Fiat May Follow In Volvo's Tracks

Spurned as a suitor, it might unload its car division, too

When Italy's legendary Ferrari unveiled its latest Formula One racer on Jan. 30, parent company Fiat was eager to share the glory. Standing like proud parents behind the racing-red monster were Honorary Chairman Gianni Agnelli, patriarch of the clan that owns 40% of the auto maker, Paolo Fresco, the former General Electric Corp. executive who became chairman last year, and Chief Executive Paolo Cantarella. Their common wish: that Ferrari would bring home the F1 championship this year, an honor that has eluded the Italians since 1979. "We've waited 20 years," Agnelli declared. "I don't want to make that 21."

Fiat desperately needs something to cheer about--and soon. Only days before, the Turin group was badly shaken when larger, richer, and more self-confident Ford Motor Co. snapped up Volvo's car division for $6.5 billion. Left on the table was a Fiat offer of about twice as much for the entire Volvo group, making the Italians look like spurned suitors.

Now, beset with problems in many of its markets, Fiat may be preparing to do the unthinkable: put its own car division on the block. Fresco, Cantarella, and other top managers no longer insist that Fiat can soldier on alone. "It would be God's blessing," says one younger Agnelli, "to sell the automobile business and get liquidity for other investments."

BIG BITE. The liquidity would be considerable. Garel Rhys, an industry specialist at Cardiff University Business School in Wales, puts the car unit's value at $15 billion to $20 billion, depending on estimates of future profitability. Only Ford, Toyota, and GM could swallow a bite that large, and a tie-up with Ford would make the best sense. While no talks are under way, Ford is no stranger to Fiat. They discussed a merger of their European car businesses in the mid-1980s for the same reasons a deal looks logical now: Ford is an also-ran in Italy and does not produce the small cars Fiat makes. Neither is Ford as active in South America as Fiat.

For now, analysts rule out other European carmakers as partners. Merging with another volume producer--Renault, for instance--would result in politically unacceptable levels of layoffs. And for the moment, no European company is willing to accept that kind of pain.

As the Agnellis know, selling Fiat's car unit would prompt the same sort of emotional reaction that Volvo now faces in Sweden. That's one reason Fiat wanted to merge with Volvo. In addition, Volvo's models do not compete directly with Fiat's. And the two companies' commercial-vehicles and aerospace operations also made a good fit. So eager were Cantarella, Fresco, and Agnelli to link up with the Swedes, say sources close to the talks, that they considered a hostile offer after the Ford deal was announced. "We were in the market for the whole group, and in the end, Volvo management wanted to sell just a piece of it," maintains Cantarella. "But we are not disappointed."

Maybe not. But Fiat's failure underscores how isolated the Italian group is in an industry that is consolidating all around it. Last year's Daimler-Chrysler marriage and now the Ford-Volvo deal expose the competitive weakness of medium-size producers such as Fiat and France's Renault and Peugeot. Fiat, whose cars accounted for just over half of last year's total sales of $52 billion, has no presence in the North American car market. And it is out of the running as a manufacturer of profitable luxury brands.

That's why the message that Fiat cannot go it alone is finally sinking in. With an output last year of 2.4 million cars--half of Volkswagen's volume and less than a third of General Motors Corp.'s--it cannot make the huge investments in technology, marketing, and distribution that bigger players can. Chairman Fresco, brought in with a mandate to force a strategic alliance, now talks of a "sense of urgency."

Fresco is right to be concerned. Car operations, analysts believe, may have lost as much as $120 million last year, on sales of $28 billion. Big bets in Brazil, Argentina, and Russia look shaky. In Italy, where sales are also slumping, Fiat's market share, traditionally more than 50%, fell to a record low of 39% for the year. Elsewhere in Europe, especially in the East, Fiat--with its models concentrated in the lower end of the market--is vulnerable to low-cost manufacturers such as South Korea's Hyundai Group and Daewoo.

Other parts of the Fiat empire cannot make up for the lackluster showing in cars. The New Holland subsidiary, a $6 billion maker of agricultural and earth-moving equipment, has been hit by falling sales as commodity prices have collapsed. For the group as a whole, profits were down 38% last year, to $760 million, and Fresco is warning that 1999 will bring little relief. Fiat's share price remains healthy--but that reflects speculation that Fresco can cut a deal.

Small surprise, under these conditions, that Fresco could find himself following in the footsteps of Leif Johansson, Volvo's CEO. Fiat's future may still be bright, but it is likely to be less Italian.