Global Economics

Fiat's Comeback—Is It for Real?


A scant 18 months ago the future of Italian auto maker Fiat (FIA) looked pretty bleak. After losses of $12 billion over six years, the carmaker was struggling mightily to come up with hit models, and had seen its European market share shrink more than 50% since 1990. The final blow seemed to come from General Motors (GM), which paid $2 billion just to cancel a put option that would have allowed Fiat to sell the ailing auto business to GM.

But now, Fiat's slow-moving restructuring suddenly seems to be getting serious traction, making GM's decision to divorce Fiat look like a $2 billion blunder. In the first half of 2006, revenues at Fiat Auto jumped 21% to $14.8 billion and operating profit bounced out of the red for the third quarter in a row, hitting $184 million.

Fiat's vehicle sales shot up 20.1% in a flat European market, helping the Italian auto maker grab back lost ground. Fiat's share (including the Alfa Romeo and Lancia brands) stood at 7.7%, up from 6.5% in the first half of 2005. And the company finally has a hit in the new Grande Punto sub-compact. Launched last fall, the car is expected to reach sales of 360,000 this year.

"NEARLY POSITIVE". Still, Fiat Group Chief Executive Sergio Marchionne must prove that the turnaround will last. So far, the Punto has been the biggest part of the recovery, and Fiat's market share remains far below the 13.8% it held in 1990. More sobering news, Fiat's auto division is still not profitable in Europe. Though costs are down and factory use is rising, Fiat still depends on its Brazilian operations to turn a profit—a fact that leaves lingering doubts in analysts' minds about how sustainable Fiat's success might be.

Marchionne remains bullish. He insists Fiat's European operations were "nearly positive" in the second quarter. Better, he says they will break even for the full year and turn profitable in 2007. "We could have been positive if we wanted to," says Marchionne, but the company decided to continue investing in advertising and marketing at high levels to buff up Fiat's image.

The Swiss-born CEO aims to raise the auto maker's operating margins to a healthy 4% next year, though analysts are skeptical he can reach that number. Fiat's operating margin in the first half of 2006 was 1.2%.

NEXT UP: BRAVO. To make the turnaround stick, Marchionne must prove Fiat can launch a steady stream of winning models, as next year the Punto will face a heavy onslaught of new competition from Renault, Peugeot, and others. "We'll know if Fiat can sustain the recovery when the Punto's sales are in the steep, normal, model-cycle decline at the end of 2007 or 2008—and other successful products can hold up market share," says Adam Jonas, auto analyst at Morgan Stanley in London.

The next important launch is the successor to the compact Stilo, which will hit showrooms in early 2007. It will be renamed the Bravo. Fiat launched the Stilo in 2001 as "the Golf-killer," a car so well-engineered that it would steal share from the leader in the compact segment, the Volkswagen Golf. But Fiat overshot: The Stilo was priced too high, the quality was still not up to top European standards, and its design was considered boring and derivative of the Germans. Fiat had somehow lost its Italian soul.

Constant turmoil in the management suite hasn't helped Fiat address its problems. Fiat had four different chief executives from 2002 to 2004. Marchionne arrived in June, 2004, and went to work finetuning a restructuring that already had been two years in the making.

ITALIAN LOOK. In 2005, he moved talented Norwegian-Spanish designer Frank Stephenson from sports-car maker Ferrari to Fiat to help power a more Italian look. Stephenson, who designed the iconic Mini for BMW, is now working on a similar project at Fiat, designing a remake of the Cinquecento mini, one of Europe's most popular cars from the 1960s. "We have to get back to Fiat's roots and make really, really attractive cars—cars that you fall in love with on the first look," says Stephenson.

The Punto, launched last year, doesn't carry Stephenson's signature. But design experts say it has started to recapture an Italian look, giving it greater appeal against design-savvy French rivals such as the Peugeot 207 and the Renault Clio. Stephenson did help make sure that the Punto's interior styling was a cut above, improving colors and materials. "What we are shooting for is dynamic and sensual-looking cars," he says.

With a rebound at Fiat's truck and farm-machinery divisions also producing strong cash flow and profits, Marchionne now has a fighting chance to steer Fiat back on track for the long term. Fiat Group's 2006 net income is forecast to triple to $1 billion. Its shares are up 45% since January, pushing market capitalization to $13.4 billion. Fiat Auto makes up 45% of group revenues.

TWIN PARTNERS. Besides producing hit models, Marchionne has to whittle down the cost of development, purchasing, and production, and narrow the gap between Fiat and larger, more efficient rivals. To start doing that, Marchionne has clinched a series of partnerships in passenger and commercial vehicles and engines, reminiscent of Peugeot's strategy.

Last November, he announced an alliance with Ford (F) to collaborate on the development and production of their next-generation minis, Fiat's Cinquecento and Ford's Ka. The two cars will share a common platform, Ford engines, and will be built at Fiat's Tychy plant in Poland.

And on July 25, Marchionne announced Fiat's latest collaboration: a joint venture with Tata Motors, India's largest automotive group, to manufacture passenger cars. The two will jointly build the Grande Punto and a new sedan, as well as engines and transmissions for India and other export markets. "It's a good strategy. Fiat is trying to play bigger than they really are," says Morgan Stanley's Jonas.

MORE DEALERSHIPS. One of the little-seen overhauls by Marchionne has been an effort to rebuild Fiat's weakened European distribution and improve marketing. Previous managers focused on the Italian market while the European network deteriorated. Gunning for European share of 8% by yearend, Marchionne has added 139 new European dealerships, largely in France and Germany, with a target of 217 by yearend. "We need to continue to invest in the network," says Marchionne.

It's a complex equation to figure out what GM's 20% stake in Fiat Auto would be worth today, had it not allowed its stake to be diluted to 10%, and then finally written the whole thing off. The calculation depends on an assessment of Fiat Auto's assets, equity, and debt levels. But one thing is clear: GM bought into Fiat just before it took a spill, and sold low before the Italian company started getting back on its feet.


Steve Ballmer, Power Forward
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