Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.
Fiat Chrysler's silver-tongued chief executive Sergio Marchionne is making an all-in bet that oil prices will stay low forever.
"Low gas prices now seen as permanent condition," Fiat intoned to investors on Wednesday in a business plan presentation for the period until 2018.
You may have heard emissions regulations are getting tougher and we're all going to be forced to buy electric super-minis? Not if Marchionne's right. He thinks U.S. consumers are going to keep buying SUVs and trucks in their droves so it's pointless making much else.
More than three-quarters of Fiat's U.S. sales volumes are light-duty trucks, according to Autodata. And now it's going to re-gear American factories so they churn out even more Jeeps and Ram pickups. The extra sales will transform the company's adjusted ebit margins in North America from 6.4 percent to 9 percent by 2018, according to the plan. (See chart right).
And that's important. Thomas Besson, analyst at Kepler Cheuvreux, calculates that last year the Nafta region accounted for more than 90 percent of Fiat's adjusted ebit (excluding Ferrari).
Selling more trucks and SUVs will turn 5 billion euros of net industrial debt into a net cash position of as much as 5 billion euros by 2018, Marchionne promises.
Investors were once reluctant to doubt a man with a talent for performing improbable feats. He's returned Fiat's Europe's operations to profit, spun-off Ferrari and transformed Jeep. But the magic's wearing thin. Marchionne failed last year to find a merger partner for Fiat, with General Motors declining his advances.
And while Fiat delivered solid 2015 earnings and unveiled those punchy 2018 targets on Wednesday, the shares have fallen two days running.
Investors were already dubious about Marchionne's previous set of 2018 targets, which included the more modest aim of up to 2.4 billion euros net industrial cash. Now they're being asked to believe he can materialize 10 billion euros of free cash flow in three years.
What could go wrong? For one, the bet on trucks seems blinkered, given the global regulatory assault on emissions.
There's no denying Americans are choosing trucks over small cars, but Marchionne has no crystal ball. Geopolitical forces determine gasoline prices.
And as Bloomberg News reported last week, Fiat finished last in a 2014 Environmental Protection Agency ranking of carbon-dioxide emissions among big automakers. The agency will accelerate CO2 targets next year. Fiat can buy emission credits from rivals but they may become more expensive.
Marchionne says Fiat has the know-how to limit emissions. But using hybrid engines, for instance, would make its vehicles more expensive and affect margins.
Equally probable is that when a market is flooded with higher volumes, margins are competed away. That's happening in China where "good-enough" Chinese-made SUVs are popular.
So Marchionne is betting big on Saudi Arabia not turning off the taps, the U.S. not hiking interest rates sharply and the health of the U.S. economy. With China and South America already turning sour for carmakers, any unexpected turn of events could make him look foolish.
The strengthening dollar's also on his side because Fiat reports in euros, which sheds further light on Marchionne's gamble. Analysts at Evercore ISI estimate that Fiat's previous 2018 ebit target would have been boosted by 1.2 billion euros just by applying today's exchange rate.
Once more, though, this isn't something over which Marchionne can claim any control.
Dismissing gloomy forecasts about the industry, Marchionne began his presentation this week with that well-worn Mark Twain quote: "The reports of my death have been greatly exaggerated." Maybe so. But Marchionne's fond of a bit of amplification too, which may prove Fiat's undoing.
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