Fiat Takes Alfa Romeo for a U.S. Test Drive

Almost 25 years ago, Lee Iacocca, who guided Chrysler from the brink in the early 1980s, proposed opening Chrysler dealerships to Fiat's Alfa Romeo, the Italian brand made famous in the U.S. when Dustin Hoffman's character pursued Mrs. Robinson and her daughter in a Spider roadster in The Graduate. That deal wasn't inked until 1988 and fell apart just three years later, precipitating Alfa's exit from the U.S. in 1995. Now Sergio Marchionne, chief executive officer of both Fiat and Chrysler, wants to bring Alfa back to the States as a linchpin of his strategy to make a global auto giant out of his two struggling regional players.

Marchionne's vision is to remake Alfa into a true luxury brand, like BMW, with a lineup of models ranging from high-end compacts to sport-utility vehicles to sports cars. Backed by the scale of the mass-market Fiat, Dodge, and Chrysler brands, the century-old Alfa would spin off outsized profits for the group in the same way hot-selling Audi does for its parent, Volkswagen. Although VW owns 10 brands, luxury-priced Audi accounts for almost half its earnings.

"Alfa is undoubtedly critical to the group," says Marchionne. "It's a premium sport brand. These brands move faster technologically, and there's more profitability there, which allows you to fund R&D. Those technologies become the base for the volume cars of the next generation."

Cruising the high end of the market is part of the strategy of all major automakers. Toyota Motor (TM) has Lexus, General Motors (GM) has Cadillac, and Ford Motor (F) held on to Lincoln, even after it ditched Jaguar, Land Rover, and Volvo as part of its own restructuring. One big reason: Luxury cars command margins that can be up to five times those of mass-market cars, while providing a halo effect for their lesser siblings.

Volkswagen Chairman Ferdinand K. Piëch said in September that he'd like to buy Alfa, and that the German company could better shepherd the brand's move upscale. VW has had considerable success keeping the image of its brands distinct, while sharing parts under the hood to cut costs. Its portfolio spans from the entry-level Skoda to the everyman VW, to the ultra-luxury Bentley and Lamborghini. Audi is the group's cash cow, making more profit per car last year than BMW and Daimler's Mercedes-Benz, and a big reason why VW has become the world's most profitable car company.

Marchionne hopes to emulate Audi's success with Alfa, which he says is not for sale. He's set a goal of more than quadrupling its global sales by 2014, to about 500,000 vehicles, including 85,000 cars in North America to be sold by Chrysler dealers. But since Alfa starts with virtually no presence in the U.S. or China, the world's biggest car markets, that will be tough. "Reaching Marchionne's targets for Alfa in the time frame they're talking about looks extremely ambitious," says Max Warburton, a Sanford C. Bernstein analyst who estimates Alfa lost €300 million ($433.3 million) last year. "Alfa is a fabulous brand which hasn't had the right products. It's going to take a long time." Forecaster IHS (IHS) projects Alfa's sales will only hit 200,000 vehicles by 2014. Harald Wester, the Fiat executive in charge of the Alfa and Maserati brands, concedes that when he talks to auto executives and dealers about plans for an Alfa luxury makeover, he's confronted with disbelief. "They think, who is this clown—the fifth clown in six years—who's telling us a nice story," says Wester. "I don't say we will get there tomorrow. ... You just need a little bit of patience."

Fiat managers believe the U.S. is ripe for an Alfa relaunch in part because the brand is so little known here that its image hasn't been tainted by a recent string of mediocre models. Over the past 10 years, less than 0.2 percent of U.S. new vehicle buyers have had any experience with Alfa, says Alexander H. Edwards, president of researcher Strategic Vision. Still, Fiat in 2008 lured American buyers for 20 percent of the limited-run 8C Competizione, a $265,000 sports car that echoes Alfa's racing exploits of the 1930s.

Alfa's U.S. reentry will begin in earnest next year with the debut of the 4C, a compact sports car. That will be followed by a small SUV, Alfa's first, that will share its underpinnings with Chrysler's new Jeep Compass. Alfa will introduce six new models between 2012 and 2014 worldwide.

Sharing parts between models and brands is a key feature of the Fiat-Chrysler makeover. Future models will cut costs by sharing parts that comprise up to two-thirds of a vehicle's value, Wester says. In compact cars, more than 20 Fiat-Chrysler models will be based on the same technology. They include a Fiat sedan slated to be made at a new factory in China, which will mark the line's belated entry into the world's biggest car market, as well as a 40 mpg Dodge for U.S. buyers. Fiat is even planning to build a Maserati SUV, based on the Jeep Grand Cherokee, in a Chrysler plant in Detroit.

Plucking Chrysler out of bankruptcy in 2009 was the deal that Marchionne, formerly head of Swiss quality and testing concern SGS Group, had been looking for since taking over at Fiat in 2004. He's long said that automakers need to sell 6 million vehicles a year to survive; that's about 2 million more than Fiat and Chrysler's current volume. This year marks a crucial test for the combination. Marchionne hopes to acquire a majority stake in Chrysler, repay government loans, and make the U.S. automaker profitable again. Fiat on Apr. 12 increased its Chrysler stake by 5 percent, to 30 percent, after agreeing with the Treasury to sell Chrysler models under the Fiat badge in Brazil and Europe. He may also try to squeeze in an IPO of Chrysler. "We made the first turn and we didn't hurt anybody," says Marchionne. "Now execution is key."

That won't be easy in Europe, where Fiat's market share in the first two months of 2011 sank to 7.5 percent from 9.2 percent a year earlier because of an aging product line and its dependence on sales in debt-stricken southern Europe. Volkswagen's share climbed to 22.2 percent from 20.7 percent. "The main risk for the group is not execution of the integration with Chrysler but the absence of new models in the short- to medium-term," says former Fiat executive Stefano Aversa, now co-president of restructuring firm AlixPartners.

The bottom line: Marchionne is positioning Alfa Romeo as Fiat's luxury brand. He hopes to capitalize on efficiencies with Chrysler to raise margins.

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