There are reasons to believe FCA was for sale even before it existed. Back in 2000, the Agnelli family unveiled the plan to sell the Fiat group to another carmaker and to keep Ferrari in the family portfolio. DaimlerChrysler and GM were first in line. A deal was signed with GM. No more than 4 years later, the deal was off and settled in 2005. Four years later, Chrysler was in turmoil and bailout when the idea of a takeover by Fiat surged. The Italian group got the salvage title of the American carmaker at no cost for the Fiat shareholders. FCA was born to a bankrupt American corporation and a weak European company, with a strong market presence everywhere but in Asia. It makes a bigger carmaker for a bigger sticker price and the perfect passport to the western car makets for an Asian investor. A deal that looks good on paper for shareholders. That is probably how it looked like from Italy. But the journey is long to realize the wish and the group is gently saying it looks for a partner.
John Elkann and Sergio Marchionne defend themselves from putting FCA up for salebut it sounds much like a rhetorical point. The best assumption is obviously the Agnelli family has been looking for a new owner for the past 16 years as there is a trail of weak signals that have been dropped all along the way.
The GM years
The GM-Fiat agreement was biased from the beginning as the Agnelli family was willing to sell by any mean while GM was having an unclear strategy. The price was set to 11 million dollars. In the early 2000s, GM product is going nowhere. The bureaucracy, the legacy costs, the heavy processes and global cultural inertia are driving the largest carmaker in the world to an unknown destination. The situation is largely described in Bob Lutz’ book “Car guys vs. Bean counters” as well as Micheline Maynard’s “The end of Detroit”. By then, it explains GM’s interest in Fiat to scale up the European operations as Opel is in a downward spiral. The agreement with Fiat shows GM’s commitment to the old continent’s market. A strategy used once again in late 2011 when GM acquires 7% of PSA’s capital to save the French group from bankruptcy and to prove GM’s willingness to save Opel.
However, the collaboration has had concrete realizations as GM sourced engines from FPT (Fiat Powertrain Technologies, one of Fiat’s gems), the Opel Corsa and the Fiat Grande Punto shared platforms and several GM models used Fiat components (e.g. climate control interfaces). Later, the Alfa Romeo 159 (plus the Spider and Brera) is developed on the GM-Fiat Premium platform, but this technical base has been quickly ditched due to cost and weight issues.
This cooperation reaches to an end when GM tries to get out of the deal to concentrate on its own whereabouts. The Agnelli family was not pleased with the deal either but this becomes a great opportunity to compel GM into a financial compensation for breaking the deal. Negotiating the end of the contract is a tailored job for Sergio Marchionne as his reputation preceded him after years dealing with Alusuisse and Algroup.
Sergio Marchionne comes on the scene
Sergio Marchionne is highly skilled in finance and a gifted negotiator with experience at growing, selling or dismantling companies. Therefore, the Agnellis are advised to hire him to restructure SGS. He makes a tremendous job in growing the business making SGS a world leader in quality, certification and trade relations. When Sergio Marchionne leaves as CEO (he remains chairman), the company lacks organizational efficiency but it is growing fast, making double digit gross margin. Once again, this proves Sergio Marchionne’s competencies. The Agnellis trust him and give him the CEO job at Fiat group.
At the time Sergio Marchionne enters Fiat, the GM-Fiat agreement is collapsing. GM has to buyout Fiat’s right to force GM to acquire the remaining 80% of the Italian company. The high debt of Fiat and the lack of visibility for GM convince the American carmaker to settle the dispute by paying $1.99 billion. This compensation helps Fiat launching new vehicles like the Fiat 500 (initiated under the Herbert Demel era) and several other programs at Alfa Romeo and Lancia. The models sharing parts and platforms with GM are going on and come to the market years after the deal is off (e.g. Alfa-Romeo 159 or Fiat Croma).
