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December 22, 2010 12:00 AM

Fiat dealers bracing for 'sad Christmas' seek help from Marchionne

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    CEO Sergio Marchionne says Fiat's Italian business will be unprofitable this year.

    MILAN (Bloomberg) -- Holiday shoppers pack the streets circling Milan's Gothic cathedral carrying bags from Gap, Gucci and Prada. Just a few blocks away at a Fiat S.p.A. dealer, there's no sign of the bustle: The showroom is empty.

    “Who does come in is interested in buying a specific model and visits several dealers to find the best deal,” says Cristina Fermi, a sales assistant at the dealer. “The risk is a cannibalization of the market. We may bleed ourselves dry to get a new client in a losing competition with other dealers.”

    About a third of Italy's 3,600 dealerships are at risk of going bankrupt in the next 18 months, taking 15,000 jobs with them, as car sales plunge following the expiration of government incentives, the Italian dealers' association said.

    Deliveries in the country, Fiat's biggest market and Europe's third-largest auto market, plummeted 21 percent last month.

    Auto sales in Italy will continue to decline in the first quarter, Fiat CEO Sergio Marchionne told analysts Oct. 21, without providing figures. The CEO says Fiat's Italian business will still be unprofitable this year.

    The Italian market is dragging on Fiat's profit potential. Fiat raised its 2010 forecast, thanks to demand in emerging markets. Full-year trading profit will be at least 2 billion euros ($2.6 billion), up from a previous target of as much as 1.2 billion euros, Fiat said in October. The company, which also controls Chrysler Group, is splitting into two by spinning off its industrial business on Jan. 3.

    “With 30 percent of sales exposed to an Italian car market that we estimate could fall 7 percent in 2011, the outlook is tough,” wrote Bank of America Merrill Lynch analysts led by Fraser Hill in a note to clients Nov. 22.

    'Extraordinary resources' for dealers

    The number of Italian dealers shrunk by more than 200 in 2010, and more than half of current dealerships are losing money, the dealers' association estimates. Last year Italy offered 1,500 euros to consumers who traded in cars older than 10 years. The incentive program, which was part of a 2 billion- euro stimulus package approved by Italy's government in February 2009, wasn't renewed for 2010.

    Dealers are in talks with Fiat to receive “extraordinary resources” beginning next year that would include an overhaul of the bonus and margins' policy on car sales, said Filippo Pavan Bernacchi, who heads the dealers' association. A Fiat spokesman declined to comment.

    “At Christmas we usually have many clients popping in, such as fathers who want to give a new car to their sons ” said Angelo Colaneri, head of Gruppo Colaneri, which has four Rome dealerships. “This year they are not coming. I've never seen such a crisis in the more than fifty years I've sold cars. Our survival is at risk. It's a very sad Christmas”

    Fiat led an eighth consecutive monthly sales slump in Italy in November. Eleven-month deliveries in the country are down 8 percent to 1.83 million vehicles.

    The drop off has increased throughout the year because people who ordered a new car by the end of 2009 could still get the government payment even if the vehicle was delivered at the start of 2010.

    “Italian dealers' margins are tight, and they are being squeezed by the automakers,” said Andrea Sianesi, a professor for supply chain management at Milan's Polytechnic University. “In the end they are not finding buyers. They should aim for more efficiency and merge to survive.”

    Rising unemployment hits car sales

    Economic growth in Italy slowed to 0.3 percent in the third quarter from 0.5 percent in the second, Istat, the national statistics institute, said Dec. 10. The unemployment rate climbed for a second month in October to 8.6 percent, the highest since monthly records began in 2004, Istat said Nov. 30.

    “We don't expect any improvement for Italian car sales in 2011,” said Gianni Filipponi, general manager of UNRAE, an association for non-Italian carmakers. “The market is heavily influenced by the economic conditions and the unemployment rate may even increase next year.”

    Italian car dealers as a whole have been unprofitable for the last three years, and 2011 will be again be difficult, especially for Fiat dealers because the automaker isn't planning many new models for next year, Bernacchi said.

    Fiat's Italian market share fell in November to 28.5 percent from 30.4 percent. Fiat next year plans a European version of the 300C sedan from Chrysler under the Lancia nameplate and an updated Panda compact by the end of 2011. Fiat will also unveil its new five-door subcompact Lancia Ypsilon in Geneva in March.

    Dealers abandon land

    Fiat, which acquired a 20 percent stake in Chrysler last year, has said it will raise the holding to 35 percent by the end of next year.

    As dealers go bust, they leave behind large tracts of abandoned land. An area more than three times the size of the Piazza San Marco in Venice sits unused along the road to the airport in the northern town of Treviso after Marazzato S.p.A., one of the region's biggest auto dealers, went bankrupt last year. Efforts to sell the property have failed so far.

    “We are engaged in a new challenge,” said Roberto Ferrari, chairman of Alfa Romeo's Italian dealers association. “The first step of our strategy is to survive. The second is to change the way we do business with automakers.”

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