Fiat's Turnaround Takes Root

The Italian carmaker's Marchionne has it turning a profit again, a miracle in itself. Now, can he really rival the Japanese?

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On Nov. 8 and 9, Fiat CEO Sergio Marchionne delivered an audacious plan to financial analysts. He aims to transform the Italian company into one of the world's top performing mass-market automakers by 2010.

Marchionne already has brought Fiat Auto back from the brink of bankruptcy. If the 52-year-old Canadian-Italian executive delivers on his growth plan for 2010, analysts say, his overhaul of Fiat (FIA) would rank as the most impressive turnaround in the history of the auto industry, surpassing even Carlos Ghosn's rescue of Nissan.

To get there, Marchionne pledged to achieve a robust operating margin of 6% by 2010. That's the same target Ghosn has set for rival Renault, where he is CEO, by 2009. It's a tough goal: Today, only luxury automakers such as BMW and Japanese outfits such as Toyota (TM), Honda (HMC), and Nissan achieve margins of 6% or better.

Marchionne also vowed to boost sales by 800,000 vehicles within three years in the face of stagnant markets, which would raise Fiat's European market share to 11%, up from 8% today. And he insisted Fiat must close the gap with industry leader Toyota in production quality and efficiency and match its world-class manufacturing standard.

A Steep Climb

"We need to swallow hard, swallow our pride, and learn from others who do it better than we do," Marchionne says. "Toyota is a flawless execution machine. We need to learn how to execute at that level."

Analysts applaud Marchionne's progress to date. "He's done a perfect job" so far, says Ferdinand Dudenhoeffer, director of the Center for Automotive Research in Gelsenkirchen, Germany. But like many others, Duedenhoeffer remains cautious about Fiat's chances of outperforming rivals in Western Europe, let alone matching the Japanese.

Attractive new models can win back former Fiat customers and recoup some lost market share, but finding converts in a fiercely contested market is far more difficult. If all goes well, Fiat may be producing margins of 4% by 2010, Duedenhoeffer says, matching the best-performing mass-market automakers in Europe.

Cheers for Bravo?

Still, bringing 107-year-old Fiat back even to consistent and solid profitability would be an enormous achievement. When Marchionne joined Fiat in June, 2004, the ailing automaker had racked up more than $12 billion in losses over five years and was headed for insolvency. An outsider to the auto industry, Marchionne overhauled a bloated and incompetent management, tore up plans for uninspiring models in the pipeline, hired a new designer, and set about fixing Fiat's crumbling European dealer network.

This year, analysts expect Fiat Auto to post operating profits of around $380 million, for a margin of 1.3% (see BusinessWeek.com, 7/25/06, "Fiat's Comeback—Is It for Real?&quot).

Accelerating Fiat Auto's growth and profits in 2007 and beyond depends on the launch of the new Fiat Bravo compact in January. The Bravo replaces the failed Stilo, a 2001 model that Fiat's former management had hoped would compete with Volkswagen's Golf. The Golf is the most popular model in a hotly competitive segment that makes up one-quarter of the European car market.

A Modest Proposal

Fiat invested in a new plant to build the Stilo with a capacity of 400,000 cars a year, but barely hit a peak of 180,000. The failure seriously punctured Fiat's earnings and accelerated its tailspin.

Marchionne scrapped a previous version of the Bravo already in the works, demanding that a new, better-looking car be designed in half the normal development time. Head-turning Italian design will be one key reason to buy the Bravo, he says.

Fiat's profit forecast assumes annual sales for the Bravo of 120,000—a conservative estimate—but the newly engineered car, which has a lower cost base, will reach breakeven at sales of 75,000 cars, Marchionne says.