Sergio Marchionne starts implementing his management specialties. He diminishes the bureaucracy at Fiat and cuts the costs everywhere including the purchasing department. This last point is probably necessary but it goes way too far as it usually does in this department. Most large carmakers have made the same mistake in the early 2000s. Product quality is a long lasting issue at Fiat. It drops even more after cost reduction and damages the relations with the suppliers. This consequence is quite unfortunate as significant design efforts are made in the meantime. However, the new policies and management have a positive effect on the balance sheets of the group. On the product side, it is not so good. The Alfa Romeo 159 and its siblings Brera and Spider are a failure. The MiTo and the Giulietta come late and once again they barely hide their Fiat origins. The attempts at keeping Fiat and Lancia in the compact and above segments meet a short term success. The subcompact models are quite successful for all brands.
Fiat is still up for sale but the automotive environment is not providing opportunities. Some projects are discussed with PSA or Tata for alliances at different levels. Accountants spend hours forecasting the results of potential mergers. In the case of PSA, the Agnelli and Peugeot families talk on and off several times but never get to reach any agreement. Probably the views and the interests are not the same. The Agnellis are willing to sell but PSA never really had the capitalization nor the vision to take over a group like Fiat. A merger could have been a solution but the overlaps and the rationalization might endanger jobs and factories. This kind of situation rarely gets the support from governments and other institutional decision makers.
The crisis’ opportunity
In 2008, sales are up for years at the time the crisis hit the car market. Everything collapses. The demand drops sharply and the carmakers are struggling to get rid of inventories. The critical issue is the access to credit lines. Most governments act to support the car market by backing the captive banks on one side and boost demand with scrappage schemes on the other side. By chance Fiat is positioned in the most supported segments. But this doesn’t prevent the group from losing volume as the European market is down. The production drops, the revenues are hit by the crisis and the debt remains high but the group is still strong.
In the US, GM drowns deep and Chrysler hits the bottom. The latter is seen as the difficult child of the Detroit Big 3 as it has been up and down for decades. The bailout of Chrysler and GM first sees the two groups merging. But rapidly, another option is raised. Marrying Chrysler to a European carmaker is probably a best way to save jobs in the US. It is also an opportunity given to Sergio Marchionne thanks to his proven record at excelling in recovery management. A large part of the acquisition has been made with Chrysler’s dividends and Sergio Marchionne defended himself from the beginning that Fiat has not invested any cash in Chrysler. Later the story says that there has been some sort of investment as FCA claims that Fiat invested in Chrysler.
At this point, the almost 10-year-old Italian plan takes place. In a few years, CNH is incorporated, Ferrari spins off, the situation describes the will of the Agnelli patriarch from the early 2000s. The group is finally in the expected situation for a quick sell but no one seems interested. The CEO deploys his best effort to generate good financial reports but the situation worsens as investment is kept low and the market is judging the product in a harder way than expected.
The product plans
Two product plans have been unveiled and none delivered. The first one is introduced in 2009 and requires a $23bn investment so much conditioned it is obvious from the beginning that FCA would be short on spending.
Sergio Marchionne declares: « If we cannot meet that objective, then we will not spend the money. It’s that simple. » The message is quite clear. FCA doesn’t intend to stop developing new products but there is a clear decision to limit the investment and not to go all along with the product plan. In 2009, the crisis is still keeping the car market low and no one can really tell when the recovery would start nor how strong it would take. Therefore, FCA rushes into making new products, deploying brands and making a worldwide strategy. It’s probably the only possible choice considering the position of the new group and the time required to structure the organizations. Luckily, the Italian and American culture have proven to be miscible, at least more than the German and the American. The cultural conflict between the Germans and the Americans has been proven by DaimlerChrysler and more recently by the Volkswagen dieselgate. The scandal proves, as if it is necessary, the American culture is much more complex than it seems from Europe.
