For all those worried about GM & FIAT ruining Alfa

[Italiacars@domain.elided]

For all those worried about GM & FIAT ruining Alfa. Here is the take on the 
GM/FIAT deal from Business Week.

For GM, Once Again, Little Ventured, Little Gained
Its small Fiat stake continues a strategy of piecemeal alliances

For Fiat, General Motors' purchase of 20% of its auto business on Mar. 13 is 
just the breather it was seeking. The Italian carmaker gets a deep-pocketed 
partner with a reputation as an easygoing, hands-off minority stakeholder, 
leaving Fiat's managers in charge. And GM's prize? It gets small Fiat diesel 
engines and a chance to trim its costs in Europe and Latin America--not to 
mention the pleasure of thwarting rival DaimlerChrysler's effort to swallow 
Fiat whole. Yet GM's minority stake gives it little clout to force the tough 
cost-cutting Fiat needs, and it leaves GM competing fiercely with its new 
partner in key European auto segments. Laments one large GM institutional 
investor: ``It looks like a huge victory for Fiat, but it doesn't do very 
much for General Motors.''
   In short, it looks like most of GM's growing network of global auto 
tie-ups: a puzzling mix of missed opportunities and timid half-steps. As the 
global auto industry has consolidated rapidly--with DaimlerChrysler and Ford 
moving boldly to acquire key players--GM has tiptoed into a series of 
minority stakes and ad-hoc alliances with rivals. GM hopes to reap the 
benefits of partnership without the messy culture clash, nationalist 
backlash, and red ink that a full buyout often entails. Says GM Chief 
Executive G. Richard Wagoner Jr.: ``We think we've hit on the right formula.''
   But its track record so far suggests a different lesson: little ventured, 
little gained. Consider GM's stake in struggling Isuzu Motors Ltd. After 29 
years as a minority shareholder, GM has gotten some diesel truck engines and 
co-designed pickup trucks. But Isuzu racked up a $200 million operating loss 
last year and amassed $8.3 billion in debt. A year ago, GM raised its 
holdings to 49% from 38%. Grouses the GM investor: ``GM never exercised the 
management due diligence it should have, but it was probably unable to.''
   Even where it has taken control, GM's kid-glove style has brought limited 
benefit. When it bought half of Saab in 1990, the Swedish carmaker was a 
money-losing seller of 93,000 cars a year. Cash-strapped itself at first, GM 
shared major components between Saab and other GM divisions, improved Saab 
quality, and eventually rolled out new models. But while Saab's small U.S. 
sales are rising smartly, it barely ekes out a profit on the 131,000 cars it 
sells annually worldwide.
   Still, Wagoner is stepping up GM's efforts to forge alliances. In 
December, the No. 1 auto maker agreed to buy 20% of Fuji Heavy Industries 
Ltd., maker of Subaru cars, after tripling its holdings in Suzuki Motor 
Corp., to 10%, in November, 1998. In January, GM bought the remaining half of 
Saab. It is also negotiating to buy Korea's Daewoo Motor and has inked a 
technology-sharing deal with Toyota Motor and an engine pact with Honda Motor.
   GM's strategy has some advantages. Buying a small chunk of a company 
allows the auto giant inside for a closer look before deciding whether to 
take a bigger plunge. And taking a small stake in a healthy rival to share 
the costs of developing new technology or gain access to distribution in 
another region  can help meet a strategic need cheaply.
   But like elsewhere in life, you get what you pay for. If the partnership 
isn't a two-way exchange of expertise and capital, the value can be limited. 
Subaru and Suzuki, for instance, bring GM some small cars without bolstering 
its knowhow. Says Brandeis University international marketing professor 
Shih-Fen Chen: ``GM's reliance on Japanese alliances prevents the company 
from developing its own small cars.''
   Acting as a silent partner is weak medicine indeed when buying into a 
company that urgently needs fixing. Only a full merger will let GM and Fiat 
tackle their biggest headache in the European market: overcapacity. To make 
their alliance pay off, they must quickly ax overlapping models and overhead 
to cut costs. Since Fiat factories run at just 60% of capacity, some must 
close. But GM can't make any of that happen--which is just fine with Fiat's 
managers and the Italian government. DaimlerChrysler execs say privately that 
they refused to accept such terms.
LOPSIDED DEAL. While GM's partial ownership may ultimately lead to a merger, 
that's at  least several years away. By then, both carmakers will have lost 
the opportunity to fix their European operations while the market was strong. 
Moreover, the deal gives Fiat the upper hand: It can compel GM to buy the 
rest of Fiat any time from 2004 to 2009 at a fair-market price. ``How do they 
know where Fiat will be five years from now, especially since they won't have 
a hand in running it?'' says Deutsche Bank Securities Inc. analyst Rod Lache. 
``That's a pretty big leap of faith.'' What's more, Fiat can sell its 80% 
stake to anyone after a year as long as GM has a chance to match terms.
   In the short run, GM and Fiat plan to gain efficiency by sharing chassis 
and key components, analysts say. While that's a good idea, getting engineers 
from different companies and cultures to collaborate is extremely tricky. GM 
has repeatedly stumbled at the far less complex task of fostering in-house 
cooperation between its North American and European engineers. The task could 
be far tougher for GM and Fiat, which will continue to battle in the small 
and midsize car segments. ``If you're competing on 40% of your product 
[lineup], how willing are you going to be to share product information?'' 
notes Lache.
   Despite the messy details, merger mania in the auto industry continues at 
fever pitch. The field of remaining candidates is down to a handful: Daewoo, 
Mitsubishi Motors, PSA Peugeot Citroen, Volvo truck. That leaves only 
holdouts BMW and Honda, which are not on the block. But BMW may toss Rover 
Cars back on the market after trying fruitlessly since 1994 to fix it. 
Daimler is busily trying to cement a deal with Mitsubishi, and Ford has 
joined the fray. GM may now seek a partner in its Daewoo buyout attempt. Not 
everyone has a good economic reason for doing these deals, warns Brandeis' 
Chen. But until almost everything is snapped up, they're likely to proceed 
apace.

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