Can Fiat's Makeover Boost Alfa Romeo?

Ferrari-designed engines and a Jeep connection will buff the brand
Katharine Ross and Dustin Hoffman in The Graduate Photograph by Everett Collection

Almost a half-century ago, Fiat’s Alfa Romeo brand grabbed the spotlight when its 1966 Spider Duetto served as the car driven by the lovesick Dustin Hoffman in the film The Graduate. Today the Italian automaker hopes the public will again fall in love with the now struggling nameplate—this time thanks to the star power of sister brands Ferrari and Jeep.

Fiat wants to scrap almost all of Alfa Romeo’s current lineup and create a new line of premium-priced sedans and sport-utility vehicles that can take on the likes of BMW and Daimler’s Mercedes-Benz, people familiar with the plans said. The models will start to hit the market in 2016, and high-end versions will be equipped with motors developed by Ferrari, the Fiat-owned supercar maker, said the people, who asked not to be identified because the discussions are private. The revitalized brand would get a further boost by sharing Jeep’s international dealer network.

Until now, Fiat Chief Executive Officer Sergio Marchionne’s promised turnaround of Alfa Romeo has been stalled. Since the executive took the reins at Fiat in 2004, Alfa Romeo’s annual sales have tumbled 56 percent, to 74,000 cars. In 2012, Marchionne cut the sales target by 40 percent after Fiat’s spending freeze in Europe delayed new models. With auto demand in the region recovering and Fiat armed with more resources because of its recent takeover of Chrysler Group, it may be now or never for the sporty brand.

“This is the last chance for Alfa Romeo,” says Giuseppe Berta, a business professor at Bocconi University and the former head of Fiat’s archives. “Marchionne’s bet is a long shot. To beat the German premium brands, he needs to make Alfa unique. His best chance is Ferrari engines and Italian design.”

The Italian manufacturer is scheduled to make public its plans for the car brand during a presentation on May 6. According to the people with knowledge of the plans, which are still being finalized, Fiat is considering ditching the current versions of Alfa Romeo’s MiTo and Giulietta hatchbacks, which accounted for 99 percent of sales last year.

The revival of Alfa Romeo is a key element of Marchionne’s strategy for the merged carmaker. Fiat managers say the allure of classics such as the iconic Spider Duetto of the 1960s will give the Alfa Romeo brand the potential to help drive profit for the parent company in the same way that Audi does at Volkswagen—by commanding higher prices than mass-market models bearing the Chrysler, Dodge, or Fiat names. “We want to exploit Ferrari’s know-how for Alfa Romeo engines,” Marchionne said in January. “It would be foolish not to.”

Fiat intends to roll out at least six Alfa models in the next five years, including two SUVs, to increase sales more than fourfold, to 300,000 cars, during that time, the people said. The underbodies of the cars will also be used in Chrysler vehicles to spread development costs, they said.

Fiat plans to sell Alfa Romeo models through Jeep’s 1,700 dealers outside North America, giving the brand a distribution network that better competes with BMW’s 3,200 sales outlets worldwide, the people said. Last year 90 percent of Alfas were sold in Europe, where it has 1,200 of its 1,400 dealerships globally.

The move is based on the idea that both brands appeal to buyers seeking alternatives to mainstream vehicles and can coexist because there’s little potential that Jeep SUVs and performance-oriented Alfa Romeo cars will cannibalize each other. “The strategy to mix SUVs and sporty sedans in the same showroom makes sense,” says Ian Fletcher, an analyst with market researcher IHS in London. “But success can’t be taken for granted.” IHS forecasts Alfa Romeo sales will peak in 2017 at 243,000 cars, 19 percent below Marchionne’s goal. Still, that would be triple last year’s sales and the highest number of deliveries in more than 10 years.

The growth would help fill unused capacity at Fiat’s Italian factories, a primary source of the company’s €520 million ($716 million) loss in Europe last year. Marchionne expects Alfa Romeo to anchor a strategy to build upscale cars for worldwide export in Italy to return plants in the region to profitability.

The first model in the new push will be a midsize sedan that will probably be called the Giulia, reviving a model name from the 1960s, and be assembled at Fiat’s Cassino factory near Rome, the people said. The engines, versions of the V6 motors Ferrari developed for Fiat’s exclusive Maserati brand, would be built at sites in southern Italy, the people said. “Alfa Romeos have to be produced in Italy with an Italian powertrain,” Marchionne said in March at the Geneva motor show. “Some things belong to a place, and Alfa belongs to Italy.”

Before it's here, it's on the Bloomberg Terminal.