More Smoke Is Pouring from Fiat's Engine

A new executive shakeup, but no sign of the necessary repairs

The high drama at Fiat (FIA ) continues, but there's no final act in sight. On Dec. 10, Umberto Agnelli winged his way in a private jet from Turin to Rome for an emergency meeting with Italian Prime Minister Silvio Berlusconi. At issue was the fate of Italy's biggest industrial company and the chief source of the Agnelli family's wealth. With his brother Gianni ailing and creditor banks pressing the Agnellis to sell assets to recapitalize Fiat, Umberto was seeking support for a radical shift in strategy for the auto maker, which could lose as much as $2 billion this year. Berlusconi, anxious about huge layoffs, union unrest, and the political fallout from Fiat's woes, signed off on his plan, including a rupture in the expected alliance with General Motors Corp. (GM ) and a possible spin-off of Fiat's luxury Alfa Romeo brand to Ferrari. But his plan stalled when boardmembers at a Dec. 10 showdown balked at ousting Chairman Paolo Fresco, accepting only the resignation of Chief Executive Gabriele Galateri.

It's the third time in 12 months that Fiat's executive suite has been thrown into upheaval. Fresco insists the turnaround plan set in motion last summer for the Turin carmaker is still on track, and creditor banks are backing him. But industry experts see little sign that any of the protagonists are willing to face the radical cure Fiat needs. That would entail cutting an additional 30% of capacity and reengineering its lineup to compete with Volkswagen (VLKAY ), Toyota Motor Corp. (TM ), and PSA Peugeot Citroën (PEUGY ), which are steadily eroding Fiat's sales. "Investment bankers don't know how to build cars," says Arndt Ellinghorst, an analyst at WestLB Panmure bank in Frankfurt. He says Fiat needs the kind of gut-wrenching overhaul that ex-Chairman Ferdinand Piëch launched at VW in the early 1990s.

An overhaul is just what Berlusconi and Italian workers fear, especially if it means a slash-and-burn American-style approach. Such concerns could be behind the surprise move by Umberto to consider forfeiting the put option to GM, which gives the Italians the right to sell the 80% of Fiat to GM that it doesn't own, starting in 2004. With GM out of the way, Fiat would be free to find other carmaking partners, or ask the government for an infusion. Analysts warn, though, that Fiat may already be unsaleable at any price.

For now, the Agnellis and government officials are keen to buy time and forestall tough measures, including the sale of Fiat group assets. On Dec. 6, Fiat temporarily shuttered two plants and furloughed 8,100 workers, some 20% of the workforce. Angry unions responded by blocking highways and closing ports. Fearful that a Fiat implosion would imperil the economy, Berlusconi and his Cabinet have insisted the workers be rehired in a year and the plants reopened. Fiat forecasts that the temporary shutdown will save the company $1 billion. But unless it revives sales within a year, it will face another surge of red ink.

Analysts are now grimmer than ever about Fiat's prospects. The company will have to go to the markets soon for another recapitalization, just 10 months after a $1 billion capital increase. A turnaround means three to four years of heavy investment and visionary management, assuming Fiat can finance a cash-burn rate of $2 billion a year plus $2.5 billion a year to invest.

A solid turnaround is impossible without new models. Sales of the Stilo compact, introduced last year, have been disappointing. And rivals such as Toyota have won market share with snazzy new cars like the Yaris--in the small-car category that Fiat once owned. "You can cut costs, but in this industry you need top-line growth, and Fiat's sales are falling. I don't see how they'll be able to fix it," says Deutsche Bank Securities Inc. analyst Gaetan Toulemonde. As the battle for Fiat drags on, that task will only get harder.

By Gail Edmondson, with Kate Carlisle in Rome

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