Fiat: Blowing Smoke or Ready to Race?

Skeptics have missed the turn, insists new chief Herbert Demel, who says new models will put the troubled auto maker in the fast lane

Former Audi Chief Executive Herbert Demel took one of the least envied jobs in the European auto industry last fall. That's when he signed on as CEO at ailing Fiat Auto, which has lost $3.6 billion over the past three years, including $1.2 billion in 2003 on sales of $24.8 billion. The 50-year-old Austrian manager not only has to restore Fiat's profitability, he must reverse a perilous slide in sales: Unit sales fell 8.8% in 2003, and revenues declined 9.6%.

The $58 billion Fiat Group last year sold several large business units, raising $12.5 billion, to help recapitalize the struggling auto division, which makes up 43% of sales. Now Demel has $6.7 billion to invest over three years in new models. With the help of 20 new models, including a restyled Fiat Panda and the attractive Idea minivan launched in 2003, Demel is forecasting a return to operating profit in 2005 and net profit in 2006.

That goal is all the more vital, since General Motors' (GM ) managers insist a put option to sell Fiat to GM is no longer valid. In 2000, GM bought 20% of Fiat, but its stake was diluted to 10% last fall, when the U.S. auto maker declined to put up its $1.2 billion share of a recent $6.4 billion recapitalization. GM says since the outfit's capital structure has undergone material changes, the put is no longer valid. Fiat and GM continue to negotiate a resolution to the dispute.

Demel, who also ran Volkswagen's Brazil operations and, most recently, Austrian supplier Magna Steyr, spoke with BusinessWeek European Correspondent Gail Edmondson at the Geneva Auto Show, which runs Mar. 4-14. Edited excerpts of their conversation follow.

Q: What did you find on the shop floor when you arrived at Fiat?


I found a good foundation of skills and a workforce willing to work much harder than is the view from outside the company.

Q: Several of Fiat's new small cars are selling well.


The new Panda is a nearly perfect product. From the outside, you see the ability of the company to accomplish a perfect design. The market price was O.K., and the launch went well, exceeding our expectations. The Fiat Idea minivan is too young to judge. The Alfa GT is working well.

Q: Does Fiat have enough capital to continue investing in new models and bridge the turnaround to 2006?


We have emerged from the deepest point, and now the strategy is to creep upward again. It's a big mountain, and it will require a lot of sweat. We had a capital increase of 3 billion euro last year. If we work reasonably well, I don't see the need for another increase.

Q: Many experts say the key issue for Fiat's survival is reducing capacity to meet the actual demand, so your cost base isn't a drain. Can you cut capacity seriously -- something your predecessors failed to achieve?


With 45,000 workers, we produce 1.7 million vehicles. You hardly find competitors with that ratio of workers to vehicles. It means we outsource more than average.

In general, labor costs are not a problem for Fiat. There are some production sites where the "clothing" is too big for the volume. Some plants historically produced three to four times as much as today. There's an adjustment to make, but I don't foresee the need to close any plants. We will end 2004 with roughly the same number of personnel.

Q: Are Fiat's losses more related to your costs or to the lack of volume?


It is 60/40 or 70/30 costs-to-volume. Certainly we still have to achieve higher productivity in how we go about producing cars. Also, we have to grow to get to operating breakeven in 2005 and net breakeven in 2006.

Q: What's your approach to the Golf-Class segment, where Fiat's Stilo failed to sell as well as expected?


The C-Segment is important for us. We had a volume of 180,000 units in 2003. The Stilo may have had turbulence in the beginning, but we now have developed a more robust offering of Stilo variants. One or two rivals are clearly doing better. Stilo was the right step in the right direction. Maybe it was too big a step.

Q: What are your top three priorities for 2004?


We have to bring new products to market that tap Fiat's potential. We have to renovate products at top speed. And we have to continue to improve the quality perception, which is still weak, though visibly improving.

We also have to grow our volumes, especially outside Italy. We've also been changing some attitudes in order to get managers to take a higher level of responsibility in individual business units. The company is moving toward relatively independent sub-units.

Q: Will that be enough to reverse the erosion of Fiat's market share?


The market-share erosion stopped in the last quarter of 2003 -- the share was nearly identical to 2002. And January was positive, especially in Italy. The sales channels are healthier than they were.

Edited by Patricia O'Connell

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