Fiat’s chief executive, Sergio Marchionne, has gone merger mad
HIS company is among the smallest of the global volume carmakers. But right now Sergio Marchionne is without question the most talked-about car executive in the world. The chief executive of Fiat Group has been alone in seeing an extraordinary opportunity in the meltdown in Detroit. By seeking to take over the running of both Chrysler and Opel, the European arm of General Motors (GM), Mr Marchionne is attempting not only to transform Fiat into a car group almost of the scale of mighty Toyota and Volkswagen (VW), but also to change the face of a perennially troubled industry.
Last December Mr Marchionne said of his stricken industry: “What we are seeing is unprecedented. I have never seen the failure of so many systems at once.” Fiat was in a fight for survival. “We’re just going to slam the brakes on, use as many temporary lay-offs as needed, cut everything back to essentials.” He added an apocalyptic forecast. “By the time we finish with this in the next 24 months, as far as mass producers are concerned, we’re going to end up with one American house [Ford or GM, you presume]; one German of size [VW Group]; one French-Japanese, maybe with an extension in the US [the Renault-Nissan alliance]; one in Japan [Toyota], one in China [several possible candidates] and one potential European player [either Fiat or PSA Peugeot Citroën].”
The details of this vision may be wrong. Despite its present travails and imminent bankruptcy, few believe that GM will vanish and leave Ford as the sole American-owned champion. France’s PSA Peugeot Citroën, though unwieldy, is not about to disappear either. The strength of Hyundai-Kia in emerging markets and North America should ensure that the South Korean producer makes the cut. And in Japan, however great the cull of smaller outfits such as Mitsubishi and Suzuki, Honda and perhaps Mazda will still be around to challenge the dominance of Toyota in its home market. So will Renault’s partner, Nissan.
But if the shake-up is likely to be less dramatic than Mr Marchionne expects, that is only because much of the industry remains addicted to wildly unrealistic market-share forecasts and value-destroying investments. Mr Marchionne thinks it has been living beyond its means for too long. “Out in front,” he says, “this business is glamorous like Las Vegas. But behind the scenes, the industrial machine is complex and chaotic. We just look round at what to invest in and it’s hard to justify the economics. To sort it out, you have to go back to the industrial machine and fix it.”
Critically, Mr Marchionne says, you need to sell in sufficient volume—about 1m a year on each platform—to drive down costs. Take the platform for the VW Golf, which yields sales of more than 1.5m a year because VW also uses it for the Skoda Octavia, the Seat Leon and the Audi A3. About 75% of the cost of a car is in its architectural underpinnings. The rest goes on giving it a distinctive body and cabin, while honing the brakes, steering and suspension. Fiat gets sales of about 600,000 from its city-car A platform (the basis of the Panda, the retro-styled 500 and Ford’s new Ka). But none of its other platforms comes close to what is required: the whole group sold only 2.15m cars last year (see chart). Mr Marchionne reckons the minimum for a volume maker competing in every sector is about 5.5m—leaving Fiat far from safety.
In the past Fiat has tried to get around this problem with various alliances. A tie-up with GM lasted for five years until 2005, when Mr Marchionne extracted $2 billion from the American firm to extinguish a put option that would have forced it to buy the then-sickly Italian company. Mr Marchionne believes that alliances are all very well, but they react too slowly and require too many compromises. Without speed, he believes, you are doomed.
Over the past year he has been developing a more ambitious strategy, at first constructed around Chrysler, but now including Opel. Cruelly mismanaged by Daimler during its decade of ownership, and too dependent on pickup trucks and an ageing line-up of SUVs, Chrysler was in no condition to withstand the storm. Its increasingly desperate management sought help from a host of other carmakers, including Fiat. It reached a tentative agreement in which Nissan would have made a small car for Chrysler and Chrysler would have built a pickup for Nissan. But that was the limit for Carlos Ghosn, under pressure as boss of the Renault-Nissan alliance.
Mr Marchionne came up with a plan that might win Chrysler the federal loans it needed to stay alive while getting Fiat much of what it wanted. In exchange for an equity stake of around 35%, Fiat would make available to Chrysler its small and medium-sized platforms and advanced, fuel-efficient powertrains. Chrysler would give Fiat some of the scale it was seeking for its platforms, joint purchasing of parts, some expertise in producing large cars, a distribution network in America and manufacturing capacity to build new Alfa Romeos and perhaps the Fiat 500 for the American market. As Mr Marchionne put it: “They have everything I don’t have (including some I will never need) and I have everything they don’t have and need.”
But Mr Marchionne’s scheme, which won the backing of the Treasury’s car-industry task-force, went further. Although Fiat would initially get only a stake of 20% (rising to 35% after fulfilling criteria set by the Treasury) and would have to repay all Chrysler’s federal loans before taking majority control, the Treasury accepted that Fiat should take over the responsibility of managing Chrysler and integrating the two operations as closely as possible.
