Fiat Lowers Chrysler Target as Europe Loss Narrows

Fiat SpA lowered its profit forecast for Chrysler Group LLC, shifting the Italian carmaker’s focus to reducing losses in Europe as the key to meeting full-year targets.

Chrysler’s 2013 operating profit may miss an earlier forecast by as much as 13 percent as Fiat’s U.S. unit spends money on rolling out new models such as the Jeep Cherokee. The Turin, Italy-based company today stuck to its group profit forecast for the year after cost cuts narrowed losses in Europe.

“Chrysler, which used to be the strength of the group and Fiat’s main competitive advantage versus its European competitors, is carrying the negative news,” said Vincenzo Longo, market strategist at IG Group in Milan.

Fiat Chief Executive Officer Sergio Marchionne, who also runs Chrysler, has scaled back investments in new mainstream models for Europe with the region’s car market mired in a six-year slump. Fiat’s car sales in Europe dropped 10 percent in the first half, worse than the 6.7 percent industry-wide decline. To become more global, Fiat is seeking to buy the remaining shares in Chrysler and merge with the U.S. carmaker.

Chrysler today forecast operating profit of $3.3 billion to $3.8 billion, compared with a previous target of about $3.8 billion. The Auburn Hills, Michigan-based company predicted deliveries of about 2.6 million vehicles, compared with an earlier range of 2.6 million to 2.7 million.

Fiat fell as much as 4.8 percent to 6 euros before the shares trading in Milan were halted. The stock has surged 58 percent this year, valuing the company at 7.5 billion euros ($10 billion).

‘Flawless Execution’

“The timing of product launches and capacity increases causes this year’s performance to be biased to the second half,” Marchionne said in Chrysler’s statement. “A continued aggressive drive for excellence and flawless execution will be essential to attain the targets we’ve set for ourselves.”

Chrysler’s damped prospects countered better-than-expected second-quarter earnings. Trading profit, or earnings before interest, taxes and one-time items, increased 8.7 percent to 1.03 billion euros, Fiat said today in a statement. The figure beat the 931 million-euro average of four analyst estimates compiled by Bloomberg. Sales rose 3.7 percent to 22.3 billion euros.

The lowered Chrysler forecast “reduces the credibility” of Fiat’s 2013 targets, said Sascha Gommel, an analyst with Commerzbank AG.

Steady Forecast

Fiat stuck to a forecast for 2013 trading profit in a range of 4 billion euros to 4.5 billion euros, up from 3.81 billion euros last year. The Italian manufacturer will probably report 3.83 billion euros of trading profit this year, according to the average of 11 analyst estimates compiled by Bloomberg before second-quarter results were released.

A merger with Chrysler would allow Fiat, which also owns the Alfa Romeo, Maserati and Ferrari brands, to tighten cooperation with Chrysler and its Dodge and Jeep nameplates. Fiat relies on Chrysler to sustain its profit amid losses in Europe. Net income rose to 142 million euros from 32 million euros a year earlier. Without Chrysler, Fiat would have posted a loss of 247 million euros in the second quarter.

Fiat’s loss in Europe narrowed to 98 million euros from 138 million euros a year earlier. Competitors also showed signs of improvement. Ford Motor Co., which is closing three production facilities in the region, cut its European losses to $348 million in the second quarter from $404 million a year earlier.

Italian Investments

General Motors Co.’s European unit, which plans to shut a factory in Germany, lost $110 million before interest and taxes, compared with a deficit of $394 million a year earlier. The European operations were helped by $400 million in cost reductions, the company said last week.

The Italian carmaker plans to end losses in Europe by 2016. Instead of shutting additional factories in Italy, after closing one in Sicily at the end of 2011, Marchionne plans to fill underutilized plants with more upscale models, such as the Maserati Quattroporte sedan and the Alfa 4C sports car.

Those investments may be at risk. Marchionne earlier this month threatened to move production of new Alfa Romeo models abroad as Italy’s labor rules hamper its ability to compete. Fiat has put new projects in the country on hold as it pushes Prime Minister Enrico Letta’s government to adopt reforms that help manufacturers with clearer work rules after Fiat’s labor contracts suffered a setback in Italian courts.

VEBA Stake

To merge with Chrysler, Fiat first has to buy the 41.5 percent stake owned by the United Auto Workers’ retiree health-care fund, or VEBA. The two sides are in court disputing the price for a portion of the shares Fiat is seeking to purchase by exercising options it holds.

The Italian carmaker has yet to take possession of 10 percent of Chrysler shares that it’s seeking after exercising three options while a judge in Delaware considers how much Fiat should pay for the initial tranche.

Fiat is “not close” to an agreement with VEBA and it “remains available” for talks, Marchionne said today on a call with analysts, adding that Chrysler is working on the initial public offering process as requested by the trust. “I have no positive news to tell you” on a Chrysler buyout, he said.

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