Marchionne pins teenage Alfa Romeo dreams on Chrysler cash

Alfa Romeo has long been a cornerstone of Sergio Marchionne's strategy for Fiat.

MILAN, Italy (Bloomberg) -- Ever since Sergio Marchionne snuck in to see the "The Graduate" as an underage teen in the 1960s, he's had a soft spot for Alfa Romeo, the maker of the Spider Duetto convertible Dustin Hoffman's character drove in the film.

Four decades later, Marchionne is the CEO of Alfa Romeo's parent Fiat Group and wants to return the struggling brand to its former glory. To pull it off, he needs cash from Fiat-controlled Chrysler Group. The problem is he hasn't found a way to get it, as a union trust that owns the remaining shares holds out for at least $1 billion more than the CEO wants to pay.

Unlocking Chrysler's $12 billion piggy bank is about more than just refreshing Alfa Romeo and fulfilling the dreams of a "young idiot," as Marchionne, 61, called himself as a teenager in Canada. Fiat's ability to recover from losses in Europe depends on combining with Chrysler and accessing the American company's resources to fund long-delayed new vehicles and stop a downward spiral in its home region.

"Marchionne is facing the most difficult moment since Fiat took over Chrysler," said Giuseppe Berta, a professor at Bocconi University in Milan. "He's in a hurry to complete the merger as soon as possible to invest in new models in Europe."

Production delay

Alfa Romeo has long been a cornerstone of Marchionne's strategy for Fiat. The plan is to transform the 103-year-old Italian carmaker, which currently sells only two hatchbacks and a small sports car, into a global upscale brand to spin off profits similar to the way Audi does for Volkswagen.

The effort has failed to make much progress as Marchionne put spending at Fiat on hold to conserve cash amid Europe's six-year slump and focused instead on turning around Chrysler after rescuing the manufacturer from bankruptcy in 2009.

Fiat will likely delay two new Alfa Romeo models that were planned for next year to 2015, according to two people familiar with the matter, who asked not to be identified as the matter is private. The Italian carmaker may finalize plans by the first quarter of 2014 to build new Alfa Romeos at the Cassino factory in southern Italy, the people said. A Fiat representative declined to comment.

The lack of investment has caught up with Fiat. Burdened by struggles in Europe, the company posted a loss of 482 million euros ($653 million) in the first half, excluding Chrysler. The group, including Alfa Romeo and the namesake brand, sold fewer cars in its home region last month than both the luxury Audi and BMW brands, even though Fiat is a mass-market manufacturer.

'Doing badly'

"Marchionne does things well at Chrysler and badly at Fiat," Volkswagen Group Chairman Ferdinand Piech told Bloomberg News during an event in Vienna this month. Based on its current performance, Fiat "isn't capable of surviving" on its own, said the executive, who has publicly sparred with Marchionne and has expressed interest in taking over Alfa Romeo in the past.

Fiat declined to comment on Piech's remarks.

The company, which reports third-quarter earnings and plans to give an update on targets on Oct. 30, is expected to report 2013 operating profit of 3.81 billion euros, according to estimates of 11 analysts surveyed by Bloomberg. That would miss Fiat's forecast of 4 billion euros to 4.5 billion euros.

Missing targets

The carmaker's struggles in Europe has hit plans for Alfa Romeo. Last year, Marchionne scaled back a mid-term sales target for the brand by 40 percent. Fiat now forecasts sales of 300,000 Alfa Romeo cars by 2016, compared with a 2010 forecast for 500,000 autos by 2014.

The brand is due to miss even the lowered goal by 36 percent. IHS Automotive estimates that Alfa Romeo will deliver 81,000 vehicles next year and 192,000 in 2016. Audi, VW's biggest profit contributor, sold 1.18 million cars in the first nine months of this year.

"If Marchionne really wants to relaunch Alfa Romeo, he needs Chrysler's cash," said Bocconi's Berta, who was the former director of Fiat's archives. "The carmaker has to invest billions of euros in the brand as VW did with Audi."

Fiat intends to boost total investment by at least 1 billion euros next year to as much as 9.5 billion euros. The higher spending is part of the development of about 19 new models in Europe in the next three years, including eight Alfa Romeos. That would be tough for the Italian company to finance without help from Chrysler.