Every CEO wants to make cars that sell. Sergio Marchionne and his executives have never lied about the willingness to sell more cars. But more than cars it starts to be storytelling too. The models are developed in a very short period of time, carrying across platforms, engines and other components. An expected scaling and economy when merging two industrial companies. The recovery starts in 2011 and brands have to be quick in order to gain back market shares. The Fiat platforms provide opportunities for mid-size and compact models. Fiat is announcing its comeback. The Ram pick-ups are quickly unveiled as the project belongs to the DaimlerChrysler era and got frozen under Bob Nardelli’s disputable tenure. Cerberus management has proven to be just about not spending. The cars coming to the market are good and well-advertised. But FCA also made bad decisions and major mistakes in terms of brand management.
The Chrysler-Lancia cross-badging is the worst idea ever leading to a loss of 80,000 sales in Europe and the death of the Italian brand. Selling Chryslers as Lancias in Europe was like going to Milan and saying you were Italian… from BrooklynThen, the Dodge Dart’s and the Chrysler 200 are dropped after a shortened lifecycle. These cars really have “nothing to be ashamed of” according to Sergio Marchionne and that’s true. To be honest, the handling of those models is above customers’ expectations. The fatal issue is the combination of high production costs with a depressed sedan demand. The combination of the low oil prices and the high demand for SUVs and Crossovers have led to the termination of the low success models. The extension of the LX platform to develop the Maserati Ghibli, Quattroporte and Levante is a failure. Another mistake was to create two additional brands. Firstly, SRT was to be a performance brand and it quickly went back to a Dodge and Jeep trim level. Secondly, Ram became the pick-up brand, taking volumes away from Dodge. This decision is highly questionable as Sergio Marchionne, an adept at the theory of the critical mass (6 million cars or more to survive), said in 2009 that Chrysler may already have too many brands.
The second product plan is introduced in 2014. It is more than ever about potential as it looks like the perfect advertisement to sell each brand with its values, its power and its history. FCA learnt from the Lancia mistake. The plan requires a $48bn investment and, once again, it’s more than obvious that it is about to fall short soon after the reveal. In his own words, Sergio Marchionne conditions the plan: « The execution of the (Fiat Chrysler Automobiles) business plan announced on May 6 depends on the fact that the U.S. operations perform well ». At this point everyone in the company knows about the tricked registration numbers and the rebates strategy. The US market is doing well but not as much as it seems. The second product plan is about explaining cancelled vehicles, delays and the complicated return of Alfa Romeo. Bringing back the Italian icon is costly and FCA is not in a position for such operation. However, if not successful, this could be a major downturn for the group.
The past years, FCA has been using artifacts to occupy the media space with very few new products. The level of investment has been kept low because of a limited financial capacity and a high debt. In addition, this could very much be considered as if Sergio Marchionne was willing to prove you can run a carmaker with high financial targets and lowered investments. But this is a dead end as the CEO himself describes the issue in his presentation Confidences of a Capital Junkie revealed in 2015. This sends us back to the theory of the critical mass. But this strategy of eternal growth is a matter of dispute especially when considering the evolution of the business model towards the mobility hardware.
In the FCA case, the critical mass strategy could be seen as a way to compensate the lack of investment through benefiting from a new partner’s past and current R&D results and products. So far, FCA’s management appears as if FCA has been showing potential and waits until a new owner pours money in to invest in products. Unfortunately, no one has yet come and the product plan starts to be empty.
Make-up for the bride, it’s that simple
Most plans are failures until they succeed. The willingness to sell prevents from any strong investment. Anyone who has ever experienced working for a company for sale has faced that frustrating feeling of lack of achievement, low investment and a global wait-and-see attitude. This is the result of a dividend oriented policy instead of a product-based strategy. The low investment had consequences on FPT (Fiat Powertrain Technology) and CRF (Centro Ricerche Fiat). The latter is the R&D center for the group and used to be one of the most advanced center in the world. Unfortunately, the lack of projects led a major hemorrhage of engineers leaving the company. And because of CRF low activity, FPT has been running low on engines and technologies to sell. This is a vicious circle for FCA.
