Italian auto maker Fiat, which inked a strategic alliance with General Motors in 2000, is struggling to survive as an independent car company, due in large part to a steady decline in market share in Europe -- including Italy, its most important market. After losses over the past four years of $2.5 billion, $1.3 billion of which was incurred in 2001, management in December announced a sweeping restructuring, closing 18 plants and cutting 6,000 jobs, all outside Italy.
Fiat Auto Chief Executive Roberto Testore resigned, and the car business was broken into four profit centers: Fiat and Lancia; Alfa Romeo; International Development, which is mainly developing markets such as Turkey, Poland, Brazil, China; and Services.
As part of the 2000 deal, GM bought 20% of Fiat Auto for $2.4 billion and agreed to a put option that allows Fiat to sell the remainder at a fair-market price beginning on Jan. 24, 2004. Industry experts wonder if Fiat can survive that long, saying it hasn't taken dramatic enough action to reverse the erosion of market share and resuscitate its lineup.
Lower than industry-average investments in research and development, and a brand image associated with lesser-quality cars have created a cycle of declining sales, losses, and reduced cash flow -- which in turn makes it difficult to invest.
Amid reports that other family members would like to sell the car company, which makes up about 40% of Fiat group sales, Honorary group Chairman Gianni Agnelli on Apr. 29 reiterated his commitment to the company's auto-making tradition. In the runup to a May 14 shareholders meeting, Fiat group Chairman Paolo Fresco and CEO Paolo Cantarella discussed the long-running struggle to turn around Fiat Auto with BusinessWeek Rome Bureau Chief Gail Edmondson at company headquarters in the Northern Italian city of Turin. Following are edited excerpts of their conversation:
There's a growing consensus that Fiat's management doesn't perceive the gravity of problems at Fiat Auto. Given the losses, sliding market share, and disappointing sales, how do you view the current situation?
Paolo Fresco:The Dec. 10 reorganization and the major restructuring shows we believe we have to do something to bring higher profitability to Fiat Auto. The alliance with GM is itself a strong acknowledgement that we need to do more and achieve a number of cost-related objectives.
Industry experts say the core issue for Fiat is products. There were high expectations for the new midsize Stilo, which has been described as everything from "disappointing" to "a failure."
Fresco:The characterization might be too black and white. Stilo is not an outstanding success, but it is not a failure.
Paolo Cantarella: The jury is still out, because we launched the car in October. The overall car market is weaker than expected, and the importance of the low end of the market is growing. We launched a higher-priced model of the car that was fully loaded with extras. We're launching [a lower end] version in May, and that will improve the success of the Stilo. The last quarter we'll launch the station wagon, which is very important in this [midsize] segment. I think the Stilo will do what we expected it to. The car we made is a solid one.
Fiat still suffers from an image problem on the market. Quality problems persist. What's Fiat doing about it?
Cantarella:The reality is quality has improved dramatically. Of course, we have to work with all our dealers to make perception match reality. In the case of Alfa Romeo, we have been successful doing that.
What about reports of problems with the new Stilo's onboard computer, which is said to occasionally turn off the car while it's being driven?
Cantarella:Some of the problems with the computer could be misuse [by] the customer. We carmakers have to be less aggressive with the degree of complexity we build into cars. Sometimes cars are too complicated, especially for car users who rent a car for a few hours or a few days.
What new models are you counting on to generate profits and volume? Will you need to trim production?
Cantarella:We will complete the Stilo [lineup] with the station wagon. We'll have the Lancia Thesis, and next year the new small Fiat. Of course, if the market goes down, we'll cut production.
Fresco: One thing that is very important is common platforms with GM. That means substantially reducing the cost per unit and amortizing cost on larger volumes of cars. For the future, we have two common platforms agreed upon, as well as a power-train joint venture. We already have substantial benefits from joint purchasing.
Is Fiat suffering a cash crunch?
Fresco:Let's clarify a point: The cash problems analysts are talking about have nothing to do with Fiat Auto. Fiat Auto represents 40% of Fiat group sales, which include trucks, agricultural equipment, energy, publishing.
