Marchionne Seen Missing Fiat Sales Target by $19 Billion

Fiat SpA (F) Chief Executive Officer Sergio Marchionne set a target two and a half years ago to sell 6 million cars annually by 2014, a goal that analysts and industry observers at the time deemed impossible to achieve. They were right.

Marchionne, who runs both the Italian automaker and Chrysler Group LLC, has said he will revise his forecasts when the two companies announce third-quarter results tomorrow. Analysts estimate his sales target will need to come down by 15 billion euros ($19 billion).

“Marchionne was too optimistic in 2010,” said Giuseppe Berta, a professor at Bocconi University in Milan who has written several books on Fiat and has worked as a company historian. “Fiat and Chrysler can’t grow by self-propulsion to the famous 6 million-car target.”

With European auto sales headed for their biggest drop in almost two decades this year, Fiat has said losses in the region are on pace to widen to 700 million euros. A quick turnaround will be a challenge with austerity measures set to restrain demand to below pre-crisis levels until at least 2017, according to forecaster LMC Automotive.

Marchionne, who said as recently as April that he could stop losses in Europe within two years, will have to make do with lower sales than originally expected. The 2014 revenue target for the group, including Chrysler, Ferrari and Maserati, could be cut to 89 billion euros from the 2010 forecast of 104 billion euros, according to a Bloomberg survey of 13 analysts.

Shares Drop

Fiat dropped 2 cents, or 0.6 percent, to 4.12 euros at the close of trading in Milan today. The stock has gained 16 percent this year, valuing the carmaker at 5.15 billion euros.

In unit sales, Fiat is likely to fall short of the target by 27 percent, or 1.6 million cars. Researcher IHS Automotive is predicting sales of 4.4 million in 2014 for the group, up from 4.1 million this year. In Europe, though, IHS expects sales to fall 1.4 percent to about 917,000, while in North America they could jump 6.2 percent to 2 million.

Fiat, which declined to comment for this story, isn’t alone in struggling in Europe. The French government has had to support PSA Peugeot Citroen (UG) by backing 7 billion euros in new bonds for its financing arm. Ford Motor Co. (F) is closing three plants in the region, Daimler AG (DAI) scrapped its profit target for next year, and Volkswagen AG (VOW) posted its largest drop in earnings since 2009 in the third quarter.

Italian Plunge

Fiat’s problems are bigger than many rivals’ because its troubled home country accounts for half its sales in the region. Its plants in Italy, where car sales are on pace to plunge this year to the lowest level in more than three decades, are running at 50 percent of capacity, far below the 80 percent threshold typically considered profitable.

To counter the severe slump in European sales, Marchionne is considering building Chrysler models in Italy, including Jeeps, for export to North America. The Italian government is evaluating tax rebates on export goods to help Fiat. Marchionne may announce details of his plan as soon as Oct. 30, the people said.

“This makes sense on multiple levels” as it will boost plant utilization and would cap “Chrysler’s own potential, limiting the likely cost to Fiat shareholders of buying out the Chrysler minorities,” Stuart Pearson, an analyst at Morgan Stanley in London, said in a note to investors today. “However we see no quick answers, and fear debt could surprise negatively first,” said Pearson, who rates the stock underweight with a target price at 3.90 euros.

Europe Concern

“We are all concerned” about the European crisis, Marchionne said in an interview in Brussels on Oct. 10. While declining to give any details, he said he would update his targets for 2014 by the end of this month.

Those European woes have been offset by the strong performance of Chrysler, Fiat’s Brazilian division and supercar- maker Ferrari SpA. For the third quarter, Fiat’s earnings before interest taxes and one-time gains or costs -- what it calls trading profit -- will increase 10 percent to 938 million euros, according to the average estimate of four analysts surveyed by Bloomberg. Marchionne said at an event in Shanghai yesterday that third-quarter results are in line with estimates.

Partner Search

“Chrysler and Brazil, the group’s strengths, could compensate for the half-disaster in Europe in the short term,” said Massimo Cassia, head of equity at Sella Gestioni Sgr in Milan, who manages about 1.7 billion euros including Fiat shares. “Fiat is massively burning cash in Europe, has few new models in the pipeline, and faces a huge issue of overcapacity.”

