MILAN (Bloomberg) -- Four months before Fiat agreed to take management control of Chrysler Group, CEO Sergio Marchionne said he wanted to create one of the world's top five carmakers.
Speaking to 1,500 people in the auditorium at Fiat's Turin headquarters on December 11, 2008, Marchionne said Fiat needed to forge alliances with other car companies to survive long term.
It hasn't gone as planned. While Marchionne scooped up Chrysler, his efforts to acquire General Motor Co.'s Opel, Saab, and South American operations last year went nowhere when GM decided to hang onto them or sell them to someone else.
“Marchionne's vision was to create a large automotive group under the control of Fiat,” said Giuseppe Berta, a Fiat expert and business professor at Milan's Bocconi University. “It's going to be a lot harder now.”
Marchionne's challenge is to match the success of Carlos Ghosn, who runs an alliance of Renault SA and Nissan Motor Co. as CEO of both companies, said Stephen Pope, chief global equity strategist at Cantor Fitzgerald in London. Ghosn's 11-year-old Renault-Nissan partnership is the only major auto alliance that has worked, Pope said.
Keeping up with Ghosn could become harder for Marchionne in the wake of Renault-Nissan's agreement in early April to share small-car and engine technology with Daimler AG.
At a press conference in Turin on April 21, Marchionne laid out his latest vision for the Fiat-Chrysler alliance. By integrating the two companies' product development and distribution and linking up with partners in Russia and China, he said, his enterprise would produce 6 million cars by 2014. Right now, Fiat and Chrysler can make about 3.3 million cars. Marchionne would have to add 2.7 million units.
“When we announced our acquisition of Chrysler, our objective was clear,” said Marchionne, who also outlined plans to split Fiat's industrial operations from carmaking. “We wanted the international benefit of access to the NAFTA region. We were looking for an industrial partner with which to shore up Fiat's business.”
While Chrysler reported a $143 million operating profit for the first three months of 2009, analysts say those results could be fleeting.
“The accounting remains opaque, and current costs may not be sustainable,” said Max Warburton, a senior analyst at Bernstein Research in London, who in an April 15 report predicted Chrysler would report a first-quarter profit.
Falling market share
Between March 2009 and March 2010, Chrysler's U.S. market share fell 2 percentage points to 9.2 percent, according to Autodata Corp. in Woodcliff Lake, New Jersey. Over the same period Ford Motor Co.'s share surged to 17.4 percent from 14.7 percent, and GM's rose to 18.7 percent from 18.6 percent. Independent analyst Maryann Keller said Marchionne, 57, could miss his sales target of 1.1 million cars in the U.S. this year.
Ghosn, 56, set the modern standard for automotive turnarounds, leading Nissan to record profits of $3.6 billion on $66 billion in revenue 17 months after his arrival.
“The lead success story in auto industry alliances is Renault-Nissan,” said Cantor Fitzgerald's Pope. “He's defied the odds. The Renault-Nissan alliance has become the benchmark.”
In the early going, Ghosn earned respect inside and outside the auto industry by setting short-term targets and promising to resign if he didn't meet them.
On October 18, 1999, Ghosn announced the Nissan Revival Plan and vowed to be profitable by March 2001, to boost operating margins to 4.5 percent and cut debt in half by March 2003. Ghosn hit the last two targets one year ahead of schedule.
By contrast, Marchionne's vision for Chrysler as the linchpin of a new global auto alliance hit rough going almost immediately after he announced it.
Last May, seeking global scale, Marchionne expressed interest in acquiring GM's European and South American assets. GM never formally offered to sell its South American operations, which included production and sales in Brazil and Argentina. The U.S. automaker declined Fiat's offer for Opel and decided to sell the division to Magna International Inc., the Canadian auto parts maker.
Then, last November, GM changed course. Overruling Fritz Henderson, who was CEO at the time, the board decided to hang on to Opel. The directors argued that keeping the division would help GM maintain a strong presence in Europe.
Marchionne wound up with only Chrysler. Fiat obtained a 20 percent stake in exchange for technology and export opportunities. The United Auto Workers' retiree healthcare fund owns 67.7 percent, with the U.S. and Canadian governments holding the rest.
Marchionne's defenders say it's too early to rate his performance because he has been running Chrysler for about 10 months. Stefano Aversa, co-president, AlixPartners LLP, which advised Fiat on a joint venture with GM, said Marchionne's efforts won't become visible until the end of the year when Chrysler will have released new versions of the Jeep Grand Cherokee, Chrysler 300 sedan and started plugging holes in the model lineup.
“He doesn't have a magic wand,” said Aversa. “It's premature to judge now.”
Marchionne faces a weak car market; auto sales were booming in the U.S. when Ghosn launched his turnaround at Nissan. The international auto market is also more competitive than it was 11 years ago because car companies can produce 90 million vehicles worldwide, about 30 million more than there are buyers.
Chrysler is weaker than Nissan was when Ghosn arrived in 1999, said John Wolkonowicz, senior auto analyst at IHS Global Insight. Bent on cutting costs, Chrysler's previous owner, Cerberus Capital Management LP, gutted the budgets for new vehicles. When Marchionne took over last June, Chrysler had few models in the development pipeline and no small, fuel-efficient cars. While Fiat's 500 minicar is scheduled to go on sale in Chrysler showrooms in December, new vehicles, about half to be built from Fiat designs, won't appear until 2012.
“Nissan was nowhere near as sick as Chrysler,” Wolkonowicz said.
Though Nissan was headed for its seventh annual loss in eight years when Ghosn took over, the company had a lineup of new models on which to build. What's more, Renault, in taking a 36.8 percent stake in Nissan, injected $5.4 billion into the Japanese automaker.
“The table was set in many respects when Ghosn came on board,” said Michael Robinet, a senior analyst for CSM Worldwide Inc. in Troy, Michigan.