Can Fiat Drive The Palio Round The World?

It's betting billions the car will take off in emerging markets

When it throws a party for its new car models, Italy's Fiat knows how to have a good time. The 800 journalists and auto analysts invited to southeast Brazil for the Apr. 15 launch of Fiat's new "world car," the Palio, will get to dance the samba through the night in the baroque square of Ouro Prêto, a colonial town famed for its ornate mansions. Next day--if they are up to it--they can test drive a Palio built at Fiat's huge factory near Belo Horizonte, 100 kilometers away.

Turin-based Fiat plans many more colorful Palio launches around the world, as it goes after consumers from Brazil to India and offers a whole family of Palio models, from hatchbacks to pickups. Other makers have rolled out ambitious world-car programs, like Opel's Corsa and Ford Motor Co.'s Mondeo. But these models are mostly targeted at the developed European and American markets. Fiat's Palio, with a starting price of around $8,000, is the first-ever car specifically designed for the emerging economies of Latin America, Africa, and Asia. That's a risky strategy--these countries, though growing fast, are vulnerable to lurches like inflation or political upheaval, which can kill consumer demand fast. But if Fiat can ride out the turbulence, it could grab a substantial piece of the fastest-growing car markets in the world.

Until now, manufacturers have traditionally recycled old models to the Third World--sometimes even shipping over entire production lines. Renault, for example, is assembling its 15-year-old Renault 9 in Argentina. Fiat's Uno, which went out of production in Italy in 1993, is being assembled in Morocco and India.

This time, though, Fiat is not offering up some slightly altered version of a European car. "Developing countries are a very interesting market, but they need different things from the European market," says Roberto Testore, 43, the recently appointed head of Fiat Auto. While North America, Western Europe, and Japan account for more than eight of every 10 cars sold today, these are mature, saturated markets. In contrast, Testore thinks that car sales in the developing world are set to increase by a huge 140% by 2004, and that such a promising market deserves special treatment.

To tap that market, Fiat is basing the Palio family of models on a single modular platform, allowing it to spread the car's $1.2 billion development costs over many different production sites. The Palio's toughened chassis is designed for the rough terrains and harsh climates of the developing world.

FIAT MAN. Later this year, Palios will start rolling out of Fiat plants in Poland, and in early 1997, production of station wagon versions will commence at a new $600 million factory in Argentina. Fiat is also negotiating partnerships with Johannesburg-based Automakers, Bombay-based Premier Automobiles, and Turkey's Koc Group to build the car, and has already cut preliminary deals to produce it in Morocco and Algeria. "We see six or seven production centers throughout the world," says Testore. If the new Fiat chief is right, Palio production worldwide should reach 900,000 units by the end of the decade. That number could jump further if the company manages to strike a deal in China.

Because of the complexity it brings to Fiat Auto, the Palio is going to be one of the toughest challenges facing Testore. A self-defined Fiat man, the Turin-born engineer began working at the auto group at age 24 and has moved quickly up the corporate ladder. By 1994, he had become CEO of Fiat's $850 million robotics division. Testore's moment came in late February, when Fiat Auto chief Paolo Cantarella was promoted to run the entire Fiat Group following the retirement of Chairman Gianni Agnelli. "We need to make way for the younger generation," Agnelli said. Testore is now the youngest head of any major car group in the world.

The Palio effort is coming just after Fiat clawed back market share in Europe and raked in hefty profits of $1.3 billion last year. The group's black ink has helped pay for the $2 billion cost of setting up production of the Palio in Brazil and Argentina. Palio won't have much effect on Fiat's bottom line this year or next, says Testore. But a little further out, he's looking for a big payoff. If the Palio is a success, Testore will certainly be entitled to a party.

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