Alfa's Return

["George" <lag@domain.elided>]

The recent discussion on the potential for Alfa's return has been quite
interesting. However, any return is dependent upon Alfa's parent company,
Fiat Auto. Fiat as a whole is doing well. Their truck, robotics, and farm
and construction equipment divisions are all very profitable. However, their
car divisions are far from profitable. According to the Economist magazine,
the return on investment that Fiat Auto has averaged 5 percent. This is low,
and compares with poorly managed companies like Peugeot and GM. Well managed
auto companies like Ford, BMW, Daimler-Chrysler, VW, Honda and Toyota have
ROI's (Return on Investment) of between 30 to 55 percent. So, Fiat Auto
hasn't been making much money in the recent past.


Moreover, chances for a turnaround aren't that good. Fiat makes most of its
money in selling mass market vehicles to the low end of the price scale.
However, the company, which sells 2.5 million cars per year, is less than
half the size of VW. Most analysts consider Fiat too small to benefit
properly from economies of scale in producing these types of vehicles. This
is especially true since the level of sophistication in these vehicles has
dramatically increased in the past few years, making research and
development much more expensive.


As a result, Fiat has been shopping its car divisions around. Since Fiat
Auto is strongest in Europe and South America, the most logical partners
would be a North American brand. The Economist report in its August 7 issue
that Fiat has offered both GM and Ford one third of Fiat Auto, which would
subsequently be spun off as a separate company. Both companies declined the
offer.


In another attempt to change their fortunes, Fiat has tried repeatedly to
buy much smaller BMW, which is privately held by the founding family and has
had financial problems due to their Rover takeover. The most recent offer
included spinning off Alfa, Ferrari and Lancia into a separate division to
be run by BMW's management team much like Ford created a Premium brand for
Jaguar, Aston Martin, Volvo and Lincoln (I imagine what the current Alfa and
Ferrari management team must think. It's no wonder why Walter de Silva left
for VW). The Quantz family said no.


Given the health of Fiat Auto and the determination of the Agnelli family
(who own one third of Fiat) to spin the company off, it likely Fiat will be
merged in the next few years. Until that happens, there is little reason for
Fiat to spend the money introducing Alfa back to the US market. However, if
there is a merger, chances of Alfa's return are much improved, especially if
it is merged with a company like Ford or GM. Can you imagine an Alfa version
of the new Lincoln LS400/Jaguar S-type 4.0?


On a similar topic, I read a rumor about a year ago that Wayne Huizinga and
Peugeot had discussions about selling new Pugs through his AutoNation
franchise. It would be a cheap way to set up a sales and distribution system
in the US, especially since AutoNation has not been as successful as
originally expected. Apparently there was a threat by the big three to cut
off his supply of off-lease vehicles if he began importing his own.

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