Fiat's Last Chance

Bringing in Montezemolo from Ferrari is smart, but can even this turnaround ace repair the stalled giant?

Ferrari Chief Executive Luca Cordero di Montezemolo has earned a hero's status in Italy for reviving the once-ailing auto icon and acing four Formula One championships in a row. He proved that Italy can rebuild a high-tech contender and come from behind just when all seems lost. Now the 56-year-old manager has to do a command performance for Ferrari's $58 billion parent. On May 30, three days after the death of former Chairman Umberto Agnelli, Montezemolo was named chairman of troubled Fiat (FIA ), Italy's largest industrial group.

Montezemolo's top priority is clinching a turnaround at the ailing, $24 billion Fiat Auto, which nearly pushed the group into bankruptcy in 2002. Over the past five years, Fiat Auto racked up $9.3 billion in net losses -- and the bleeding hasn't stopped. Several new models finally seem to be reversing a dire decline in sales. But to secure a solid recovery, the Turin-based auto maker needs to keep hot models coming, boost factory flexibility, and overhaul sales and marketing debilitated by years of underinvestment and mismanagement.

Montezemolo, a skilled marketer with a deep appreciation for cutting-edge technology and production, might well be the steady hand that could help steer Fiat back to health. At Ferrari, Montezemolo restored lost brand luster in part through ingenious marketing, including persuading the Museum of Modern Art in New York to do a splashy retrospective on Ferrari's design over the decades -- a high-gloss exhibition that other major museums in Berlin and Toyko have since restaged. Fiat, too, has a tarnished brand that needs refurbishing.

But fixing Fiat is not all Montezemolo has on his agenda. On May 27 he became president of the Italian employers' association, Confindustria -- where Job One is reversing Italy's alarming industrial decline. The country's exports are eroding, investment is stymied, and promised economic reforms are stalled -- Fiat's woes writ large. The double role thrusts Montezemolo squarely into the void left by the March, 2002, death of late Fiat Chairman Giovanni Agnelli, who once ran Confindustria and who for a generation personified Italy Inc.

For Montezemolo, who is known for his ability to coax opposing parties toward a common goal, the rescue of Fiat would be an object lesson in how Italy can reinvent itself. A turnaround plan launched at Fiat 12 months ago has helped trim losses, while the sale of some $8.5 billion in group assets, including insurer Toro Assicurazioni, injected urgently needed capital for a new generation of cars. Vehicle sales at Fiat Auto are up 13% in the last six months -- and demand for Fiat's newly launched Panda supermini and Idea subcompact minivan is outstripping supply. "The new products are wonderful. Fiat can finally join the race," says Christoph Stürmer, senior market researcher Global Insight in Frankfurt.


But the 105-year-old auto maker remains plagued by inflexible production lines that can only produce one model. To boot, intransigent labor unions have blocked plant closures, making it harder for Fiat to return to profitability. Its five factories in Italy plus those in Brazil and Poland can produce some 2.5 million cars a year, but last year the company made only 1.8 million. Unable to trim its production overhead sharply, Fiat will need a strong rebound in sales to survive. "Fiat's on its last chance," says Jochen Gehrke, auto analyst at Kepler Equities in Frankfurt. "If they produce flops, the game is over." In the first quarter, Fiat Group halved its losses to $192 million. But analysts note a worrying rise in net debt to $5.4 billion and forecast that the group will run a negative free cash flow of $1 billion to $1.5 billion in 2004.

While Fiat last year raised $2.2 billion in a rights issue, its financial credibility will be on the line as early as July, 2005, when a $3.6 billion convertible bond comes due. That's when a group of eight Italian banks has the option of turning the bonds into a controlling 24% equity stake. Bankers and analysts say it is unlikely Fiat will be able to repay the bond.

Even sooner, in January, 2005, Fiat's put option with General Motors Corp. could trigger a crisis of confidence. The two are negotiating to eliminate the option, which allows Fiat Group to sell its share in its auto maker to GM. The Detroit company insists the put is no longer valid, but Fiat wants to be paid for the value it represents. Yet if Fiat fails to reach an agreement with GM by yearend and continues to post heavy losses, the put will be worthless, analysts say. "That's the moment of truth," says Albrecht Denninghoff, auto analyst at Hypo-und Vereinsbank in Munich, noting that such an assessment would kill investors' appetites for another capital increase.

Adding to Fiat's woes, CEO Giuseppe Morchio resigned on May 30 following the appointment of Montezemolo. Morchio wanted the combined position of chairman and CEO. Fiat's board named board member Sergio Marchionne, 52, the CEO of Swiss testing and inspection company SGS, as successor on June 2. Despite Marchionne's strong turnaround credentials, many worry about the discontinuity plaguing Fiat's top management, which has seen five CEOs in three years.


Those close to the company say Montezemolo will work closely with his team. The problem is, Montezemolo may have taken on more than any manager could handle by agreeing to help oversee Fiat's recovery and turn around Italian industry at the same time. To be sure, the long-time friend of the Agnellis -- he grew up playing with the Turin dynasty's children -- has the complete trust of the family, including John P. Elkann, 28, the grandson of Gianni Agnelli, who was recently named vice-chairman of Fiat. Montezemolo also has able execs in Marchionne and Herbert Demel, the former Audi executive and first outsider brought in to run Fiat Auto. But Fiat's condition is fragile, and one more wrong turn might be its last.

Meanwhile, as industry boss, Montezemolo will seek to defuse tensions between Silvio Berlusconi's center-right government, which has failed to deliver on economic reforms, and the unions, which have blocked them. Montezemolo will now sit in the hot seat on explosive issues such as pension reform, tax cuts, and labor market reform. Also on the front burner: A vital overhaul of education, research and development, and innovation policy. "I don't ever tire of saying: It's innovation, innovation, innovation," Montezemolo said during an inaugural speech as industry chief on May 27. Exactly. If only Fiat -- and Italy -- had heard those words sooner.

By Gail Edmondson in Frankfurt

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