Fiat's Next Chapter

Fiat Auto SpA, with money in the bank from its split with General Motors Corp. and a new management team at the helm, has reached what could be the most critical juncture in its colorful history.

Even as sales and profits continue to fall, Fiat's new brass is busy reworking product plans and shifting divisions to find synergies and new business opportunities, while revamping the auto maker's distribution network to gain prominence in Europe's major markets.

The Italian auto maker also is exploring ways to improve its productivity and utilize — or eliminate — the 20% excess capacity within its production network.

All this comes as Europe and Fiat's home market of Italy remain mired in economic uncertainty, with few signs of improvement on the horizon.

Fiat's sales have tumbled dramatically in recent years. The Italian auto maker saw demand for its vehicles in Western Europe fall to 1.35 million units last year, down 24% from 1.79 million in 2000. The slide has continued so far this year, with first-quarter sales off another 14.8% in the region.

Even in Italy, where the auto maker controlled a dominating 60% share as recently as 1986, sales for the Fiat, Lancia and Alfa Romeo brands have plunged 24% since 2000, to just 745,736 vehicles last year. No turnaround is expected this year, with demand off 11.1% from like-2004.

Fiat Auto, Europe's sixth largest auto maker based on market share, is on equally shaky financial ground. It lost €840 million ($1.1 billion) last year, a disappointing follow-up to its €979 million ($1.2 billion) in red ink reported in 2003. Debt levels stand at about €8 billion ($10 billion), according to analysts.

The bleak sales and financial results appear to paint Fiat Auto as a lost cause, but industry observers are reluctant to write off the company.

“There have been no major failures of big car companies, no real big exits out of the industry,” says Nigel Griffiths, director-international automotive research for Global Insight. “In fact, we have seen some great turnaround stories in this industry.”

Fiat Auto's parent, Fiat SpA, has taken several dramatic steps of late to ensure it has the proper team in place for the automotive unit.

The eclectic mix includes:

Marchionne, unhappy with the pace of change at the ailing auto maker, summarily took the broom to Fiat's executive ranks. “We think the speed of change and the speed of recovery we were experiencing in the auto (sector) was insufficient to meet our objectives,” he says.

Demel, sources within Fiat tell Ward's, did not appear to be a good fit for the auto maker during his short tenure. His consensus-building style of management was at odds with Fiat culture, centered around a history of shoot-from-the-hip leaders who rarely sought input from underlings.

Marchionne's financial experience makes him a better match, given Fiat Auto's current predicament, industry-watchers say.

“Demel was really intent on bringing the company back from a product standpoint, and Marchionne is more focused on cash… he's not a car guy,” Patrick Juchemich, senior auto analyst with Sal. Oppenheim in Frankfurt, tells Ward's. “I just hope he does not cut too hard on the product portfolio.”

At Fiat Auto's Turin headquarters, executives such as Kalbfell and DeMeo are working to ensure that doesn't happen.

Their aggressive game plan reaches a critical juncture quickly with this fall's introduction of the new Punto, a car that accounts for 40% of Fiat-brand sales.

“This is the vehicle that will decide the company's future over the next three years,” predicts Juchemich.

Fiat also is in the final launch stages for its new Croma, which marks the end of the brand's 10-year absence from Europe's crucial D segment.

“Consider for a moment that the D segment accounts for more than 15% of the total volume, but more than 20% of the turnover in the European market, and you can see it's almost like putting an additional 20% turnover potential into Fiat,” DeMeo tells Ward's. “Re-entering the segment is a challenge, but the reality is we are back after 10 years in what essentially is one-fifth of the total European cake.”

The Croma, which shares its GM-engineered underpinnings with the Epsilon-based Opel Signum and Chevrolet Malibu Maxx, is one of the direct beneficiaries of the now-defunct GM relationship. The Punto also contains GM DNA, thanks to architecture sharing with the Opel Corsa.