So far, the Agnellis’ plan to sell is a failure despite Sergio Marchionne’s best efforts. It failed with GM in 2000, it failed with PSA, then GM again in 2015. On this particular point, it takes some guts to knock at GM’s door to ask for a new merger 10 years after the $1.99bn settlement. Sergio Marchionne’s attempt to get Mary Barra’s interest in FCA was a total failure. And there were probably several other discussions to sell FCA as it goes without saying that the public is not aware of every talk Sergio Marchionne has had inside and outside the automobile industry.
For the time being, FCA is parting out several gems to reduce drastically the group’s debt and make the car division easier to sell (although there is still CNH and Iveco along with the car brands). Magneti-Marelli could be acquired by Samsung. The robotic specialist Comau could be sold to Shanghai Electric. It provides cash, improves the value of the FCA car division and saves some capital for the Agnelli family (and Sergio Marchionne as he currently owns about 2% of FCA). The goal is. The current debt is negatively impacting the group’s value and it could be seen as a deal breaker for any investor showing interest in the acquisition of FCA.
Perspectives
FCA has been for sale from the very first day it was founded. It took 6 years to restructure the company, to separate Ferrari from the rest and to settle a financially productive organization (FCA is a UK based Dutch company that has its main operations in US and in Italy). Before FCA, Fiat was too small to get any investor’s attention. Now, a larger group could get the interest from a larger player. FCA operates in Europe, in North America and in Latin America. The operations are weak in Asia. Therefore, we can conclude that the group is made to seduce a Chinese or an Indian investor. FCA is the perfect entry point to the rest of the world providing any investor with factories, distribution networks and brands with character and history. But who would invest in a carmaker with shortness of breath and urgent need for investment? Why not waiting for the group to face major difficulties to acquire the whole thing for a cheaper price?
Several major actors could be interested. But the situation doesn’t please the Agnelli family. They would rather like to see their shares sold with a premium instead of having to depreciate their long term investment. On the opposite side, any investor has to wait for the time to take its toll as FCA is struggling to keep its volume up. Jeep and Ram are the only money makers and they benefit from the low oil prices. Other brands are losing money. This is a weak situation and FCA has no real leverage to fight back. Any investor just has to wait for the product plan to fail and the volumes to drop in order to make the acquisition at the best possible price. Many deals are made when carmakers are in a difficult situation. Chrysler, Avtovaz, Mitsubishi and Proton are good examples.
It’s quite easy to understand why the Agnellis could be upset with the situation as they put pressure on Sergio Marchionne and, therefore, pressure is applied from the top to the bottom of FCA. We can expect the CEO to remain until his normal term set to 2018. But since he declared he won’t leave until he sees the 2014 plan completion bets are open for the months to come. The situation worsens every week. One could say that Chrysler went through hard time after the lies and hidden takeover by Daimler, the failure of Cerberus. With FCA, most were expecting a new era but a group for sale would just mean another short term strategy. The current period has been the most promising to believers as the two product plans were raising expectations. The crisis recovery has provided volume hope. Declaring FCA for sale would probably ease the situation and make it easier to understand for most enthusiasts, customers and investors.
It’s more than time for FCA to find a way to get out of the situation. There are several undeniable elements that point in the direction of FCA being up for sale. It’s time for Sergio Marchionne to succeed and to provide new hope to customers and car enthusiasts as the Maserati, Alfa Romeo, Jeep and Dodge account large groups of aficionados.
To one extent, FCA could become the most advanced carmaker if it embraces the expected new business model based on the mobility tool on one side and the services on the other. FCA is the perfect ally for the mobility hardware assumption. A generic platform coming from a company like Faraday Future produced and sold through FCA as branded mobility hardware solutions and plugged with Google mobility services.