Fiat's Turnaround Takes Root

The Italian carmaker's Marchionne has it turning a profit again, a miracle in itself. Now, can he really rival the Japanese?

On Nov. 8 and 9, Fiat CEO Sergio Marchionne delivered an audacious plan to financial analysts. He aims to transform the Italian company into one of the world's top performing mass-market automakers by 2010.

Marchionne already has brought Fiat Auto back from the brink of bankruptcy. If the 52-year-old Canadian-Italian executive delivers on his growth plan for 2010, analysts say, his overhaul of Fiat (FIA) would rank as the most impressive turnaround in the history of the auto industry, surpassing even Carlos Ghosn's rescue of Nissan.

To get there, Marchionne pledged to achieve a robust operating margin of 6% by 2010. That's the same target Ghosn has set for rival Renault, where he is CEO, by 2009. It's a tough goal: Today, only luxury automakers such as BMW and Japanese outfits such as Toyota (TM), Honda (HMC), and Nissan achieve margins of 6% or better.

Marchionne also vowed to boost sales by 800,000 vehicles within three years in the face of stagnant markets, which would raise Fiat's European market share to 11%, up from 8% today. And he insisted Fiat must close the gap with industry leader Toyota in production quality and efficiency and match its world-class manufacturing standard.

A Steep Climb

"We need to swallow hard, swallow our pride, and learn from others who do it better than we do," Marchionne says. "Toyota is a flawless execution machine. We need to learn how to execute at that level."

Analysts applaud Marchionne's progress to date. "He's done a perfect job" so far, says Ferdinand Dudenhoeffer, director of the Center for Automotive Research in Gelsenkirchen, Germany. But like many others, Duedenhoeffer remains cautious about Fiat's chances of outperforming rivals in Western Europe, let alone matching the Japanese.

Attractive new models can win back former Fiat customers and recoup some lost market share, but finding converts in a fiercely contested market is far more difficult. If all goes well, Fiat may be producing margins of 4% by 2010, Duedenhoeffer says, matching the best-performing mass-market automakers in Europe.

Cheers for Bravo?

Still, bringing 107-year-old Fiat back even to consistent and solid profitability would be an enormous achievement. When Marchionne joined Fiat in June, 2004, the ailing automaker had racked up more than $12 billion in losses over five years and was headed for insolvency. An outsider to the auto industry, Marchionne overhauled a bloated and incompetent management, tore up plans for uninspiring models in the pipeline, hired a new designer, and set about fixing Fiat's crumbling European dealer network.

This year, analysts expect Fiat Auto to post operating profits of around $380 million, for a margin of 1.3% (see, 7/25/06, "Fiat's Comeback—Is It for Real?&quot).

Accelerating Fiat Auto's growth and profits in 2007 and beyond depends on the launch of the new Fiat Bravo compact in January. The Bravo replaces the failed Stilo, a 2001 model that Fiat's former management had hoped would compete with Volkswagen's Golf. The Golf is the most popular model in a hotly competitive segment that makes up one-quarter of the European car market.

A Modest Proposal

Fiat invested in a new plant to build the Stilo with a capacity of 400,000 cars a year, but barely hit a peak of 180,000. The failure seriously punctured Fiat's earnings and accelerated its tailspin.

Marchionne scrapped a previous version of the Bravo already in the works, demanding that a new, better-looking car be designed in half the normal development time. Head-turning Italian design will be one key reason to buy the Bravo, he says.

Fiat's profit forecast assumes annual sales for the Bravo of 120,000—a conservative estimate—but the newly engineered car, which has a lower cost base, will reach breakeven at sales of 75,000 cars, Marchionne says.

The CEO also is racing to market a stylish remake of the Fiat Cinquecento (500), an iconic minicar from the 1960s that he hopes will give the Fiat brand new panache. The Cinquecento will be unveiled in September, but Fiat has already launched a Web site to build buzz about it, not unlike BMW's clever marketing strategy with the remake of the Mini.

Hands Across the Water

Fiat's 2010 plan also includes the ambitious goal of doubling sales at sister brands Alfa Romeo and Lancia to 300,000 by 2010, and returning to the U.S. market in 2009 with new Alfa models. Industry experts believe the sporty Alfa Romeo has potential for growth as an upmarket brand, but that Lancia, hardly known outside Italy, will be a tougher slog (see, 9/26/06, "Lancia's Stylish Second Century").

Joint ventures and alliances are another hallmark of the new Fiat. Following the pioneering model of French automaker PSA Peugeot-Citroën, Fiat aims to keep new models flowing at the lowest possible development cost. Fiat and Ford (F) will jointly produce two different minicars on the same platform, the Cinquecento and the Ford Ka, in Fiat's Polish plant. Fiat has also teamed up with India's Tata Motors and recently inked an alliance with a Chinese partner.

Marchionne admits that his plan is not without risks, requiring iron discipline and near flawless execution. At the two-day analysts' meeting at Fiat headquarters in Turin, Marchionne introduced his brash young team of 25 senior managers, repeatedly referring to them as "my kids."

Pumping Iron

Elevated to top posts after Marchionne fired much of the company's previous top management, the hard-charging execs and the cultural change they are driving are the key to Fiat's future, Marchionne says. "There is a fundamental change in the way Fiat Auto is being run. This house is incredibly fast and fleet. Speed and simplicity are what we do."

A blunt manager who dispenses with formality and wears a trademark grey pullover instead of suits, Marchionne is known to sleep only four hours a night and hold management meetings on Saturdays and Sundays. His unconventional approach has transformed Fiat's sclerotic management ranks into a muscular, young team determined to revitalize Italy's largest industrial group, which single-handedly represents 5% of the country's GDP.

"Change is Possible"

"What has gone on in the last 30 months is hard to describe. Someone called it a resurrection," said Marchionne. "These kids haven't failed, they have delivered. The thing that keeps me up at night is the thought that one of these guys will leave."

Marchionne plans to hand over control of Fiat Auto to one of his young managers in 2007, while he remains CEO of $66 billion Fiat Group, a conglomerate that includes trucks, farm equipment, and other businesses. "The moral of the story," says Marchionne, "is that change is possible."

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