Can Fiat Rouse Its "Sleeping Beauty"?

General Motors Corp. (GM ) Chief Executive G. Richard Wagoner would love to snare stylish Italian sports car maker Alfa Romeo from its floundering parent, Fiat Auto, in which GM has a 20% stake. But for now, Alfa Romeo is not for sale. Despite a crushing 2002 net loss of $2.9 billion, Fiat Auto is taking the bold move to launch a new range of models that will bring Alfa Romeo cars back to the U.S. market in 2007. "The Alfa brand is like a sleeping beauty," says one Fiat senior executive. "We can reactivate it with new models."

That's not just marketing hype. Fiat got the Alfa Romeo brand buzz humming in the late 1990s, when it introduced the sexy 156 and 147 models. But those styles are now aging, and sales are in decline. At the same time, its dealer network is woefully weak outside Italy in key European auto markets such as Germany and France, where Alfa doesn't even reach a 1% market share. Last year, Alfa's unit sales slumped 18%, to 169,345.

Alfa Chairman Daniele Bandiera aims to jump-start growth with a raft of new models that leverage the cachet of Alfa's pre-World War II racing heritage and Italian sports car styling pizzazz. His lofty goal is to boost unit sales 80%. But Bandiera's managers have their work cut out for them. Alfa needs to invest more in technology, innovation, and quality to challenge the likes of BMW and Audi in global markets.

Fiat (FIA ) seems willing to make that commitment: It's pumping $636 million a year into Alfa for research and development and capital spending over the next three years, some 23% of Fiat Auto's $2.76 billion budget, even though Alfa accounts for just 9% of Fiat sales. "The competition has gotten tougher. We have to take Alfa up a notch," admits a Fiat exec.

The four cars under development for the U.S. market, called the 939 range, include a coupe, a two-seat Spider Roadster, a four-door sedan, and a station wagon. The 939 range, styled by Italy's prize-winning design house Italdesign Giugiaro, will use the premium platform developed with General Motors' Saab unit and will include four-wheel-drive versions. Alfa also is developing a sport-utility wagon called the Kamel, which will be launched in Europe in 2005. In all, Bandiera plans to introduce 10 brand-new models between 2003 and 2007, and 6 derivatives of existing models.

Fiat already has started talking with GM and former Alfa dealers about collaborating on Alfa's relaunch in the U.S., where analysts say it could reach sales of 50,000 cars. But first, it must strengthen its position in Europe. "The U.S. market is very important for Alfa," says Carlo Mario Guerci, president of Milan consultancy Evidenze. "But before they reenter the U.S., it's [crucial] to reach unit sales of 250,000 to 300,000 [and] become profitable."

Alfa needs more innovation edge to boost its market share on the Continent. That's why it is exploring technology partnerships with fellow European auto makers. Industry insiders believe Audi is a top candidate. And despite Grand Prix wins over half a century ago, Alfa needs to invest in new engines that can compete with BMW and Audi. Indeed, some Turin insiders see Alfa as a brand that, with proper handling, could rival those two. That's what makes GM's pulse quicken.

By Gail Edmondson in Turin

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