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Fiat Losses in Europe Widen as Debt Crisis Hits Demand

July 31, 2012

Fiat Loss Widens in Europe as Region’s Debt Crisis Hits Demand

Without Chrysler Group LLC, Fiat SpA would have posted a net loss of 152 million euros in the quarter compared with a profit of 76 million euros a year earlier. Photographer: Nelson Ching/Bloomberg

Fiat SpA (F), the Italian carmaker that controls Chrysler Group LLC, posted a wider second-quarter loss in Europe compared with the previous three months as the region’s debt crisis sinks auto demand.

The loss in the region before interest, taxes and one-time items including investments was 184 million euros ($226 million), the Turin-based company said in a statement today. That compared with a first-quarter loss of 170 million euros.

Chief Executive Officer Sergio Marchionne is reducing spending in Europe by 500 million euros in 2012 as sales fall in the region for a fifth straight year. Fiat’s European sales dropped 17 percent in the first half to 456,191 vehicles, according to data from industry group ACEA.

“Until the euro zone stabilizes and consumer confidence improves, the European sales crisis won’t end,” said Gian Primo Quagliano, president of Promotor, an automotive research group based in Bologna. “Consumers in the region are holding back from buying cars.”

Fiat dropped 19 cents, or 4.4 percent, to 4 euros in Milan trading today. The stock has gained 13 percent this year, valuing the carmaker at 5 billion euros.

Without Chrysler, Fiat would have posted a second-quarter net loss of 152 million euros compared with net income of 76 million euros a year earlier. Those figures exclude one-time items and include minorities.

Closing Factories

The manufacturer shut a factory in Sicily at the end of 2011 and may close a second plant in Italy as Marchionne expects the auto market to remain at the current level for two to three years. A decision hinges on whether Fiat and its unions can come up with a viable plan to use excess capacity to build cars for North America, Marchionne said July 3.

The Italian carmaker’s net industrial debt fell to 5.4 billion euros at the end of June from 5.8 billion euros at the end of March as total available liquidity rose to 22.7 billion euros, including 3 billion euros in undrawn credit lines, the automaker said today.

Carmakers’ earnings are being hit by the slump of sales in the region. PSA Peugeot Citroen (UG) posted a first-half loss of 662 million euros at its automaking division and announced plans to eliminate 8,000 jobs. Fiat said today second-quarter earnings in the region were hit by a 91 million-euro writedown of a joint venture the carmaker has with Peugeot in France.

Europe Drops

Volkswagen AG (VOW), Europe’s largest carmaker, last week reported slowing earnings growth in the quarter. Ford Motor Co. (F:US) is predicting its 2012 losses in Europe will exceed $1 billion.

“Peugeot and Ford results show that depleting cash into new models doesn’t pay out in profits and clearly burden the balance sheet with debt,” Massimo Vecchio, an analyst at Mediobanca in Milan, wrote in a report to clients July 26.

Fiat’s second-quarter operating profit in Latin America declined 25 percent to 238 million euros, as deliveries in the region slipped 7.4 percent to 226,000 vehicles.

Marchionne, who plans to combine Fiat and Auburn Hills, Michigan-based Chrysler to boost revenue to more than 100 billion euros by 2014, is relying on the U.S. carmaker’s profit as Fiat struggles to end the losses in Europe.

Including Chrysler, Fiat’s group trading profit almost doubled to 1.01 billion euros from 525 million euros, beating the 957.8 million-euro average of four analyst estimates compiled by Bloomberg. The American carmaker was consolidated into Fiat results in June 2011. Fiat maintained a forecast that trading profit this year will be in a range from 3.8 billion euros to 4.5 billion euros.

Chrysler Profit

Chrysler reported a second-quarter profit yesterday of $436 million compared with a year-earlier loss of $370 million. The second-quarter 2011 figures included a one-time $551 million cost for repaying government loans. Sales increased 23 percent to $16.8 billion.

Fiat said earlier this month that it will boost its stake in Chrysler to 61.8 percent. The cumulative cost of that stake would be about $2.3 billion. The additional 3.3 percent holding would be purchased from the United Auto Workers’ VEBA retiree health-care trust in a transaction that Marchionne estimated would cost less than 200 million euros

Overcapacity in western Europe may more than double to about 2 million vehicles in 2012, according to IHS Automotive. Marchionne, who currently holds the rotating ACEA presidency, has been urging manufacturers to take action to scale back vehicle production.

VW Spat

The planned Grand Punto hatchback, originally scheduled to be built in 2013, is being reconsidered and may be part of a partnership that Fiat may set up, Marchionne said in an interview last month. The CEO said that the Punto’s introduction would be a “failure” because European carmakers are cutting prices amid the auto market’s contraction.

The CEO suggested that Volkswagen’s pricing strategy is creating a “bloodbath,” according to a report published July 26 in the New York Times, which cited him among industry executives as accusing the German carmaker of exploiting Europe’s sovereign-debt crisis to expand its market share. Volkswagen has threatened to leave the ACEA in response to Marchionne’s comments.

To contact the reporter on this story: Tommaso Ebhardt in Milan at tebhardt@bloomberg.net

To contact the editor responsible for this story: Chad Thomas at cthomas16@bloomberg.net


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