Dec. 21 (Bloomberg) -- Fiat SpA Chief Executive Officer Sergio Marchionne got a show of support from Italian Prime Minister Mario Monti yesterday for the carmaker’s latest effort to shore up domestic operations. The political cameo in southern Italy will do little to overcome the plan’s challenges.
To stem mounting losses in Europe as its market share dwindles, Fiat intends to transform underused factories into export hubs for more expensive vehicles from Jeep, Alfa Romeo and Maserati.
The initiative faces hurdles including labor costs that are 14 percent higher than in the U.S. and the strength of the euro, which has gained 4 percent against the dollar in the last six months. Analysts at Deutsche Bank say the plan may not be enough to fix Fiat’s production overhang, which could require closing at least two plants.
“It’s hard to see that an upmarket move will sufficiently support” Fiat’s effort to close its capacity gap, said Jochen Gehrke, an analyst at Deutsche Bank in Frankfurt. “Fiat should simultaneously reduce capacity.”
Fiat, which uses the smallest share of its production capacity of any European carmaker, says an expansion of high-end models can fill factories and stop it running through what Barclays estimates to be 260 million euros ($345 million) of cash a month. An aging lineup of mass-market compacts and plunging demand in Italy has meant that Fiat has suffered more than most peers from the weakest European demand in 19 years.
To rebalance its operations, Fiat may need to halt production lines capable of making 700,000 vehicles a year, according to Deutsche Bank. That would be equivalent to more than double Fiat’s hometown Mirafiori plant, which is using just 23 percent of its 300,000-car annual capacity, the bank said.
Fiat has a different idea. Backed by a 6 billion-euro investment budget through 2014, the Italian manufacturer intends to boost European production by 750,000 vehicles to 2 million in four years. Upscale cars for customers in markets like the U.S., Russia and China will account for 15 percent of that output, according to Marchionne’s plan.
“Underutilization of plants caused us huge losses in Europe, which are not sustainable,” Marchionne said at an event yesterday at Fiat’s factory in Melfi, where the carmaker will invest more than 1 billion euros to build two compact sport-utility vehicles. “There are moments to start a new page and start from scratch. We decided to shift away from mass carmaking and compete in the upscale market.”
Accompanied by local union, church and political leaders, Marchionne and Monti pressed a button to symbolically fire up the new production line, which will build a new Jeep model and a Fiat 500 SUV for sales worldwide from 2014. The Fiat executive vowed not to close any factories in Europe and insists his plan can fill Fiat’s capacity in four years.
“It is not a hazardous strategy,” said Marchionne, who has been vilified in Italy over concerns that Fiat may withdraw from the country. “We can afford this new road.”
Fiat, which controls Chrysler Group LLC, the maker of Jeep, intends to introduce 19 new or revamped Italian-made models through 2016, including nine Alfa Romeos and six Maseratis. The plan mimics Volkswagen AG’s strategy with luxury brands such as Audi, Porsche and Bentley, which generate half its profit. Still, it’s not a quick fix.
“There’s significant long-term opportunity, but it is long term,” said John Casesa, senior managing director of investment banking at Guggenheim Partners LLC. “These are 20-year projects. It’s three or four or five product cycles and you have to keep doing things well again and again.”
Marchionne’s strategy has become riskier, as tax breaks on exports that are crucial to the plan may get delayed. Monti, who is due to resign as early as today, could leave a final decision to a new government next year, three people familiar with the matter said.
“While the move upscale is the right choice, the political uncertainties will weigh on Marchionne’s plan,” said Giuseppe Berta, a professor at Bocconi University in Milan who has written several books on Fiat. “It may be inevitable for the Italian carmaker to reduce its capacity in the country.”
After angering unions and politicians over an investment cut in Italy and the closing of a factory in Sicily last year, Marchionne is seeking an alternative to closing plants.
The aim isn’t just politically motivated. Fiat estimates that shutting a facility may cost around 600 million euros. A closure could also hurt the Italian market and lead to strikes and other disruptions, according to a Dec. 7 company presentation.
Before deciding to boost spending in Italy, Marchionne met with Monti for more than five hours in Rome in September, where he won a pledge to help Fiat export its cars outside the euro zone. The support -- tax breaks on exports -- was geared at offsetting the drawbacks of producing in the country.
Italian auto workers cost 28.17 euros per hour, 3.54 euros per hour more than in the U.S., according to data from German auto-industry group VDA. In addition to the extra labor costs, transatlantic shipping can cost as much as $1,200 per vehicle.
Those headwinds are stiff for products like the new Jeep because it lacks the luxury cachet of a Maserati. Fiat’s upscale brands also don’t have the same track record as BMW and Daimler AG’s Mercedes-Benz, which operate from the larger and more stable German market.
“The forces are bigger than Marchionne’s going to be able to overcome,” said Gerald Meyers, a business professor at the University of Michigan in Ann Arbor and former CEO of American Motors Corp., which owned Jeep. “I take a dim view of Fiat’s immediate future.”
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