Fiat is extremely bullish on the outlook for the Croma, saying it expects to sell as many as 70,000 units annually once the vehicle reaches full production. That compares with the 24,000 Signums Opel sells annually.

Also on the drawing board are changes to Fiat's C-segment range, headed up by the disappointing Stilo. The current car has managed to capture only 3.3% of the C-segment, which accounts for 23.6% of the total European market, according to Fiat.

DeMeo acknowledges Stilo lacked proper design and functionality. That will be addressed in a replacement model, which will feature several variants, including a multipurpose vehicle, to be rolled out over the next few years.

“We have really halted the development of the new Stilo because we believe a lot more work needs to be done to assure we cover a significant segment of the (C-sector) market,” CEO Marchionne says. “We need to make sure we hit it right.”

On the other side of the Fiat headquarters building from DeMeo are the offices of Alfa Romeo, where Kalbfell plans to take his brand to new heights, both in terms of volume and image.

The hard-charging German, who talks softly but carries vast clout with Marchionne, is setting ambitious targets for Alfa.

“Our (sales and financial) results are not satisfactory, and I am here to change that,” he tells Ward's.

Alfa Romeo deliveries slipped to 158,280 in Europe last year, down from 163,500 in 2003. The slide continues in 2005, where sales are off 18.4%, according to Ward's data.

Kalbfell says he wants to see Alfa reach 300,000 sales within the next four to five years.

That's a bold target. But Alfa Romeo is positioned where the greatest potential for volume growth exists, says Pierluigi Bellini, senior automotive analyst with Global Insight in Milan.

“Alfa Romeo still has a good brand image, the best in the group. They have value they can extract from that brand,” he says.

Plans are to kickstart the marque in the next few months with the launch of the Epsilon-based 159 and Brera, both of which were introduced at the Geneva auto show earlier this spring.

A new sport wagon, GT and 147 also are planned for Alfa Romeo, while a new production version of the 166 sedan should arrive in 2007. Insiders say Alfa intends to make the 166 replacement more performance-oriented to take on a rumored Porsche AG sedan.

Plans call for a new cross/utility vehicle (CUV) based on the Kamal concept, which debuted at the Geneva show in 2004.

In February, Fiat Auto moved its Maserati SpA unit from Ferrari to Alfa Romeo, giving Kalbfell even more influence.

The move will provide the Alfa Romeo group with improved synergies in product and component development. While declining to confirm Maserati will get a version of the Kamal, Kalbfell says development of a CUV with Alfa Romeo is a better business case for Maserati than doing one under the Ferrari umbrella.

“The supply base (for Maserati) with the Ferrari relationship was at its highest possible cost level,” he says. “We need to find a different, more cost-effective basis for our technology.”

Maserati is scaling back growth prospects, as Kalbfell lowers sales expectations for the marque from the 10,000-unit pace set by former CEO Martin Leach to a more reasonable 6,000-unit level.

Fiat's near-luxury Lancia brand also is struggling, with sales reaching only 116,600 units in 2004, and first-quarter deliveries remaining on a lackluster pace, on par with year-ago's 36,600-unit level. Like the Fiat marque, Lancia suffers from a ho-hum product lineup and fuzzy image.

“That brand (Lancia) has a strong potential and is a clear opportunity for the group,” says DeMeo. “I was very surprised by the fact that as soon as we had some clear idea of the product strategy, the right people seemed to embrace the brand.”

He points to the redesigned Lancia Ypsilon as a success story. Its average transaction price jumped 50% from the previous model to an average of €15,000 ($19,300), while the previous-generation model had to be discounted to €10,000 ($12,900).

“The issue for Lancia is to get back into some of the other European countries, especially in some areas where the brand had a very strong position. I am thinking of Paris — this is a typical city where you would have seen many Lancias 10 or 15 years ago,” DeMeo says.

Likewise, Kalbfell has plans to return Alfa to the U.S., where the brand packed up its boxes in 1995. Now, Kalbfell envisions a return with the storied Spider, which insiders say could hit showrooms as soon as 2007.

