Fiat: No More "Cheap Italian Tin"

The Fiat group is focusing on quality and flashy new models. Can it steer its way out of the small-car ghetto?

Fiat Honorary Chairman Gianni Agnelli has just capped a legendary career as the leader of Italy Inc. His latest triumph, a successful bid for agro-energy conglomerate Montedison, accelerates Fiat's expansion into services. But one thing still eludes Agnelli--a decisive turnaround at Fiat Auto, the barely profitable business that accounts for 44% of the $50 billion group's sales.

Agnelli may not have to wait much longer, however. At Fiat Auto headquarters in Turin, engineers, technicians, and marketers are putting the final touches on the planned October launch of the Stilo. The midprice compact represents Fiat's most ambitious effort yet to end its dependence on minicars and take on Volkswagen (VLKAY ), Ford (F ), and Renault in the heart of the European car market.

The success of the Stilo could well determine the fate of Fiat Auto and the strategic direction of the entire Fiat group. Last year, General Motors Corp. (GM ) acquired 20% of Fiat Auto, and Agnelli now holds a put option to sell the rest of the car business to the Americans between 2004 and 2009. If Fiat Auto can finally reel in strong profits, Agnelli may be less inclined to sell the world's sixth-ranked auto maker to GM. Or if he does sell, he can command a much higher price.

A restructuring launched in the late 1990s is just beginning to produce visible improvements in the auto maker's fortunes. Fiat Auto earned a meager $39 million in operating profits last year, but analysts forecast an increase to $151 million this year and see an even sharper rise in 2002, as full-year sales of jazzy new models kick in for Fiat and its sister brands, Alfa Romeo and Lancia.

Auto analysts who have driven early versions of the Stilo hatchback are impressed with the car's handling, German-quality interior, and special features including eight airbags, keyless ignition, adaptive cruise control, and electronic stability program. "They've turned out a model that is Northern European in aspect," says Stephen Reitman, senior auto analyst at Merrill Lynch & Co. in London.

ACHILLES' HEEL. To clinch the comeback, Fiat Auto's management is also racing to overhaul sales and marketing, long the company's Achilles' heel abroad. Shopping its rivals for some first-rate talent, Fiat last fall recruited Juan Jose Diaz Ruiz, the architect of sales-led turnarounds at Toyota Europe, Audi, and Seat. The Spaniard has installed powerful brand managers for Fiat, Alfa Romeo, and Lancia, and started overhauling a weak distribution network. For the Fiat brand alone, Diaz Ruiz aims to ratchet up the marketing budget by 27% next year, to $610 million. "Fiat has management now that understands how to sell," says Merrill's Reitman.

Enhancing the turnaround are the benefits now flowing from the joint venture with GM--a deal clinched by Chairman Paolo Fresco, the former general Electric veteran handpicked by Agnelli to boost Fiat's competitiveness in global markets. Savings from common parts purchasing and the shared development of engines and transmissions are expected to be $174 million this year. By 2004, the two auto makers are expected to generate further savings by producing common chassis components, starting with a shared platform for the future Alfa Romeo, Lancia, and Saab models. Overall, GM and Fiat hope to reap $2 billion annually in savings by 2006. "It's hard to find another example [of an alliance] that has moved so quickly," says Michael J. Burns, president of GM Europe.

WEAK IMAGE. But the road ahead remains steep. Fiat Auto's European market share has sunk dramatically, from a peak of 14.6% in the mid-1980s to 10.9% at the end of 2000. Coddled by a protected domestic market, where it still sells a third of all cars, Fiat failed to innovate; meanwhile, foreign sales grew increasingly weak. Despite a nascent generation of better-made products, Fiat suffers from a weak brand image outside Italy. Auto suppliers in Germany still joke that the letters in the name Fiat stand for the German words "defects in every part." "For years, Fiat has pandered to the prejudice of cheap Italian tin for less discerning customers in Europe," says Garel Rhys, professor of motor industry economics at Cardiff University. "Fiat now needs fantastic products to break out of the ghetto they are in."

That's where the Stilo comes in. Fiat hopes to sell 400,000 Stilos by 2003. A home run with the model would help shift Fiat's sales mix toward lower-middle-range cars and away from minis like the Punto, which today represent 74% of sales. "We're trying to shift the center of gravity. When 74% of your sales are in small cars, you're in the small-car business," says Diaz Ruiz.

Fiat's overhaul of Alfa Romeo, the maker of sporty models, has already delivered impressive results, with vehicles sales up 76% since the launch of several new models starting in 1997. Analysts expect sales of the Alfa 147, introduced in 2000, to top 120,000 this year. Both the Alfa 147 and the Stilo offer an option for a high-tech information and entertainment system, including a trip computer, satellite navigation, and a hands-free cellular phone that uses voice recognition--features hardly associated with Fiat in the past. But that's the point. Before he exits, Agnelli wants a new Fiat Auto to emerge from the old.

By Gail Edmondson in Rome with Christine Tierney in Prague

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