Marchionne, 60, has acknowledged that he neglected Europe while fixing Chrysler. While he ultimately would like to merge the two companies into a single global giant, he said he wants to get Fiat back on track before that can happen.

A merger could help the Italian carmaker survive the crisis by providing a reliable source of cash flow. Marchionne has said that in the long term, Fiat and Chrysler may need a third partner to survive and that he has held partnership talks with Mazda Motor Corp. (7261) and Suzuki Motor Corp. (7269)

Last month, Marchionne confirmed Fiat’s targets for 2012, including a revenue increase of at least 29 percent, to more than 77 billion euros, and a 59 percent jump in trading profit to at least 3.8 billion euros. Those gains, though, come mostly thanks to the full consolidation of Chrysler, which last year was included for only seven months.

‘Reality Check’

Marchionne may offer a “reality check on his 2014 targets” when Fiat releases earnings tomorrow, Gianantonio Villani, an analyst at Kepler in Milan, said in a note investors. Villani expects the carmaker’s global sales to be flat next year with revenue falling 8 percent in Europe.

Fiat has suspended investments in Italy, cutting European spending by 500 million euros in 2012, and has delayed new models, including the Punto hatchback because Marchionne doesn’t expect a recovery in the region before 2014.

That strategy of freezing investments and postponing new models has been criticized by politicians and union leaders in Italy and also by Fiat’s main European rival, VW.

Introducing new products is “the preferred strategy than trying to muddle through,” Hans Dieter Poetsch, Volkswagen’s chief financial officer, said on an Oct. 24 conference call, when asked about Fiat’s decision to hold off on refreshing its lineup.

White-Knuckle Ride

The Italian manager, who grew up in Canada, has been urging his European counterparts to come up with a plan to cut overcapacity throughout the region. Fiat itself closed a plant in Sicily last year and is trimming output. The company will halt its Pomigliano plant, where it builds the Panda subcompact, its only new model in the country, from Nov. 26 to Dec. 9, furloughing about 2,000 workers at the facility.

While Marchionne’s aggressive approach to navigating the crisis could still pay off, it may be a white-knuckle ride.

“There are much easier stocks and stories to own in the global auto sector,” Max Warburton, an analyst with Bernstein Research, said in a note to investors. “But while the risks are material, Fiat management’s chosen path could also bring reward.”

To contact the reporter on this story: Tommaso Ebhardt in Milan at tebhardt@bloomberg.net

To contact the editor responsible for this story: Chad Thomas at cthomas16@bloomberg.net

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Photographer: Photographer: Jason Alden/Bloomberg

As recently as April, Fiat SpA CEO Sergio Marchionne said he could stop losses in Europe by 2014.

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Photographer: Photographer: Jason Alden/Bloomberg

As recently as April, Fiat SpA CEO Sergio Marchionne said he could stop losses in Europe by 2014. Close

As recently as April, Fiat SpA CEO Sergio Marchionne said he could stop losses in Europe by 2014.

Photographer: Alessia Pierdomenico/Bloomberg

With European auto sales headed for their worst year in almost two decades, Fiat is on pace to see its 2012 loss for the region widen to 700 million euros. Close

With European auto sales headed for their worst year in almost two decades, Fiat is on pace to see its 2012 loss for... Read More

Photographer: Alessia Pierdomenico/Bloomberg

A Fiat SpA Panda automobile travels along the production line at the company's Pomigliano factory near Naples. Close

A Fiat SpA Panda automobile travels along the production line at the company's Pomigliano factory near Naples.

Photographer: Michele D'Ottavio/Bloomberg

For the third quarter, Fiat’s earnings before interest taxes and one-time gains or costs - what it calls trading profit - will increase 10 percent to 938 million euros, according to the average estimate of four analysts surveyed by Bloomberg. Close

For the third quarter, Fiat’s earnings before interest taxes and one-time gains or costs - what it calls trading... Read More

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