Will New Product Save Fiat (and GM and Ford)? Maybe, Maybe Not.
MiBiz • May 1, 2006
by Jim Gillette
Having suffered a long stretch of seeing both GM and Ford play whipping boys to the media and analyst community here in North America, I thought it might be a cathartic experience to take a look at how Fiat is doing these days. The Italian company, well known for producing some of the world’s most stylish autos, has no doubt been the worst performer among European automakers during at least the last ten years.
During the last quarter of 2005, Fiat did manage to stop the flow of red ink and reported a modest accounting profit. Much of the (at least near-term) turnaround can be attributed to the launch of some snazzy product, led by a new Punto, the stalwart that is forecasted by CSM vehicle analysts to provide slightly more than 25% of the company’s total European light vehicle sales. With a number of product revisions coming on stream, including Alfa Romeo models, analysts are asking if great product will save the company.
It is sometimes said that both GM and Ford could solve their financial problems if only they could come up with some great products. While auto industry analysts admit that improved sales would go a long way to ease the situation at both companies, there are structural problems remaining that would require both companies to eventually take other actions to avoid financial distress.
During the 1980s, Fiat enjoyed a market share in its home country of around 60%. Sales having fallen precipitously since the early the 90s, Fiat was only able to capture 29.9% of Italian light vehicle purchases in 2005. CSM analysts see that share further dwindling to 24.5% in 2012. (You’re seeing the similarity to GM, right?)
Given the bulk of its manufacturing capacity sits in relatively high-cost Italy, it is not hard to image that sizeable financial losses have accompanied the sales decline. Both GM and Fiat had high expectations for a joint venture established in 2000 that was intended on providing shared platforms and powertrains. By 2004, however, it became apparent that GM was in no position to make a larger investment in Fiat and wanted out of a commitment (the “put”) to purchase Fiat Auto.
Fiat was in such bad shape financially by 2003, it might have been forced to enter bankruptcy had a group of banks not provided a Euro 3 billion convertible loan. The company also benefited from the Euro 1.55 billion it received from GM to buyout the 2000 “put” agreement, but much of the turnaround success to date is probably attributable to CEO Sergio Marchionne, who took the reins in February 2004 and instituted a series of management reforms and restructurings that are still underway. (Never underestimate the power of strong leadership – witness Carlos Ghosn at Renault/Nissan.)
The question remains: will the new product be enough to restore Fiat to financial health? Here are some reasons other than new products that Fiat is likely to do better during the next few years:
- Fiat has been forming strategic alliances with Ford, Tata Motors, and Suzuki for vehicle and component development. A joint venture with PSA will produce commercial vehicles and large minivans. Strategic alliances will add product with minimum investment and offer economies of scale.
- Fiat’s European production has been shifting to lower cost countries. During 2000, only 21.4% of European production took place in Poland and Turkey. That will rise to 30.5% in 2006 and is forecasted to hit 40.4% in 2012.
Here are the problems yet to be overcome:
- Even with shifts to lower-cost location, the bulk of Fiat’s production base remains mainly in West Europe.
- Product offerings are concentrated in the “A” and “B” product segment (small cars), which rarely generate robust profits.
- Toyota, Honda, Hyundai, and Nissan are making strong headway in Europe with products that directly challenge Fiat to maintain even its current dwindling market share.
In the case of all three, GM, Ford, and Fiat, product improvements are necessary, but not sufficient to return each to financial health.