“Alfa has to be in the States, but it has to be related to several prerequisites,” Kalbfell says. “Alfa Romeo is such a strong brand still in the U.S., but we have to take a step-by-step approach.”

Kalbfell says Alfa's 159 sedan and Brera coupe can meet U.S. crash and emissions regulations, but lack a history in the U.S. market.

Alfa plans to use Maserati's dealers as a starting point for distribution in the U.S., with modest sales volumes eyed.

DeMeo, meanwhile, has more subtle tweaks on tap for the Fiat brand's distribution network, including minor growth in London, Paris and Milan.

Existing Fiat-brand dealers are under the gun to improve the appearance of their showrooms in time for the Punto launch. The target is to revamp 70% of the dealer network in Italy to the new look when the Punto arrives.

The comprehensive expansion plans should help Fiat Auto in another crucial area: capacity utilization, which stands at an anemic 80% throughout all 13 of its worldwide assembly facilities.

According to insiders, Fiat has the built-in capacity to produce more than 2 million units, although it is only manufacturing 1.75 million vehicles annually.

The largest plant is the Mirafiori facility, located adjacent to Fiat Auto's headquarters. Built in 1939, Mirafiori employs 4,000 people directly, with output totaling 1,000 vehicles per day on two shifts.

Here, workers produce the Fiat Punto, Idea and Multipla, as well as the Alfa Romeo 166 and Lancia Musa, Thesis and Lybra.

Weakening demand for these aging products makes Mirafiori among Fiat's least efficient plants, and the auto maker has been forced to close the facility several times in recent months, with the latest 6-week layoff announced in early April.

Mirafiori is not alone. Fiat has idled several of its plants in recent months due to weak demand for some models, but the auto maker says it has no plans to close any facilities permanently in the near term.

Fiat says it will introduce new products to keep operations running, including the new Lancia Ypsilon penciled in for launch at the Termini facility later this summer.

The Melfi operations will become the home of the new-generation Punto later this year, building both 3- and 5-door hatchback versions.

Like the rest of the industry, Fiat is putting the heat on its supply base for further cost savings. Marchionne says the auto maker is focused on reducing its “financial exposure” to suppliers and recently took a €250 million ($322 million) charge against earnings for “supplier rationalization,” to better align Fiat's supply base with its volume expectations.

“In the past, this business has been very gullible in predicting (vehicle volumes),” he says. “Our operating plans have now been built in such a way that the cost structure will be lower to be better in line (with expectations).”

Are all of these actions enough to secure Fiat's future? Global Insight's Bellini says Fiat will have to change with the competitive environment, which likely means a much smaller, streamlined organization long term.

“It may be true we'll see a different Fiat in the next few years, and this may all result in a smaller Fiat than today,” he says. “But I do think they are doing the right things.”

Fiat most likely will have to seek partners to gain a foothold in specific product segments, says Sal. Oppenheim's Juchemich.

Fiat has a joint venture with PSA Peugeot Citroen to manufacture multipurpose vehicles in France and Italy. Such alliances are the key to survival, Juchemich says.

“Fiat on a standalone basis may be difficult in the long run,” Juchemich says, “They need to go search for a new cooperation network.”

Marchionne signals he will be patient, noting he wants to see just how far Fiat can go on its own.

One area where Marchionne and his team have begun to expand their business opportunities outside the gates of Turin is in powertrain development.

Earlier this year, the auto maker formed a consolidated Fiat Powertrain Technologies unit, bringing together 26 plants and 16 research and development centers in 12 countries from Fiat Auto Powertrain, Iveco Powertrain, Magneti Marelli Powertrain and Iveco Motoren Forschung.

Fiat hopes Powertrain Technologies will be able to sell its wares to other OEMs looking to source diesel and commercial-vehicle powertrains.

With a game plan in place, Fiat's survival rests solely on the shoulders of Marchionne. The next 24 to 36 months will determine a new chapter in the Fiat story: Another of the great turnarounds — or the first major auto maker to fade away.