Chrysler, Fiat, and Marchionne Today by Merkel Weiss 11/1/11
Today Fiat owns 53.5% of Chrysler and expects to raise their share to 58% sometime this year as a result of certain agreed to goals met involving Chryslers’ development of a 40mpg car based on Fiat architecture. I find this especially interesting considering that Chrysler should already have a 40mpg car in the new Fiat 500, a 1.4 liter minicar with variable valve timing and lift, mysteriously rated 34mpg at present.
The background to this interesting bit is equally full of intrigue. You may be aware that Marchionne has struggled with the Italian labor unions to bring certain reforms, internally called Fabbrica Italia involving more flexible work hours and worker attendance to bear on the underproducing Italian factories by threatening to either have his contract reforms accomplished or pull the entire factory from Italy and place it in Poland, USA, or one of the other more productive factories. As a result, the most radical of the labor Unions, FIOM, has taken the matter to court, and just last week organized a one day work stoppage. Obviously, this was not a good sign for Fiat, but it’s my understanding that at this point, FIOM only represents a minority of the union votes in Italy as a whole. Even so, there is clearly a deep divide in the Italian unions between those who are generally grateful to be working and those who feel that they should be more highly compensated for producing less, as in the past.
Marchionne has clearly saved Fiat from certain death in the direction that they had been going in the late 20th century. At that time, they were producing a worn out product lineup, both here and in South America where they are also very big. Fiat had a purchasing agreement with General Motors in which the two companies were to build flexible architectures together and use each other’s platforms for new products. This contract included a stock swap by which they guaranteed each other’s independence should a corporate raider emerge that might try to purchase either one and then sell it off in pieces. As a result, there was also a put clause contained in the agreement requiring GM to purchase this certain amount of Fiat stock.
At some point, GM became uncomfortable with the put clause and wanted out of the contract. The result of this was that GM paid Fiat $2B in order to exit, and Fiat turned that money into the Fiat 500 which was European Car of the Year nearly immediately. A line of other marginally successful products emerged from the profits generated by the 500. Fiat was holding their own in Europe and doing quite well in South America, especially Brazil and Argentina. It was at this point that the US housing market collapsed and Chrysler at that time owned primarily by a venture capitol firm, Cerberus Capitol Management, asked the US government for a loan to keep their doors open.
As an aside, this was a little different than the loan that Lee Iacocca engineered in 1980 when he asked the US congress to countersign a bank loan to develop the K-car, in a well laid out plan. Now, Chrysler was freed from the venture capitol firm but had no real path to profitability until Fiat arrived in 2009 to purchase an initial 20% stake in the firm. The federal government provided some $6.6B to the “old Chrysler” and took a 9.85% ownership, while the Canadians took a 2.46% share. The UAW retiree medical fund got 67.69% at that time.
Today, Fiat is selling Chrysler Minivans and 300s in Europe badged as Lancias. Whether this current plan does well or not is really not the point here, I think. Fiat Auto would have been out of business in the early 20th century had it not been for Sergio Marchionne’s guidance and skill. He fully realized the real benchmark of a company is not sales volume per se, but rather volume per platform and attendant economy of scale. He has managed this quirky and frail little automobile company from near death to a potentially powerful worldwide competitor. Chrysler products today are looking better than ever before, with 8-speed transmissions and efficient engines permeating the lineup which is now headed for a place where they are better suited than most of their other competitors to meet future CAFÉ standards of 54mpg. Fiat on the other hand, now has a large car lineup that nicely compliments their own small car portfolio, thereby potentially extending the sales per platform quota which had been previously mired in the respective home markets.
So that to say that Marchionne merely saved Fiat and Chrysler is putting too fine a point on the accomplishment here. While negotiating with the home unions, he’s earnestly saying that the workers can grant these concessions and bring their respective plants up to world standard or else risk having the whole mess shut down and move outside Italy. He’s said that Fiat/Chrysler is a multinational company and in 3 or so years, at the correct time it will be incorporated into one functional unit in some country, to be decided at a later time. Naturally, all of Italy wants Fiat to remain at home in Italy. Marchionne has said that it will. He has not said however, that the Fiat Chrysler headquarters will necessarily be in Italy. By doing so he has kept doors open for further negotiation, at a time when the Euro currency is in particular danger and indeed, the entire European Union is in dire condition with his own Italy feeling the threat of a looming bankruptcy at the doorstep. If there was ever someone who could manage through this minefield, it would have to be Sergio Marchionne.