Conflicting views on Fiat's future (Long)

["Phill Erasmus" <erasmusp@domain.elided>]

The following article was posted on a local car magazine's web site, CAR 
Tod 
<http://www.cartoday.co.za>
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Conflicting views on Fiat's future 
9 February 2000
There are widely divergent views on the future for Italian car giant Fiat - 
which is now launching its world car in South Africa. Fiat's problems and 
successes hinge around the future profitability of small cars in an 
increasingly competitive market and with enormous global over-capacity to 
produce them.
Influential commentators in the US seem pessimistic about whether Fiat can 
reshape itself to become competitive, while in Europe the Italian group's 
automotive operations are generally perceived as showing strong signs of 
recovery.
William Diem, writing in the Detroit Free Press, which tends to reflect 
informed American motor industry opinion, says that there are expectations 
that Fiat will be the next carmaker sold or merged in the industry's global 
consolidation. 
"Fiat's automotive business has lost money five quarters in a row - it lost 
three points of market share in Europe in the 1990s," says Diem. "Although 
it makes 2.5 million cars a year, they are mostly small cars with low 
profit margins. Meanwhile, tough environmental rules around the world are 
pushing automakers to develop such expensive technologies as hybrid power 
trains and fuel cells.
"That has Fiat in a squeeze.
"Giovanni Agnelli, the patron of the family that controls the Fiat empire, 
sought some American management help two years ago when he named Paolo 
Fresco chairman of Fiat Group. Fresco, born in Italy, had been vice 
chairman to Jack Welch at General Electric Corp. for most of the decade and 
had worked for the American conglomerate since 1962.
"Fiat is also a conglomerate, and Fiat Auto is only half its business. The 
rest is auto parts, agricultural and construction equipment, trucks, 
factory tools, foundries and other businesses, mostly related to 
transportation.
"The strategy of GE's Welch, who was named last year to Fiat's board, is to 
be No. 1 or No. 2 in any given business -- or get out. Fresco is clearly 
following that policy.
"Fiat's Comau subsidiary bought Michigan-based assembly-line maker PICO, 
making it one of the two largest companies of its type in the world. Fiat's 
New Holland bought American Case, and now Case New Holland, or CNH, is also 
one of the two biggest farm implement makers.
"But Fiat cars and Iveco trucks rank only sixth in the world. So it needs 
partners, and big American car companies are supposed to be at the top of 
the Italian's list.
"'The orientation is all American', Italy's influential daily newspaper La 
Republica recently said in a report based on an interview with Fiat's No. 2 
executive, Paolo Canarella. 'The big candidates for the wedding with Fiat 
are GM and Ford and, with some misgivings inasmuch as the Germans are in 
charge, DaimlerChrysler could be considered American.'
"The Americanization of Fiat is well under way. At the end of last year, 
Fiat Group had 24 factories in the United States, including those of 
Magneti Marelli, the parts maker; Teksid, the foundry arm, and Comau, the 
assembly line maker. Without counting PICO and Case, Fiat had 5,600 workers 
in America and sales of $3 billion.
"In mid-December, Agnelli held his annual meeting for management in Turin. 
Of the 750 managers attending, more than 50 were Americans, according to 
the French economic newspaper Le Figaro. The year before, there were 10 
Americans.
"Fiat has many partnerships in Europe, of course. Renault and Fiat put 
their bus operations together to make Irisbus, a 50-50, self-financing 
joint venture. Fiat makes minivans with PSA Peugeot Citroen in a jointly 
owned factory in France. 
"And Fiat is innovative. Its engineers invented the common rail, 
direct-injection principle that has turned Europeans into fans of diesel, 
because it is cleaner and more efficient than ever.
"At the Geneva auto show in March, Fiat will show a plastic-bodied concept 
car, the Ecobasic, that it says can be sold for $5,000. That is $1,000 less 
than the goal Renault and Volkswagen AG have announced for their basic car 
projects.
"With the Fiat Multipla, a bizarre-looking minivan, it introduced 
space-frame technology, which involves lower tooling costs. Because the 
steel frame provides protection in a crash, the body panels are easier to 
design and can be, as in the case of the Ecobasic, plastic.
"In partnership with Mitsubishi and Pininfarina, it is introducing its 
first sport-utility vehicle, which is a growing segment in Europe.
"So while Fiat searches strategically for a partner, management is 
tactically trying to improve the car business.
"The sporty Alfa Romeo brand has been successfully revived with the Alfa 
Romeo 156 and 166. Sales were up 20 percent last year, and the cars have 
been well reviewed.
"Fiat is also trying to revive its Lancia brand, which is a more difficult 
task, as it is little known outside Italy. Fiat wants Lancia to be a 
competitor to such brands as Volvo and Saab, while Alfa Romeo would compete 
for customers with BMW.
"But Fiat's bread and butter are small cars, which don't earn big profits.
"Profitability for the entire group for the last four years was 1.8 percent 
of sales, and the car division operated in the red for the second half of 
1998 and the first three quarters of 1999.
"Analysts at Commerzbank of Germany and Banca IMI of Italy follow Fiat 
