As Italy's giant Fiat Group (FIA
) jettisoned four top executives in the past 15 months, one key question hung over the $58 billion Turin conglomerate: Can anyone save Fiat's crisis-plagued car unit from collapse? Members of the Agnelli family, the dynasty that founded and still controls the 104-year-old auto company, watched in horror as huge losses from the carmaker forced Fiat Group to report a record net loss in 2002 of $4.5 billion. Following the death of Fiat patriarch Giovanni Agnelli on Jan. 24, few believed the family would find the will to struggle on in cars. A sale to General Motors Corp. (GM
) seemed the only option: Three years ago, when Fiat Group sold 20% of its auto unit to GM, it obtained a put option to sell GM the rest of the business starting in January, 2004. As recently as February, bankers were pressing the Agnellis to exercise that option, which would leave GM saddled with a sputtering Fiat Auto.
But in a bold reversal, Fiat's new chairman, Umberto Agnelli, Giovanni's younger brother and a grandson of the company's founder, has made it clear that the Agnellis are determined to back the revival of Fiat Auto. On Mar. 7, he announced at the Geneva Auto Show that Fiat did not plan to sell its car business anytime soon. "I do not think we will exercise the put in the near term, and we hope never to exercise it," he said. To speed the turnaround, he recruited a new chief executive for Fiat Group, seasoned Pirelli executive Giuseppe Morchio, a Turin outsider with U.S. career experience who is expected to shake up Fiat Auto. "In the last four to five weeks, we've made a clear strategic choice. We want to relaunch Fiat Auto," says one senior manager at the company.
Morchio, 55, is off to a running start. He devoted his first weeks on the job to speeding the sale of group assets, reaping $2.5 billion on Mar. 22 for insurer Toro Assicurazioni. On Apr. 7, he signed an agreement to sell aerospace unit Fiat Avio to Carlyle Group, a U.S. private equity firm, for $1.7 billion. By endorsing these sales, Umberto is making it clear that the Agnellis are reversing a decade of diversification in order to salvage the auto business.
Resuscitating Fiat won't be an easy task. Morchio faces a race against time to reverse declining automotive sales and negative cash flow, estimated at $1 billion in 2003. Market share in Europe has dropped to 8.2%, from 14% in 1990. The company is counting on snappy new models such as the Gingo mini and the Idea minivan, due out this year, to lure new customers and bring back old ones.
The odds of a smash hit are low, given the industry downturn and fierce global competition. "The margins in small cars are in terminal decline, and now you've got the Japanese and the Koreans, who can make profits at price points Fiat can only dream of," says Stephan B. Cheetham, an analyst at Sanford C. Bernstein & Co. in London. Meanwhile, Agnelli and Morchio are trying to persuade GM to participate in a $2 billion rights issue that would up its stake to 40% of Fiat Auto. But so far, GM is sitting on the sidelines.
GM may be wary of putting up hard cash, but it seems willing to broaden its three-year-old parts-sharing and powertrain joint venture with Fiat. Starting in 2005, Fiat should get an extra kick from the launch of the next-generation Punto, which is being developed on a joint platform with GM's Corsa. Total savings from the joint venture are expected to reach $1 billion for each partner in 2005. The two are also discussing possible platform-sharing between the next-generation Opel Astra and Fiat Stilo.
Morchio, an engineer with financial savvy, is praised for his focus on technology and innovation. At Pirelli, he invested heavily in fiber-optic technology and patented the company's research before selling the business unit to Corning Inc. (GLW
) in 2000 for $3.6 billion. If this Turin outsider succeeds only in bringing Fiat Auto back to breakeven, he will have steered the company further than many believe it can go.
By Gail Edmondson in Turin
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