Fiat Targets Doubling Its Profit by 2018 on Global Brands

Fiat SpA laid out plans for 55 billion euros ($76.6 billion) in investments to transform Alfa Romeo, Maserati and Jeep into global brands and more than double profit in the next five years.

The Italian automaker yesterday forecast 2018 earnings before interest and taxes of 8.7 billion euros to 9.8 billion euros, up from 3.5 billion euros last year.

Chief Executive Officer Sergio Marchionne, 61, unveiled the goals yesterday during an investor presentation in Auburn Hills, Michigan, that also included boosting yearly deliveries 61 percent to 7 million vehicles in 2018. His program envisions expanding model offerings and production capacity at Alfa Romeo, Maserati and Jeep to make them into nameplates that can attract customers from Beijing to Berlin to Boston.

“Today we bring all the various pieces of the mosaic together,” Marchionne said. “It’s a courageous plan that in several respects represents a major break with the tradition of the past.”

The push marks a critical step in the CEO’s decade-long effort to turn Turin, Italy-based Fiat into a carmaker big enough to challenge General Motors Co., Volkswagen AG and Toyota Motor Corp., following the completion of the purchase of the rest of Chrysler Group LLC in January. VW, the world’s second-biggest carmaker, is targeting sales of more than 10 million vehicles in 2014, while Toyota, the global sales leader, is forecasting deliveries of 10.32 million.

Reaching 7 million should move Fiat Chrysler up at least one rung on the global sales rankings, Marchionne said.

Quarterly Results

The need for the reorganization was underscored yesterday after Fiat reported a 1.4 percent decline in first-quarter earnings. Trading profit fell to 622 million euros, missing the 854 million-euro average of five analyst estimates compiled by Bloomberg.

Fiat dropped 10 cents, or 1.2 percent, to 8.47 euros yesterday in Milan, prior to the release of the quarterly results and 2018 group targets.

The Alfa Romeo effort is the most aggressive, with plans to invest 5 billion euros through 2018 to bring out eight new vehicles and increase deliveries more than fivefold. Fiat’s expansion is focusing on rebuilding Alfa, a cultural touchstone since the 1967 film “The Graduate.” The marque has the potential to help drive profit for the group, in the same way that Audi does for VW, by commanding higher prices than mass-market models with the Chrysler, Dodge or Fiat badges.

Rebuilding Alfa

Alfa Romeo, which will develop new rear-wheel-drive and four-wheel-drive vehicles, aims to boost sales to 400,000 in 2018 from 74,000 last year. The brand, which will continue to build all its models in Italy, will begin rolling out the new vehicles at the end of 2015 when a new mid-size car comes to market. Alfa will ditch the current Mito compact as part of the overhaul.

Maserati will increase annual deliveries more than fourfold by 2018 to 75,000 and expand its model offerings to six, including adding the Alfieri sports car, shown this past March in Geneva. The brand aims to more than triple revenue in the next five years to more than 6 billion euros. Maserati will invest more than 2 billion euros to push growth.

Jeep aims to more than double deliveries by 2018 to 1.9 million sport-utility vehicles, with the number of dealers worldwide rising 28 percent to 6,023. The brand, which last month received approval to begin production in China, plans to eventually produce SUVs at 10 factories in six countries.

Slow Process

Marchionne is also planning to boost sales at the group’s mass-market brands, with the Fiat nameplate’s annual deliveries set to rise 27 percent to 1.9 million in 2018 and the Chrysler badge more than doubling to 800,000.

“The problem is powerpoint presentations are a lot easier than real life,” said Harald Hendrikse, a London-based analyst with Nomura Holdings Inc. “These brands need a huge amount of work to get where they need to be. The world changes very slowly and you have brands at the bottom of the pile in many regions. It’s not going to happen overnight.”

Marchionne led turnarounds of Fiat and Chrysler Group that started with audacious plans. While falling short on some volume targets, the CEO has stuck to the strategic actions as outlined, so investors and other stakeholders such as dealers and union leaders pay close attention to these capital and product plans.

He also said he will run Fiat and Chrysler until the end of the plan in 2018, two years longer than he said he would stay in January.

Funding Needs

Fiat will need to come up with the money for the investments laid out yesterday against a backdrop of mounting debt, which the automaker forecasts will rise to 10.3 billion euros by the end of the year after the acquisition of Chrysler. Available liquidity at the end of 2013 was 22.7 billion euros. The carmaker said yesterday that it’s keeping open its financing options, while ruling out a capital increase before 2018.

Marchionne said Fiat doesn’t plan any “divestiture” to finance the plan, ruling out the sale of any unit. At the same time, a “mandatory convertible bond is not off the radar screen” after shares of the new entity, Fiat Chrysler Automobiles NV, are trading in New York.

The CEO targets completing the merger of the Italian and U.S. carmakers by the end of 2014. Fiat Chrysler will have its main stock listing in New York while it will be registered in the Netherlands with a fiscal domicile in the U.K. for tax purposes.

Fiat started accumulating Chrysler stock in 2009 as part of a rescue of the U.S. carmaker following the global recession. Without the division, Fiat would have been unprofitable in 2012 and 2013 because of losses in Europe.

Exor SpA, the company that controls Fiat with a 30 percent stake, would invest more in Fiat if it was needed, said John Elkann, chairman of Fiat and Exor.

“I wish I had more” of Fiat, Elkann said. “Sergio doesn’t want more capital.”

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