closely and are preparing new reports for investors in anticipation of the 
year-end earnings report due Feb. 18. Neither currently recommends the 
stock as an investment.
"'We consider Fiat among the least attractive European automotive stocks in 
view of its poor earnings outlook and its high exposure to Brazil', Sabine 
Blumel, Banca IMI's analyst in London, said after third-quarter results 
were announced in November.
"The fourth quarter of 1999 is expected to have been profitable for Fiat 
Auto at last, based on the introduction of the redesigned little Punto in 
September. The Punto is cheaper to build than its predecessor, and Fiat is 
not having to discount it. But sales have not been what Fiat hoped, say 
automotive analysts.
"'Even with new Punto, they are still losing market share', said Gaetan 
Toulemonde, automotive analyst with Deutschbank in Paris. 'We feel 
uncomfortable, because until now the numbers we get from Fiat are not 
excellent.'
"That's not to say that Fiat's auto business doesn't have some attractions 
for potential partners. The Italians, for example were among the first to 
see the wisdom of investing in emerging markets.
"'Three years ago, Fiat made 6 percent net in Brazil,' Toulemonde said. And 
while most other automakers are still losing money there because they 
import parts made more expensive by the devaluation of the Brazilian real, 
Fiat is not.
"'Fiat has local sourcing'" he said, "and they were quick to lay off 50 
percent of the workforce in one year."
"In Europe, Fiat Group is buying the remaining 3.5 percent of Comau it 
doesn't own and restructuring that division. Operations of PICO and Comau 
will be merged in each country 'with the goal of realizing all potential 
synergies'" Fiat said. 
"Comau will give its former American operations to PICO and take over 
PICO's units in Britain. A new Comau holding company is to be set up in 
Holland for tax reasons.
"In trucks, Iveco has 16 percent of Europe's market and is established in 
many emerging markets, but it is invisible in North America and Asia. One 
of the possible scenarios is for Fiat to use money from a car sale to 
invest in another truck maker.
"The key to all the potential changes at Fiat is held by the Agnelli 
family, which owns 30 percent of Fiat Group. 
"Today Agnelli, who is nearly 80, is willing to sell control of Fiat Auto, 
but he is a hard bargainer, and there is a matter of pride when a business 
has been in a family for generations. His grandfather, who founded the 
company in 1899, was a friend of Henry Ford, and he was a good friend of 
Henry Ford II.
"'The issue for the family is, 'Is it better to be richer or more 
powerful?' Toulemonde said of Fiat, which he said is 4 percent of the 
Italian gross domestic product. 'Today, they are not the richest, but they 
might be the most powerful people in Italy. 
"'A new generation might have some different goal. In the long term, 
automotive is kind of a lousy sector. It might be better to cash in and 
invest in a more exciting business'."
London's Financial Times is more bullish about the Turin company's 
prospects in comment about recent frenzied share dealings in Fiat's common 
voting stock as well as its preferred and non-voting savings shares. 
However, it points out how market speculation and merger rumours can be 
fuelled by the new phenomenon of the Internet.
"For the past two years, the market has been expecting a strategic alliance 
between Fiat and another leading car maker," says the FT.
"Apart from DaimlerChrysler, regarded as the leading merger candidate, the 
names of Ford, General Motors and Mitsubishi have regularly done the rounds 
in financial circles.
"Fiat appears to have become the target of speculation on a huge scale, 
largely prompted by the growing phenomenon of internet online trading and 
stock-picking in Italy."
The FT says that Internet news and chat sites appear to be dramatically 
increasing stock market-related volatility.
"The many mentions of Fiat on such sites are believed to be behind much of 
the recent speculation," it notes.
"Although Fiat has repeatedly said it was able to survive as a car 
manufacturer on its own resources, the market for the past two years has 
expected the company to be forced to make a move in the consolidated world 
car industry.
"Fiat has considered a large-scale alliance or merger for the past 30 
years. In the 1970s it considered acquiring the Peugeot group when it was 
controlled by the French Michelin tyre company. In the 1980s and early 
1990s, it considered acquisitions or mergers with Chrysler, Renault and 
Ford Europe.
"In the absence of any confirmation that the company is in advanced talks 
to forge a strategic alliance with a car group, bankers (have) noted that 
the company's financial performance is improving.
"The car sector, accounting for about half of the group's overall turnover, 
was operating in profit again in the last quarter of 1999.
"The important Brazilian car operations started breaking even at the end of 
last year after significant restructuring. The Fiat group as a whole would 
show a net profit in 1999 after investing more than E6bn ($5.8bn) last year 
in n 
acquisitions."
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Regards, 
Phill
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The Alfa Romeo Club of SA <arcsa@domain.elided> 
Web site <http://users.iafrica.com/e/er/erasmusp/> 
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2000 156 2.0 T/S :-)

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End of alfa-digest V7 #1341
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