Certainly, we're now under pressure from analysts and rating agencies to reduce our net debt. We have about $5.3 billion of net debt. This net debt is generated by the delta between acquisitions and dispositions we had in the last few years. This was something that we felt was entirely bearable, except that the view of financial institutions has changed. Now, we have to move faster to reduce this number.
After September 11, our ability to sell some assets got delayed. Then the pressure to reduce the debt increased. What we've done is revisited our portfolio. We have on the block assets that are equal to the total value of our debt. We should be able to sell assets worth between $1.8 billion and $2.7 billion this year.
The real challenge we have now is to increase operating cash flow. Then, we need to have healthier results for Fiat Auto. But the other Fiat group businesses are really generating nice cash flow. CNH [Case New Holland agriculture and construction equipment company] is a great success that we haven't advertised well enough. We're the largest producer of agricultural equipment in the world, neck and neck with John Deere.
Fiat Auto has lost a net $2.5 billion over the past four years. If losses continue, couldn't the capital demands on Fiat Auto threaten the long-term health of Fiat group?
Fresco:These losses have been covered by better cash management at the group level, by having excess cash at the beginning of the period. For the long term, you're right. If this business keeps losing $623 million per year...over time there is no one who can keep filling in this black hole.
If Fiat Auto is still making losses in 2004, will you exercise the put option that allows you to sell the remaining 80% of Fiat Auto to GM starting on Jan. 24, 2004?
Fresco:I don't deal with theoretical questions. We have in hand a very solid contingency plan. Obviously, nobody wants to use it. The primary plan is the recovery of the business. But there is a contingency.... We believe the reason it won't happen that way is that we'll manage Fiat for profitability.
Are the Agnelli family members increasingly frustrated with Fiat Auto's poor performance and unwilling to continue capitalizing the company?
Fresco:They just participated in a capital increase of $890 million. It's not a huge amount, but it is a substantial commitment.
But the $890 million is not sufficient, right?
Fresco:What is sufficient? I think it's a substantial amount and shows the Agnelli family maintains trust. In fact, they could have blocked the decision.
Are you delaying product development as a result of the shortage of cash?
If you plan to remain independent, don't you need to invest billions now?
Cantarella:That's exactly why we're sharing platforms.
American auto makers have never been very successful in Europe. Why did you think GM would make the best partner for Fiat?
Cantarella:The size of the companies: Fiat Auto and GM in Europe and Latin America are very similar. And the size of the cars, which makes synergies very viable. We could rely on big brother on the other side of the ocean for development in things like fuel-cell [technology] and new electronics, and so on.
Fresco: Frankly, you follow a different logic if you do an alliance than if you do an acquisition. If you do an acquisition, you look for a company that will bring you profits and the ability to integrate to the maximum extent possible. If you do an alliance, you look to supplement your weaknesses. From that viewpoint, GM was an ideal partner. The main objective for us was to get most if not all the benefits of a merger, without having the merger.
But your options are open -- you can still sell to a third party ultimately.
Fresco:Why did we ask for the put? Because the closer you get to GM, the more captive a partner you are. If we integrate everything, no buyer but GM would make sense. That's why had to have the put. But technically, we can sell to anyone else.
Would you consider selling Alfa to raise cash?
Cantarella:I don't think so. It's our best bet for growth in the future.
But it's too small to turn around Fiat and could produce a nice cash infusion.
Fresco:It's like selling the family jewels. I don't even know if it would be feasible, but it would be a stopgap proposition. Alfa is going to be one of the engines, maybe the principle engine, for future profitability.
When is the point of no return -- when you're so close to GM that it doesn't make sense for anyone else to buy Fiat Auto?
Fresco:It's not now. But there will be eventually a time, and that's why we had to have the put. But we are far from being there now.
Some say you'd make a fine match with Peugeot.
Fresco:People speculate we'd make a very fine match with BMW. GM was not the only alliance possible.
Can you address the growing concern that Fiat needs a root-and-branch overhaul to survive independently?
Fresco:We have seen turnarounds at Fiat Auto that have been more dramatic than the one we plan. The changes in organization and people and philosophy about how to run the business are quite dramatic.
At the end of 2004, would you bet Fiat Auto is still independent?
Fresco:I would put some money on that.