MILAN--Not for the faint of heart.
That was Fiat SpA (FIATY, F.MI) boss Sergio Marchionne's
assessment of the ambitious plan the Italian automaker unveiled
Tuesday to rework the company's namesake brand, and it is likely
few would disagree.
The overhaul involves basing new models on the premium-priced
500 super mini and economical Panda city car in an export-focused
effort to rescue Fiat's European business, whose losses widened in
the third quarter.
Rather than closing factories in Italy to bring costs down in
line with the slump in European demand for new cars, Mr. Marchionne
is gambling that he can put burgeoning spare capacity to use by
exporting more premium-priced cars to growing markets in the
Americas and Asia. These exports would be primarily a wider product
range based on the retro-styled Fiat 500 as well as the group's
Alfa Romeo and Maserati brands.
Fiat said its European factories are operating at 45% of
capacity on average, while its plants in Brazil and North America
are operating at full tilt.
Mr. Marchionne gave few details on new models. But the new
product roll-out in Europe between 2013 and 2016 would include five
new Fiat cars, nine new Alfa Romeo cars, six new Maserati models,
three new Fiat light trucks, as well as new vehicles from Fiat's
58.5%-held U.S. unit Chrysler Group LLC, comprising a Chrysler car
and six Jeep models including one specifically for the European
market. Fiat plans capital spending of up to 1.8 billion euros
($2.3 billion) in 2013 and the same again in 2014 compared with
around EUR1.9 billion this year.
The plan also involves jettisoning Fiat's Punto and Bravo models
and paring back the Lancia brand, which relies heavily on
cross-selling cars made by Chrysler that have been rebadged.
By doing this, Mr. Marchionne wants to make the Fiat brand more
distinctive in Europe's ferociously competitive and price-sensitive
market for smaller cars where Fiat and rivals including France's
PSA Peugeot-Citroen (PEUGY, UG.FR) and General Motors Co's (GM)
Adam Opel unit struggle to compete with market leader Volkswagen AG
(VLKAY, VOW.XE) and Asian rivals such as Toyota Motor Corp (TM,
7203.TO) and Hyundai Motor Co (HYMLY, 005830.SE). Fiat aims to
carve a bigger niche in the premium-priced small car segment. In
Italy, the Fiat 500 costs up to 25% more than others in its
segment, such as Ford Motor Co's (F) Ka, according to Quintegia, a
research group.
As for its premium brands, Fiat will build a new sport utility
vehicle for Maserati in Italy rather than the U.S. It will also
build in its home country the Giulia, a sedan for Alfa Romeo
designed for the U.S., according to a union representative who
attended a meeting between Mr. Marchionne and union leaders in
Turin late in the day.
The representative also said Mr. Marchionne pledged not to lay
off workers.
Fiat recognizes that the plan is ambitious, with the group
likely to burn through almost as much cash in 2013 as the 700
million euros it expects to get through this year, with break-even
only likely in Europe in 2015 or 2016.
"This is truly not for the faint-hearted," Mr. Marchionne said.
"But we have never shied away from a fight."
Earlier Tuesday, Fiat said 2012 earnings will hit the low end of
its forecasts given the dire conditions in Europe, but it still
swung to a third-quarter profit on improved sales in Brazil while
its Chrysler unit enjoyed a strong recovery.
It reported a net profit of EUR39 million ($50.6 million)
compared with a loss of EUR46 million a year earlier, as revenue
beat forecasts with a 16% rise to EUR20.44 billion. Including the
contribution from Chrysler, net profit more than doubled to EUR286
million from EUR112 million.
Fiat's troubles in Europe and the resulting cash burn caused its
net industrial debt to deepen to EUR6.7 billion at the end of the
quarter, as its European operations reported a loss before interest
and taxes of EUR219 million, against EUR136 million a year earlier.
Fiat said its net debt at Dec. 31 would likely be EUR6.5 billion,
having previously projected a range of EUR5.5 billion to EUR6.0
billion.
Heavy cash outflows at other European auto makers have led to a
series of announcements from Fiat's rivals about how they plan to
stem the flow of red ink as their factories run well below full
capacity.
Ford is cutting jobs and plans to close three plants. PSA
Peugeot-Citroen has secured loans from the French government to
support its financing arm, and it is investigating ways to deepen
its cost-saving alliance with General Motors, whose Opel unit
remains in talks with unions about job cuts and a possible factory
closure in Germany.
Mr. Marchionne first raised the idea of focusing the Fiat brand
on the 500 car at the Paris motor show in September. The plan has
been the subject of discussion at the group's executive council,
the highest management level within the group, for many weeks.
Until now, Fiat's attempt to address the European car slump had
focused on suspending investments in Italy, postponing most product
launches, idling factories and the furlough of workers to keep
costs in check, all to the consternation of politicians in Italy
fearing that deeper job cuts were in the offing.
With the 500--an updated version of a model from Italy's
post-war economic boom--Fiat has already started extending the
range, launching the 500L minivan in Europe in September before the
U.S. next year. The 500L's body design resembles that of the 500,
with its roundish headlights and short front end. The Panda,
meanwhile, is a boxy, more rugged car.
"The (Fiat) brand has two souls: the emotional and the
functional," Gianluca Italia, who heads the brand in Europe, said
in a recent interview.
By upgrading the brand, the Fiat group would seek to replicate
the success other European auto makers have had in setting
themselves apart.
BMW AG (BMW.XE) revived the Mini brand in 2001, giving it a
modern look and charging a premium price, broadening the company's
range from a single two-door city car to a wide range of models
today including a coupe, a roadster and a four-door version.
Peugeot has also created an upscale model range for its Citroen
brand based on the 1960s DS priced about 20% more than others in
its segment.
"If you have a brand that .. has a heritage, it's easier to
differentiate yourself in the market and get more of a (profit)
margin out of it," said Andrea Formica, a senior consultant for
FutureBrand.
Europe's sixth-biggest auto maker by volume, the Fiat makes the
bulk of its sales come from the Fiat brand. Between January and
September, the brand sold 451,877 vehicles in Europe, down 16.7%
from a year earlier--far worse than the 7.2% decline for the
market, industry figures show.
Part of Fiat's problem is its lack of success in the market for
larger cars. In 2011, Fiat sold 32,036 of its Bravo model against
522,370 units of Volkswagen's Golf in Europe, according to IHS
Global Insight. As for the 500, its sales in Europe and elsewhere
outpaced those of the main Mini model at 119,836 units versus
83,150 in the first half of 2012, according to IHS Global
Insight.
Write to Gilles Castonguay at gilles.castonguay@dowjones.com
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