Fiat Chrysler's New Strategy: Ignore the Future
Ask any auto executive about the issues that keep them up at night, and they'll reply with one or more of the following:
- The hunt for opportunities to boost volume, as the days of developing-market expansion come to an end.
- Increasingly tougher emissions regulations, which threaten the truck and SUV segments that deliver the healthiest margins in the business.
- The rise of technology-driven "new mobility paradigms," such as car sharing and autonomous vehicles, which threaten to erode the private-ownership values that underpin the industry.
Addressing these pressures requires the scale to compete profitably and the cash to invest in new technologies, which puts smaller automakers, such as Fiat Chrysler Automobiles, at a distinct disadvantage. So it was hardly a surprise that Fiat Chrysler's chief executive officer, Sergio Marchionne, spent much of the last year trying to drum up a merger that would give his firm the ability to face these challenges head-on. But with his search for partners meeting with universal rejection, Marchionne has turned to a bold new strategy to manage these staggering threats: arguing that they aren't really real.
During Fiat Chrysler's fourth-quarter earnings presentation this week, Marchionne went down the list of industry bogeymen and casually dismissed each one. Volume is no longer the critical factor it once was, he argued, because healthy demand for trucks and SUVs is boosting Fiat Chrysler's margins without it having to achieve economies of scale. Emissions regulations can be managed by buying the credits generated by his competitors' money-losing electric-car programs. And as for those new mobility paradigms, Marchionne dismissed the wave of futurism as just the latest distraction for an industry that regularly fails to stick to its knitting.
Marchionne's breezy optimism is backed by a flood of cheap gas that has revived the market for trucks and SUVs -- a market few thought would ever return. With the automaker’s Jeep and Ram brands selling vehicles as fast as they can be produced, Marchionne sees little reason to invest in the brutally competitive, low-margin business of mass-market sedans. The company won’t invest in future versions of its Dodge Dart or Chrysler 200 models, according to Marchionne, but will look to "partners" to provide replacement product.
By cutting sedan production and switching that newly freed-up plant capacity to trucks and SUVs, Marchionne hopes to replace Fiat Chrysler's weakest business with its strongest. With cheap gas prices likely to persist, getting out of the small-car business seems like a no-brainer for an already truck-dependent firm like Fiat Chrysler. In the longer term, the sedan business looks like a loser anyway, since sedans are increasingly becoming commodified "mobility appliances" and are thus most likely to be affected by ride-sharing apps, as well as autonomous taxis and commuter pods.
But Marchionne's pragmatic strategy is far from a no-brainer. For one thing, Fiat Chrysler hasn’t found a partner to produce the sedans it needs -- if not for profit, then to provide its dealers with the full product line they need to keep consumers coming in the door. Absent a long-sought deal with another major automaker, the company's default option will be to rebadge Mitsubishi sedans as Dodges and Chryslers, a move that echoes dark periods of its past and could cause serious erosion of its brand equity.
That would be a worrying development: By abandoning investments in anything but trucks, SUVs and luxury brands such as Alfa Romeo and Maserati, Fiat Chrysler will lose the ability to generate new value for its brands. Though Marchionne's skeptical approach to green cars and new mobility technologies seems pragmatic, it is a strategic retreat from investments that generate meaningful excitement. Other automakers aren't spending billions on electric powertrains or autonomous drive because the future of cars is right around the corner; they’re spending those billions because futurism has replaced performance and motorsports as the prime drivers of the public’s interest in cars.
For now, the market may be reveling in the simple pleasures that trucks and SUVs provide, but at the same time, the public has become fascinated with a future of mobility that couldn't look more different. This contradiction foreshadows the day when tastes change -- whether due to a change in gas prices, market saturation or just boredom -- and a desire for the new overtakes the attraction of large, unsophisticated vehicles. When that day comes, Fiat Chrysler will find itself stocked up on tired brands and yesterday's trends, totally unprepared for the new segments, brands and concepts in which its competitors will have invested billions of dollars.
If Marchionne wants to imagine what a car company looks like after a few product cycles spent betting everything on the premise that nothing in the car business will change, he need only remember what Chrysler was like when he found it.
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