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Fiat to Spend $1.33 Billion on SUVs to Boost Capacity Use

Fiat CEO Sergio Marchionne
Chief Executive Officer Sergio Marchionne said, “We decided to shift away from mass carmaking and compete in the upscale market.” Photographer: Jeff Kowalsky/Bloomberg

Fiat SpA, the Italian carmaker which controls Chrysler Group LLC, will invest more than 1 billion euros ($1.33 billion) to build two compact sport-utility vehicles at an Italian factory as part of a program to boost capacity usage and end losses in Europe.

“It is not an hazardous strategy,” Chief Executive Officer Sergio Marchionne said today at the Melfi plant where the models will be assembled. “We decided to shift away from mass carmaking and compete in the upscale market.”

Marchionne plans to boost sales of more expensive models to turn around Fiat’s European operations, which are forecast to post 700 million euros in losses this year and led the manufacturer to cut its 2014 trading-profit goal by 31 percent to 5.2 billion euros. The CEO intends to introduce 19 Italy-produced models through 2016, including nine Alfa Romeo-badged vehicles and six Maseratis.

The carmaker plans to increase production of Fiat and Chrysler cars in Europe to 2 million cars a year in 2016 from 1.25 million this year. Marchionne said today he aims to hit break-even in the region in the next three to four years and to reach full Italian plant capacity by then as well.

The Italywide plan, which will use 15 percent of Fiat’s capacity in the country for exports, may cost around 3 billion euros a year through 2014, according a chart in a Dec. 7 presentation on the automaker’s website.

Compact SUVs

One of the compact SUVs will carry the Fiat badge and the other will be a Jeep model, with assembly starting in Melfi in 2014. Fiat, which is negotiating tax breaks with Prime Minister Mario Monti’s cabinet to make the vehicles more cost competitive, plans to export the models, including to the U.S.

“Going upscale is the only way to grant a future to the automotive sector in Italy,” said Giuseppe Berta, who teaches business at Bocconi University in Milan. “These will, on the other hand, mark the end of mass-market production in the country.”

The expansion of luxury vehicles contrasts with delays in bread-and-butter models. Marchionne postponed the introduction of a new version of the Fiat Punto hatchback, which is produced at the Melfi facility, because of the lack of prospects to recoup the investment amid stiffer competition in Europe’s volume car market.

Marchionne opted to boost Fiat’s offerings of upscale models instead of shutting additional plants after closing one in Sicily last year. Fiat estimates that shutting a factory would cost around 600 million euros, have a negative impact on the Italian market and cause strike actions, according to the Dec. 7 presentation.

Upscale Climb

Fiat isn’t the only volume carmaker in Europe pushing upscale vehicles. Demand in the segment is typically more resilient during economic swings than mass-market models. Renault SA plans to revive the Alpine sports-car brand and is considering building its Initiale Paris insignia into a full-fledged luxury brand, while PSA Peugeot Citroen is expanding the Citroen DS line.

Fiat said Dec. 7 that it plans to eliminate 1,500 jobs in Poland to reduce production as the European auto market is on track to hit a 17-year low in 2012. The carmaker last year moved production of the new Panda from Poland to Italy.

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