Marchionne's big gamble
CEO bets billions on Alfa, Maserati revival; skeptics see many risks, few rewards
Photo credit: Reuters
TURIN -- Fiat CEO Sergio Marchionne is betting billions of euros that Alfa Romeo and Maserati will help drive the automaker's money-losing European operations back into the black by 2015-2016.
He's also counting on the underperforming sporty brands to help ignite a production boom that will turn the company's under-used European plants – particularly those in Italy – into export champions that will work around the clock to meet untapped global demand for models such as the Levante, Maserati's first SUV.
Marchionne's big gamble on Alfa and Maserati comes at a time when rivals such as PSA/Peugeot-Citroen, General Motors and Ford Motor are negotiating to close European car plants to adjust to shrinking demand and to end big financial loses in the region.
Marchionne has said for years that European volume automakers must make painful capacity reductions to become profitable in Europe again. Now the CEO has accepted that it is politically impossible for Fiat to close factories in Italy. To fully use the group's underperforming Italian plants, Marchionne aims to increase Maserati's annual sales to more than 50,000 by 2015 from about 6,000 last year, and he wants Alfa to triple sales to more over than 300,000 by 2016.
Boosting exports from Italy to global markets makes sense as the European new-car market has shrunk every year since peaking at 16 million units in 2007. New-car sales dipped 8 percent to 12.5 million in Europe last year and volume is forecast to slip below 12 million this year. Analysts don't see a return to the pre-crisis sales level until the end of the decade at the soonest.
Marchionne is also wise to concentrate on the Fiat Group's higher-end brands, especially considering the success of BMW, Audi and Mercedes-Benz. The three German premium automakers have avoided the European sales declines that have plagued most volume brands over the past few years. In addition, all three have added shifts or shortened vacation periods at their European plants in recent years to keep pace with strong demand for their models in countries such as China and the United States.
"We will focus on Alfa Romeo and Maserati to access the higher end of what we consider to be a permanently polarized market now," Marchionne said last month.
Can't do both?
Analysts are skeptical about Marchionne's new plan because it will likely conflict with his other mission, which is to take full control of Chrysler Group. Industry watchers say Fiat simply does not have enough cash to buy the stake it still needs to take over Chrysler and also to invest billions to revive Alfa Romeo and Maserati.
"While Fiat adapting its product to a polarizing market makes sense, we think the market could be disappointed that capacity actions do not feature in Fiat's plans, especially given Ford, GM and PSA have all made tough capacity decisions recently," Morgan Stanley analysts wrote in a note to investors. In early February, Marchionne reiterated that Fiat won't close any Italian vehicle assembly factories. The Cassino, Melfi, Mirafiori (Turin) and Pomigliano plants have an installed capacity of 1 million units, but last year their combined output declined by 18 percent to 394,620 units, according to the Italian automakers association ANFIA.
An automaker should use from 75 percent to 80 percent of installed capacity to reach break-even, industry observers say. Last year, Fiat's capacity use rate was about 40 percent in Italy and just above 50 percent in the rest of Europe, which includes plants in Poland, Serbia and a joint venture in Turkey.
Managing capacity might get even harder for Fiat as it adds production in Italy. In January the automaker reopened an abandoned Bertone plant outside of Turin, where it plans to build up to 50,000 Maseratis a year. If Marchionne's plan to build upscale vehicles in Italy works, high-margin Alfas, Maseratis and Jeeps will offset the country's high labor costs and low labor flexibility.
2 million vehicles
The CEO envisions Fiat's European plants building about 2 million cars, SUVs and light commercial vehicles annually by 2016, up from 1.25 million units last year. At that production volume, Marchionne says that the company would break even in Europe.
By 2016, about half of the additional 750,000 units built in the company's European plants will be sold in Europe and the other half – dominated by Alfa Romeo, Maserati and Jeep models – will be sold in global markets, according to Marchionne's planning.
Analysts believe Marchionne's mission might be too costly to achieve. "Fiat's plan to move upmarket comes with a big price tag. With up to 18 billion in capital expenditures to fund over two years, net debt is unlikely to decline before 2015, meaning a full buyout for Chrysler may be off the table for some time," Morgan Stanley said.
Barclays Capital also signaled concern in a recent analyst note. The firm wonders how Fiat can succeed when most of its rivals "are pursuing the opposite strategy of trying to localize production to hedge against currency risk." The analysts also said: "Competitors have tried on numerous occasions but failed to push upscale, with the notable exception of Audi."
