014. But that's where Marchionne's humility stops. Chrysler thinks it can build the prestige of its brands overseas—especially with Jeep—and triple international sales to 500,000 cars a year. In the U.S., market share is supposed to grow from 9% to almost 14%. Nissan didn't gain that much market share in the resurgence that commenced in 2000. So why don't I think Marchionne is crazy? That's simple. The company has enough cash to survive until the economy turns around. If Chrysler misses targets, Marchionne can still save it. He will have introduced a few Fiat and Alfa Romeo models to Americans and saved money on parts by jointly buying for both companies. And even if sales keep sinking as fast as they have this year and Chrysler fails, Marchionne will keep some of the factories and dealers to bring more Fiat and Alfa Romeo cars to the U.S. He will have paid very little for Fiat's North American foothold.