Cash burn

"Fiat needs to generate cash to invest in new models and be competitive, but the cash flow they're generating is not enough," said Falk Frey, a Frankfurt-based analyst at Moody's.

Fiat is due to burn through about 1.3 billion euros in cash this year, according to estimates from analysts at Sanford C. Bernstein. Chrysler targets adding $1 billion to its coffers.

Pooling cash with Chrysler would boost Fiat's financing potential and is a key driver behind Marchionne's push to buy the remaining 41.5 percent stake from a UAW retiree health-care trust. The union fund is requiring Chrysler to prepare for an initial public offering as it feuds with Fiat over the stake's valuation.

Even if the two sides agree on a deal, Fiat wouldn't have full access to Chrysler's cash because of covenants on some of the American carmaker's debt, which restrict use of the company's funds. Chrysler Chief Financial Officer Richard Palmer said in July that buying back the debt wouldn't make sense before 2015 at the earliest.

New roadster

Still, Alfa Romeo isn't totally at a standstill. The brand has started taking orders for the 4C sports car, which will hit U.S. showrooms as soon as April next year, as part of a plan to return to North America after an absence of almost 20 years.

Alfa Romeo will also make a modern version of the roadster that Dustin Hoffman's wayward graduate drove in the 1967 film.

The car will be built in cooperation with Mazda Motor Corp. and hit showrooms in 2015. Alfa Romeo CEO Harald Wester sees cause for optimism.

"I can just tell you that I expect demand for the 4C to exceed planned production," Wester, who is also in charge of Maserati's plan to boost sales eightfold by 2015, said in Milan this week, declining to elaborate on the brand's broader plans.

Contact Automotive News

Have an opinion about this story? Click here to submit a Letter to the Editor, and we may publish it in print.

Or submit an online comment below. (Terms and Conditions)

GM's rising faith in Opel

Douglas A. Bolduc
12:01 am U.S. ET | Feb. 11 2016

GM CFO Chuck Stevens expects the U.S. automaker's long-struggling European arm will break even in 2016. Opel CEO Karl-Thomas Neumann is more cautious. ...
 Read More ›

Ford can boost Europe profits by adding upscale Vignale SUVs

Nick Gibbs
12:01 am U.S. ET | Feb. 11 2016

Ford of Europe isn't saying which models will next get its upscale Vignale trimline but the brand's ...
 Read More ›

Jeep joins Nissan, Honda and others getting big benefit from European production

Nick Gibbs
12:01 am U.S. ET | Feb. 10 2016

Fiat Chrysler's decision to build the new Jeep Renegade in Italy is paying off, helped by strong dem ...
 Read More ›

Ford faces tough decision on B-Max

Douglas A. Bolduc
12:01 am U.S. ET | Feb. 9 2016

When Ford of Europe President Jim Farley says that the automaker must be even more selective on the ...
 Read More ›

'Autopia' future promoted by Google and Apple will hurt traditional carmakers

Luca Ciferri
12:01 am U.S. ET | Feb. 8 2016

Industry disrupters such as Google and Apple are better funded than their potential rivals from the ...
 Read More ›

Automotive News Europe celebrates 20 years; watch this space for future trends

12:01 am U.S. ET | Feb. 5 2016

In an industry reshaping at the speed of light, Automotive News Europe brings you reliable, relevant and unbiased coverage of the auto business. ...
 Read More ›

How GM's 'shampoo princess' is restoring Opel's image

12:01 am U.S. ET | Feb. 4 2016

Opel marketing chief Tina Mueller, a former cosmetics executive dubbed the "shampoo princess," is pl ...
 Read More ›

Nissan claims win in Europe, but Toyota had more sales

12:01 am U.S. ET | Jan. 29 2016

Nissan claims it has achieved a long-stated goal of becoming the No. 1 Asian automaker in Europe by ...
 Read More ›

How GM zoomed past VW in China

Yang Jian
12:01 am U.S. ET | Jan. 25 2016

The Volkswagen Group was China's largest automaker in 2013 and 2014, but last year, General Motors r ...
 Read More ›

ZF executive 'remarkably comfortable' in one-on-one chat with Obama

Bryan Johnson
3:21 pm U.S. ET | Jan. 21 2016

The most commonly asked question I've received in the past 24 hours is: “Were you nervous?R ...
 Read More ›

2015 Assembly map

Latest Headlines

More »