Only three weeks after General Motors Corp.'s () acrimonious $2 billion divorce from Fiat () was final in February, top managers from Fiat and Ford of Europe () snuck off together at the Geneva auto show to discuss their own tieup. Eight months later, on Nov. 7, the two auto makers sealed a deal to build their next-generation small cars -- the Fiat 500 and the Ford Ka -- on the same platform. But theirs is not a full-fledged marriage, with all the attendant expense and the clunky fusion of strategies. Their goal is to team up on the engineering and production for one model, slashing costs radically. That's it. "What we are looking at with Fiat is significantly different from what GM was looking at," says Ford of Europe CEO John Fleming.
No wonder. Many auto mergers forged in a euphoric rush to conquer global markets have failed to deliver the promised benefits -- and some have turned into wrecks. DaimlerChrysler () recently announced the sale of its remaining 12.4% stake in Mitsubishi Motors Corp. after writing off most of the $2.4 billion it pumped into the Japanese auto maker.
The Ford-Fiat alliance highlights the move toward more pragmatic and limited pacts that bring results quickly to the bottom line. Fiat already collaborates with Peugeot on light commercial vehicles. DaimlerChrylser and Volkswagen have teamed up on minivans for the U.S. market, while VW and Porsche () have a linkup on sport-utilities. Ford and Fiat's new tandem should save each partner roughly half of the $1.5 billion cost of developing a new model. "Ford gets low-cost access to Fiat's small-car technology, and Fiat gets to fill its factories," says Christoph St?rmer, a senior auto researcher at Global Insight in Frankfurt.
Under the agreement, Fiat will manufacture the new Ford Ka and Fiat 500 at its plant in Tychy, Poland, on a shortened version of the platform for the Fiat Panda. The new models, targeted at the city-car niche where starting prices are around $10,000, are scheduled to hit European showrooms in 2008. They'll be outfitted with Fiat engines and transmissions, but the shells and interiors will be different. The production goal is 240,000 cars, split evenly between each model.
The tieup will allow Ford of Europe to shift some of its manufacturing to low-cost Eastern Europe, without having to build a factory there. Wages in Poland are about 20% of those in Spain, where the Ka has been produced since 1997. "The problem with the Ka is that it is increasingly uneconomical to assemble bargain-basement vehicles in Western Europe," says Stephen B. Cheetham, auto analyst at Sanford C. Bernstein & Co. in London.
Unless Ford and Fiat can boost their European sales dramatically, eventually they will have little choice but to shutter operations in the West, no matter how politically unpopular. Ford of Europe, which logged revenues of $26.5 billion in 2004, has been struggling to turn a profit for years. Although analysts forecast it will be roughly at breakeven in 2005, Ford's European market share of 8.5% is down from 8.9% in 2002. The outlook is worse at Fiat Auto, which has piled up $14 billion in net losses since 2000. Despite the cost-cutting efforts of Chief Executive Sergio Marchionne, Fiat is expected to rack up a $363 million operating loss this year as sales continue their precipitous slide. Fiat's European market share recently sank to a new low of 4.8%.
Marchionne is betting a slew of similar cooperative agreements can better Fiat's bottom line. The Italian maker is also counting on a stylish remake of the iconic Fiat 500, which will replace the 600, a poor seller, to lend fresh cachet to the brand. "With a new strategy, we can recover the ground lost in 2004-2005," says Alfredo Altavilla, senior vice-president of business development at Fiat. Fleming, too, hopes to turn heads with a restyled Ka. Frankfurt-based Metzler Bank auto analyst J?rgen Pieper figures Ford and Fiat could make a profit in the "double-digit millions" on each model by producing in Eastern Europe. Besides erasing the red ink, the new small cars will be vital to keeping cutthroat Asian rivals at bay.
By Gail Edmondson