Fiat Chrysler's Five-Year Road to Ruin
Fiat Chrysler Automobile gave its latest Five Year Plan journalists and investors on Monday in a presentation that, according to the tweets of exhausted attendees, lasted more than 11 hours. Having attended the 2009 version of Chrysler's quintennial Powerpoint deathmarch, emerging more dazed by the ordeal than enlightened, I was a little surprised to see another Ironman Marathon rolled out for analysts.
But as tweets of despair turned to stories credulously reiterating the day's slides, it became clear that the tactic was once again basically successful. A day-long onslaught of information and projections, directed by the company's mercurial Chief Executive Officer Sergio Marchionne, has turned out to be an reliable way to maintain the illusion that one of the most marginal of automakers is a viable player in the brutally competitive global marketplace.
Still, illusion it most surely is. Fiat, the ostensible rescuer of Chrysler in 2009, has seen its European and South American strongholds suffer in the face of economic headwinds and intense competition. New Fiat-based products in the U.S. have received a mixed reception at best, and the company's product lineups have dwindled as models are cut and not replaced.
Meanwhile, neither of the merged firms has any presence worth mentioning in China, the key global volume-driving market. For the moment, FCA is functionally little more than an Italian luxury car company (the Ferrari and Maserati brands) and an American truck and SUV company (Ram and Jeep) propping up a number of loss-making attempts at volume car brands. In some respects, the fact that Fiat and Chrysler even made it through their first five year plan is an impressive achievement, but the onus is on Marchionne to explain how his patchwork empire is worth more than the sum of a few of its parts.
To that end, he has one real weapon: a fantastic starting point for his graphs. In 2009, when the he set about merging Fiat and Chrysler, the global economic crisis had brought the U.S. auto market crashing from over 17 million units to just over 10.5 million units, hitting Chrysler the hardest. The subsequent rebound toward the 17 million level has been rapid, buoyed by an explosion in auto loan availability, and has driven an 82 percent increase in Chrysler's Nafta-nation sales over the last five years. But with the U.S. subprime auto loan market showing signs of mounting risk, and gas price pressure growing, the U.S. truck and SUV sales boomlet on which the company's fortunes rely is looking decidedly fragile. Even if a gas price shock or credit crunch doesn't take out FCA's key profit centers, the inevitable cooling of U.S. auto loan expansion will cut heavily into its projected 48 percent sales growth in North America. If continued anticorruption campaigns in China further affect luxury car demand there, Maserati's four-fold projected increase in volume (another key profit contributor in FCA's plans) is in similar trouble.
After all, FCA's mass market plans are only just taking shape. Having initially presented Chrysler as a pseudo-luxury brand in its 2009 plan, the latest presentation saw a rapid about-face, with Chrysler now being positioned as a mass-market volume brand, taking on Ford and Toyota with an expanded lineup. Yet the first new Chrysler models won't actually hit showrooms until 2016 at the earliest, and then the only new models are a re-badge of the lukewarm Dodge Dart compact and a a plug-in hybrid version of the Town & Country Minivan. New full-size and mid-size crossovers won't debut until 2017 and 2018 respectively, and there's no sign that Chrysler will compete at all in the fast-growing compact crossover segment. Having slashed R&D to the bone to keep the lights on for the last five years, FCA desperately has to fill a yawning abyss where its new product pipeline should be.
Moreover, the firm has no fewer than 18 architecture families underpinning its relatively small global volume, putting it miles behind the intensive platform rationalization being pioneered by Volkswagen, Nissan and others. Add the firm's inability to develop hybrid, plug-in or electric technology for anything other than regulatory compliance, and the technological gap between Fiat Chrysler and the global majors widens to the point of absurdity. What FCA seems to be offering in lieu of high technology or new product is a portfolio of brands that, Marchionne asserts, have "more DNA" than competitors. But as the delicate balance between FCA's American and Italian interests demonstrates, brand DNA can be as much a risk factor as an asset. FCA's planned ramp-up of imports into Nafta, from 32,000 units in 2013 to 360,000 units in 2018, including a new Italian-made Jeep Renegade, could well re-open ugly debates from the 2012 election. In any case, all the brands in the world are no substitute for the new product or global rationalization strategy that FCA doesn't have.
With over $10 billion in net industrial debt already, the company can't take on more, but Marchionne also refuses to raise more equity in the company or sell a crucial asset such as Ferrari. With no hopes of translating any of the profits from Ram, Jeep, Ferrari or Maserati into a dividend any time soon, shareholders may decide that those profit centers would provide a greater return on their capital as part of a more competitive firm. If Marchionne can't keep journalists and analysts spellbound with audacious growth estimates, a plucky underdog narrative and free tablet computers for another five years, his firm (and the US taxpayers' investment in Chrysler) is in serious trouble.
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