Another skeptic is Max Warburton of Bernstein Research. He wrote: "Perhaps it is possible to grow Maserati, Alfa, the [Fiat] 500 [range] and Jeep, but it will take time, capital and success is obviously far from assured." Warburton noted that Marchionne's strategy results from pressure from the Italian government to pursue growth when the pragmatic choice would be to rationalize.
Marchionne knows that the revival of Alfa and Maserati will take time. His challenge is to exploit the brands' potential, which is something that has eluded him. In my first interview with Marchionne in October 2005, he shared this view on Alfa: "The Alfa issue is complicated and simple at the same time. Alfa is a great, world-renowned brand, but it is selling fewer cars than planned." Seven and a half years and two unsuccessful relaunches later, Alfa remains a Rubik's Cube that the workaholic CEO just can't seem to solve. In 2012, global sales slipped 27 percent to 101,000, which was Alfa's lowest total since 1969.
Last October, Marchionne announced a new plan for Alfa that calls for the introduction of nine all-new or replacement models in the next four years to boost sales to 300,000 by 2016. To reach this goal the CEO has committed more than 1 billion euros to Alfa for 2012 to 2014.
Barclays analysts have doubts about the Alfa plan because, as they said in a note to investors: "It is not the first time we have heard an ambitious volume plan for Alfa." In the past, Marchionne was even more bullish with his Alfa sales predictions. He said in April 2010 that he wanted the brand's annual sales to reach 500,000 by 2014.
Just keeping Alfa's sales steady will be tough. At the Geneva auto show this month, Alfa will debut the production version of the 4C sports car, but the automaker won't get a significant sales boost from the coupe because output will be limited to 2,500 units. Until 2015, Alfa will offer just two aging models: the MiTo subcompact and the Giulietta compact hatchback.
Massimo Vecchio, a financial analyst with Mediobanca Securities in Milan, said the new Alfa plan will not succeed because the competition is too tough. "Even if it reaches the planned 300,000 units, Alfa will continue to lose money and remain a pygmy in the battle of titans between the German premium brands, which are already selling well over a 1 million units a year," Vecchio said.
Marchionne is investing more than 1 billion euros in Maserati to double its product range to six models from three. Those additional models are expected to boost sales eightfold by 2015 compared with last year's 6,288 units. Maserati is already an export-oriented brand, with 2,904 units sold last year in the United States, the brand's biggest market, and 930 in China, its No 2 market.
The first model in Maserati's product offensive is the Quattroporte. The Quattroporte went on sale in Europe in February starting at 149,000 euros in Italy for the top-of-the-range V-8 model. The car's U.S. and Asian rollouts happen this summer. The company aims to sell from 12,000 to 15,000 Quattroportes this year, which is more than twice the previous Quattroporte's 5,088-unit peak in 2007.
Maserati plans to unveil a mid-sized four-door sedan called the Ghibli at the Shanghai auto show in April. At about 5000mm long, the Ghibli will compete with sporty sedan offerings including the Audi A6, BMW 5 series and Mercedes E class. The Ghibli will start at about 70,000 euros when it goes on sale in Europe this summer.
A third model, the Levante SUV, will be built at Fiat's Mirafiori plant in Turin using underpinnings shared with the Jeep Grand Cherokee. Production will begin in 2014. Combined volume for the Quattroporte and Ghibli is about 35,000 units a year at full capacity. The Levante would account for another 20,000 units.
Marchionne believes that the only thing that could keep Maserati from reaching its ambitious goal would be poor product execution, "which is highly unlikely," he added.
Mediobanca's Vecchio agrees: "In the years to come, Maserati looks to become a success story. This relaunch was long overdue."
Plant (brands made) output capacity use
Cassino, Italy (Alfa, Fiat, Lancia) 91,809 46%
Melfi, Italy (Fiat) 106,857 36%
Mirafiori, Italy (Alfa, Lancia) 46,809 17%
Pomigliano, Italy (Fiat) 155,822 74%
Tychy, Poland (Fiat, Lancia, Ford) 293,890 65%
Kragujevac, Serbia (Fiat) 23,830 13%
Bursa, Turkey (Fiat, others*) 189,680 63%
* Others includes Citroen, Peugeot, Opel
Source: R.L. Polk estimates