Having presided over a near-miraculous turnaround at Fiat since being appointed in 2004, Mr Marchionne saw in Chrysler an opportunity to apply the same lessons. At Fiat he saw a sluggish organisation that lacked leadership and had become accustomed to management by committee. But he also saw, buried within the company, a new generation of leaders.
“The single most important thing was to dismantle the organisational structure,” he recalls. “We tore it apart in 60 days, removing a large number of leaders who had been there a long time and who represented an operating style that lay outside any proper understanding of market dynamics.” In their place he promoted a group of younger executives, many with a background in consumer marketing, who understood and could provide what he wanted: accountability, openness, rapid communication and impatience with hierarchy and internal politics.
Some doubt that Fiat’s lean management has the resources to spread itself across Chrysler, let alone Opel too. Mr Marchionne understands the concern, but rejects it. He believes he already knows who the new leaders at Chrysler will be. He is confident that the same will apply to Opel, should that too fall into his lap.
Chrysler is essentially a done deal, although some uncertainty remains, not least because a few senior debtholders chose to push the firm into bankruptcy rather than accept the Treasury’s offer of $2.2 billion on the $6.9 billion they are owed. Fortunately for Fiat, the bankruptcy court judge, Arthur Gonzales, this week rejected the lenders’ argument that they had been treated illegally and cleared the way for Chrysler to emerge as a going concern within a couple of months. Mr Marchionne is preparing for the day: “We must act very quickly to cut overheads, lighten everything, speed up new models.”
Nor has Mr Marchionne been twiddling his thumbs in Europe. Having insisted for weeks that he had made no direct approaches about GM Europe, on May 4th he went to Berlin to present the German government with a plan that would give Fiat control of much of Opel (which includes Vauxhall in Britain) and possibly Saab, GM’s bankrupt Swedish unit. GM, which can no longer fund the lossmaking operations of its European arm, has been looking for a partner to take a majority stake in Opel since March. If it cannot find one, the German government will be loth to provide bridging finance. Fiat’s main rival is a group consisting of Magna, a Canadian car-parts and engineering business, and Oleg Deripaska, a Russian oligarch.
As with Chrysler, Mr Marchionne will have to win over both government and unions. He says that the deal depends on the willingness of European governments, but chiefly Germany’s, to stump up €5 billion-7 billion ($6.6 billion-9.3 billion) in bridging loans. In return, Mr Marchionne has promised to keep open Opel’s three main assembly plants in Germany, although there are fears for factories in Belgium and Britain. Over time he intends to reduce combined capacity by 22%, but he says he will do so by slimming factories rather than closing them. It is, he says, the preferred way in Europe—but it will mean forgoing savings of about €250m a year.
Even so, combining Opel and Fiat could save at least €1 billion a year. Partly because of Fiat’s shared history with GM, Mr Marchionne says that Opel fits perfectly. GM lacks an A platform, which Fiat has. They already share a B platform (for the Corsa and the Grande Punto) and Fiat would be happy to use Opel’s excellent new C and D platforms. “We can achieve convergence on all the big platforms by 2012. Ultimately, I need to do this with Chrysler, but Opel gets me there much faster and with more immediate returns.” Mr Marchionne adds: “I’m offering the German government a car business that will be effectively debt-free and I will take on Opel’s liabilities, including pensions. I told them: if you have a better offer, take it.”
If Mr Marchionne pulls it off, he will create a new company consisting of Fiat Auto (without Ferrari and Maserati or the rest of the Fiat Group), Chrysler and GM Europe. Among the probable stakeholders would be the Agnelli family (which controls Fiat), the United Auto Workers union health-care fund (until it cashes out) and GM. The rest of the equity would be sold in a public offering. In a normal year that combination could expect revenue of $100 billion from the sale of 6m cars—just above Mr Marchionne’s viability threshold.
Others think that amalgamating three different cultures and several less-than-stellar brands is beyond even the formidably self-confident Mr Marchionne. The tale of Mr Ghosn is not wholly reassuring. It is now pretty clear that his heroic rescue of Nissan came at the expense of taking his eye off Renault, which in recent years has produced a succession of mediocre cars. This week Martin Winterkorn, the boss of VW, pointed out that his company had been applying its vaunted platform strategy since 1992. “I wonder if he will be able to succeed,” said Mr Winterkorn, “because successfully managing several brands and obtaining true synergies is really difficult.”
Some see Mr Marchionne as an empire builder who has come to believe his own publicity. The charge exasperates him. “It’s just nonsense,” he says. “Fiat Group employs 200,000 people, but I’m going to carve out the car business and let the rest of it go its own sweet way. Look, I really hate the personal issue. It’s not about me, let’s just fix the industry. I’m only a conduit for change. You can’t just have Toyota on its own, we need this to guarantee survival. Now it’s up to others.”
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