Are You Trying to Seduce Me, Mr. Marchionne?

To bankroll a luxury-car expansion, Fiat’s CEO will have to tap the U.S. automaker he helped revive
Photo illustration by 731; Car: Copyright "Alfa Romeo Automobilismo Storico, Centro Documentazione (Areze, Milano)"; Marchionne: Marka/Superstock

Ever since Sergio Marchionne snuck in to see The Graduate as an underage teen in the 1960s, he’s had a soft spot for Alfa Romeo, the maker of the Spider Duetto convertible Dustin Hoffman drove in the film. More than four decades later, Marchionne is the chief executive officer of Alfa Romeo’s parent, Fiat, and he wants to return the struggling brand to its former glory. To pull it off, he needs cash from Fiat-controlled Chrysler Group. The problem is, he hasn’t found a way to get it: A union trust still owns more than 40 percent of the U.S. automaker’s shares.

Unlocking Chrysler’s $12 billion cash hoard is about more than just refreshing Alfa Romeo and fulfilling the dreams of a “young idiot,” as Marchionne, 61, recalls himself. Fiat’s ability to recover from losses in Europe depends on getting access to the American company’s resources to fund long-delayed new vehicles and stop a downward spiral in its home region. “Marchionne is facing the most difficult moment since Fiat took over Chrysler,” says Giuseppe Berta, a professor of business history at Bocconi University in Milan. “He’s in a hurry to complete the merger as soon as possible to invest in new models in Europe.”

Alfa Romeo has long been a cornerstone of Marchionne’s strategy for Fiat. The plan is to transform the 103-year-old Italian carmaker, which currently sells only two hatchbacks and a small sports car, into an upscale global brand that can spin off profits the way Audi does for its parent, Volkswagen. Marchionne has failed to make much progress, as he’s put spending at Fiat on hold to conserve cash amid Europe’s six-year slump. Instead he focused on turning Chrysler around after rescuing the carmaker as part of its government-aided bankruptcy in 2009.

Fiat will likely delay by a year the introduction of two Alfa Romeos that had been planned for 2014, according to two people familiar with the situation, who were not authorized to speak on the record. The Italian automaker may complete plans by next spring to build new Alfa Romeos at a factory in the southern Italian town of Cassino, the people say. A Fiat representative declined to comment.

Burdened by high costs, underused factories, and weak demand for its middlebrow cars in Europe, Fiat posted a loss of €482 million ($653 million) in the first half of the year, excluding results at profitable Chrysler. The group, including Alfa Romeo and the namesake brand, sold fewer cars in Europe in September than either Audi or BMW—even though most of Fiat’s cars are in the usually higher-volume mass-market segment.

Fiat now predicts sales of 300,000 Alfa Romeos a year by 2016, compared with a 2010 forecast of 500,000 by 2014. The upscale nameplate is expected to miss even this lowered goal by 36 percent: Researcher IHS Automotive estimates that Alfa Romeo will sell 81,000 vehicles next year and 192,000 in 2016. Audi, VW’s biggest profit contributor, sold almost 1.2 million cars in 2013’s first nine months.

“Marchionne does things well at Chrysler and badly at Fiat,” Volkswagen Chairman Ferdinand Piëch says. Based on its current performance, Fiat “isn’t capable of surviving” on its own, says Piëch, who has publicly sparred with Marchionne over strategy and expressed interest in taking over Alfa Romeo in the past. Fiat declined to comment on Piëch’s remarks.

“If Marchionne really wants to relaunch Alfa Romeo, he needs Chrysler’s cash,” says Bocconi University’s Berta, a former director of Fiat’s archives. “The carmaker has to invest billions of euros in the brand, as VW did with Audi.” Fiat intends to boost total investment by at least €1 billion next year, to as much as €9.5 billion. The higher spending, part of the hoped-for development of about 19 models in Europe in the next three years, including eight at Alfa Romeo, will be tough to finance without Chrysler’s help. “Fiat needs to generate cash to invest in new models and be competitive, but the cash flow they’re generating is not enough,” says Falk Frey, a Frankfurt-based analyst at Moody’s. Fiat is due to burn through about €1.3 billion this year, according to estimates from analysts at Sanford C. Bernstein. Chrysler, by contrast, expects to add $1 billion to its coffers.

The prospect of pooling cash with Chrysler, which would significantly bolster the combined company’s balance sheet, is behind Marchionne’s push to buy the 41.5 percent of the U.S. company still owned by a United Auto Workers retiree health-care trust. The union fund has pushed Chrysler to prepare for an initial public offering as it feuds with Fiat over the stake’s valuation. The fund wants as much as $6 billion; Marchionne’s offering less than $5 billion.

Even if the two sides agree on a deal and avoid an IPO, Fiat will still struggle to gain quick access to Chrysler’s cash, because of covenants on some of the American carmaker’s debt that restrict use of the funds. Chrysler Chief Financial Officer Richard Palmer said in July that buying back the debt wouldn’t make financial sense before 2015 at the earliest.

Plans to revive Alfa Romeo aren’t at a total standstill. The brand, which hasn’t been sold in North America for almost 20 years, has started taking orders for the 4C sports car that will hit U.S. showrooms as soon as next April. Alfa Romeo will also make a modern version of the Spider roadster that Hoffman’s wayward graduate drove. That will be built in cooperation with Mazda Motor and turn up in showrooms in 2015. Says Alfa Romeo CEO Harald Wester: “I can just tell you that I expect demand for the 4C to exceed planned production.”