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Gianni Agnelli's Last Hurrah


The Corporation

GIANNI AGNELLI'S LAST HURRAH

For most of the 26 years he has run Italian auto giant Fiat, Gianni Agnelli has been the very image of corporate success. During the 1960s, he helped engineer a ground-breaking deal to build cars in the Soviet Union. In the 1970s, Agnelli somehow kept Fiat afloat in the midst of constant strikes and sabotage by radical political groups. By the end of the 1980s, the perpetually suntanned tycoon had turned Fiat into Europe's biggest and most profitable carmaker, a symbol of Italy's emergence as a world industrial power.

Now, just when he says he would prefer to spend more time with his eight grandchildren, Agnelli, 71, is facing probably the greatest challenge of his long career. With Fiat's existing models aging and its European market share sliding, sales and profits at its core carmaking subsidiary, Fiat Auto, are plummeting (charts, page 78). Agnelli himself underscored the depth of Fiat's problems at a mid-November meeting of 1,100 senior managers of Fiat Auto. "We are going to pass through one of the most difficult, trying times in the history of our company," he said.

Fiat's aggressive chairman is fighting back with a bold plan to reclaim Fiat's status as Europe's top carmaker. The focal point of his blueprint for recovery is a huge investment of $31 billion to drastically overhaul the industrial giant. Instead of cutting back, as many of its rivals are doing, Fiat is pumping billions into building new plants and refurbishing old ones. What's more, Agnelli is planning a barrage of new models to lure consumers back to the Fiat fold. The company expects to introduce no fewer than two new models a year through the 1990s, with the first of the most promising models expected to roll off the assembly line by late 1993.

The sheer scope and ambitiousness of Agnelli's plan has prompted some analysts to describe the strategy as the European equivalent of General Motors Corp.'s Saturn Corp. investment in the 1980s. But the stakes for Fiat are even higher. "If it works, Fiat will be back," says Credit Suisse First Boston automotive analyst Dagmar Bottenbruch. "If it doesn't, Fiat is probably finished."

Many of Fiat's problems can be traced to Europe's tenacious recession. With demand for new cars falling, virtually every European auto maker, from Sweden's Volvo to Germany's mighty Daimler Benz, is feeling the pain. And next year could be worse, industry executives say. "For the overall European market outlook, we are revising our numbers downward every week," says Giorgio Garuzzo, Fiat's chief operating officer.

COMPLACENCY. The car company has also been battered by Italy's own unique set of economic problems. A vicious circle of high inflation, high interest rates, and high wages over the last few years led to galloping overhead at Fiat's huge factories in Italy. Since 1987, for example, costs associated with Fiat's 220,000-strong Italian work force increased on average 8% a year. "Just 60 miles from here," says Garuzzo, motioning westward across Fiat's hometown of Turin toward the French border, "labor costs have only been increasing 3% to 4%. For the last four or five years, our competitors have had it easy."

Even so, Agnelli and Cesare Romiti, Fiat's 70-year-old chief executive, bear some responsibility for the auto maker's dicey predicament. By 1988, Fiat was the top European carmaker, thanks in large part to the success of the econobox Uno. The following year, the company earned a record $3.7 billion in pretax profits. And Agnelli was feted by Wall Street when Fiat shares were listed on the New York Stock Exchange in 1989.

That success, however, led to complacency--and carelessness--at Fiat. Increasingly, upper management in the hushed seventh- and eighth-floor executive suites at Fiat's headquarters became preoccupied with the question of who would succeed Agnelli and Romiti, according to company insiders. Political infighting also became a distraction. For example, Vittorio Ghidella, the marketing genius behind the successful Fiat Auto models of the late 1980s, was forced out in 1988 after a showdown with Romiti over the company's strategic direction. Ghidella wanted to focus more resources on Fiat's automotive business.

PAST GLORY. Before long, the boardroom intrigue diverted managers from the critical job of developing and marketing new models, with disastrous results. By mid-1992, according to DRI/McGraw-Hill, Fiat's main bread-and-butter cars, such as the Panda compact, were almost 7.5 years old--by far the oldest fleet of Europe's Big Six auto producers. Models at rival Volkswagen, by comparison, had an average age of 4.4 years, while those of France's Renault were real youngsters at only 2.2 years. Consumers abandoned the Fiat nameplate in droves. Even in Italy, where 6 out of 10 Fiats are sold, market share plummeted to 45% this year, from 60% in 1989. Many Italians ended up turning to more stylish models offered by Ford Europe, VW, and Renault.

Nowadays, Agnelli insists that regaining Fiat's past glory is his only objective. And he is gambling the company's future to achieve that goal. To fund his aggressive investment plan, Agnelli has already started selling pieces of Fiat's far-flung business empire, the most diversified of any major carmaker in Europe. Earlier this year, Fiat completed the sale of its Telettra telecommunications division to France's Alcatel for close to $1 billion. Next on the list is likely to be La Rinascente, Italy's largest department-store chain, which earned $70 million in 1991. Fiat has also unveiled plans to tap Italian and other European banks for $500 million in loans.

Much of the cash raised by Agnelli is being plowed into new-model development in hopes that Fiat can reverse its slumping market share. The Cinquecento, a two-door subcompact, was unveiled earlier this year. Company executives think they have a sure winner in another new economy car that will replace its best-selling Uno. Analysts who have seen prototypes of the car, code-named Type B, describe it as a slick eye-catcher. It had better be. Fiat executives are hoping that the new model will be their main workhorse through the 1990s. Fiat will unveil the new model at August's auto show in Frankfurt.

A trove of other potentially hot new models will hit Fiat showrooms in 1994 and 1995, including powerful new Fiat coupes and convertibles. That will drive the average age of Fiat models down to a competitive 2.8 years by mid-1995, DRI estimates. True, Fiat will be pushing those new cars into a lackluster market. But company executives believe they must revitalize the brand to hold off competitors. Says Fiat's Garuzzo: "I prefer to have better weapons when the battle gets tough." It's getting tough already, with rivals readying new, spruced-up models of their own. "Everybody is unveiling something," says analyst John Lawson of DRI.

MERGER SCOUT. Although it will take some time before the new models begin to have an impact, Fiat's sales are expected to get a nice shot in the armfrom Rome's decision in September to devalue the Italian lira. With a depreciation of the lira against the French franc and the German mark, Fiat scored a 20% gain in price competitiveness--although inflation will in time eat into thosegains. A recent agreement with Italian unions should also be helpful in the near term. The pact ends four decades of automatic wage indexation and will help ensure that Italian labor costs remain moderate.

Even if Fiat climbs out of its morass, the turnaround campaign is something of a last hurrah for Agnelli and Romiti. Romiti, who has ruled the company's day-to-day operations as CEO since 1976, hasn't announced any retirement plans. But given his age, it's likely that his tenure is drawing to a close. Agnelli, whose family owns close to 40% of Fiat, says he'll step down from the chairmanship when he turns 73 in July, 1994. His designated successor: younger brother, 58-year-old Umberto Agnelli.

Although a vice-chairman at Fiat, Umberto has no real corporate responsibilities at the moment. But that could change quickly. On Nov. 17, Fiat announced a streamlining of upper management that gives more power to chief operating officer Garuzzo--a move that many analysts see as the beginning of the transition of power at Fiat. Company insiders already expect Umberto to assume a more active management role within the year.

Looking ahead, many analysts are also betting that Umberto will be the one to finally broker a marriage between Fiat Auto and another major car group. Such a merger has so far proved elusive. In the 1980s, Fiat was close to linking up with Ford Motor Co. More recently, Chrysler Corp. and France's Peugeot have emerged as possible partners. There's also talk of a linkup with Japan's giant Toyota Motor Corp. Umberto, who heads the Italy-Japan Business Group and is a constant visitor to Tokyo, "has the perception that merging the auto activities is probably a necessity," according to one executive who knows the Fiat vice-chairman well.

Before that happens, however, Gianni Agnelli will have to get consumers thinking about Fiat again. Only then, analysts say, will the company be in a position to negotiate a decent deal with a potential partner. And only then can Italy's legendary car boss retire with his record of startling accomplishments relatively intact.John Rossant in Turin


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