Can an Italian Elvis Make Fiat-Chrysler Dance?
The doors of the Geneva Motor Show have just slid open and immediately throngs of reporters and camera crews scramble to reach Fiat's stand.
The Italian carmaker is unveiling the Freemont, one of its first models to borrow from the Chrysler playbook since it took a stake in the Detroit auto giant after its 2009 bankruptcy.
But the media isn't here for the car. They want Sergio. Sergio Marchionne, who runs both Fiat and Chrysler, has a rock star appeal you don't see anywhere else in the global car industry these days.
After two hours, he finally appears, tieless, in a dark turtleneck sweater over a white-and-blue checked shirt. As always, he's wearing laceless shoes. Laces take too much time.
"Don't look at me," the Italian-Canadian drawls. "Look at the cars and how beautiful they are." Before taking questions, he keeps everyone waiting until the last Fiat brand presentation is over.
"Why is it like that?" asks one of his helpers, after the scrum has cleared. "This doesn't happen with other car CEOs." Maybe it's because so much is riding on Marchionne.
The car boss is trying to bring together two firms that have struggled in their respective markets for the past decade or so. This year he has to refinance billions of dollars of Chrysler debt and take the company public, with an initial public offering expected in the second half of the year.
The plan also calls for Fiat to bump up its stake in Chrysler to 51 percent, and get the freshly combined group melded and motivated to lift its vehicle sales by more than 80 percent by 2014.
"This seems a Herculean task, even for a gifted manager such as Sergio Marchionne," says Thierry Huon, who heads the automotive team of Exane BNP Paribas.
It's also a huge gamble. In what's sure to be a landmark in the IPO calendar, watched by trade unions and politicians from Washington to Rome, Marchionne must sell the story of Chrysler and its partnership with Fiat as one of growth — despite a fragile economic backdrop, scant presence in the world's largest auto market, China, and a truck-heavy vehicle lineup that's ill-suited for surging oil prices. Investment bankers are licking their lips.
"He's like the Elvis Presley of the industry right now," said one U.S. banker who knows Marchionne well.
"Not only because Fiat had been doing better and he's getting a lot of accolades for turning Fiat around. But it looks like he cut himself a great deal on Chrysler so he's looking like the smart guy in the room right now." He charms the media.
He barely sleeps. He's almost always in a slouchy black sweater, rain or shine, though he will occasionally don a tie if he happens to have a meeting in the Vatican or at the Italian Parliament.
If he does revitalize Chrysler, he will be doing something that eluded its two previous owners: Daimler AG, one of the world's most respected auto makers, and Cerberus Capital Management, a deep-pocketed Wall Street private equity group.
The son of an Italian "carabiniere" — a member of the Italian paramilitary police — Marchionne was born and raised in the impoverished central region of Abruzzi. His family moved to Toronto when he was 14 to escape what his father viewed as the confines of an Italian society obsessed with status over talent.
The future finance-wizard started off by studying philosophy in Toronto, but quickly moved to law and accounting.
His background is in finance, not autos, but Marchionne earned kudos for his turnaround skills in 2004/5 when he saved Fiat, Italy's biggest industrial group with a century of history and a 200,000-strong global workforce, from near bankruptcy. The firm escaped a forced marriage with General Motors with $2 billion cash.
He took the top job at Chrysler in 2009, hoping to follow in the footsteps of Italian-American businessman Lee Iacocca, the architect of Chrysler's revival in the 1980s.
Iacocca had made his name with the pitch: "If you know a better car, buy it." Known by some of his direct reports in Italy as "il Dottore" and by U.S. ones as "The Boss," Marchionne already runs the executive team with an iron fist, expecting everyone to adhere to his high standards, people who work closely with him say.
Marchionne declined to be interviewed for this report, but Fiat and Chrysler made other executives available. His 48 direct reports at both Chrysler and Fiat keep him updated by pinging one of the six smartphones — three BlackBerries and three iPhones — he carries in a black bag.
One of the phones is for Fiat, and one for Chrysler, but his spokesman can't say exactly what he uses the others for.
Marchionne responds swiftly and succinctly to messages: "Ok--S."
"He has a good mixture of brains of guts," says a senior Fiat source who has known Marchionne since well before he joined the company. "He can motivate people and create loyalty. He is also very tough. You can't make the same mistake twice, but the first time you will be forgiven."
At Chrysler, if you can make a case for what you need, insiders say, Marchionne will make it happen, in contrast to earlier Chrysler leaders who would approve projects but then come up with up only half the funding.
"You can't go to Marchionne and say 'I couldn't get it done' because of some excuse," Chrysler Chief Financial Officer Richard Palmer told Reuters.
"You just need to get it done." Among signs of investors' enthusiasm for the man is the combined Fiat group's market value, which doubled from the time Fiat took management control of Chrysler to the end of 2010.
At 12 times its estimated 2012 earnings, Fiat is currently trading at a premium to peers, reflecting the implicit value of the Chrysler stake and high expectations for the Italian group. France's PSA Peugeot Citroen, for instance, only trades at 5 times forecast.
If Marchionne succeeds in his goals with Chrysler, investors could see significant returns from a company that literally could not be sold for a dollar just two years ago.
Time to Deliver
Of course, Marchionne has had his missteps. He can be a combative negotiator who seeks no counsel and can shift his stance fluidly and without warning, according to people who have experienced his negotiating style.
These people also say he has grown increasingly isolated from other Fiat executives over the years as he concentrated more and more power in his hands.
The only person who's really close to him in the company's top ranks is Fiat Chairman John Elkann, a descendant of the wealthy Agnelli family which owns 30 percent of Fiat.
Marchionne is banking on past success to sell the Fiat/Chrysler integration, and he is piling up project after project to excite the market.
At the start of this year he spun off Fiat's truck and tractor business from the group's carmaking activities, he met the first of three U.S. government targets to raise Fiat's stake in Chrysler, and — with a Chrysler debt of $7 billion to refinance — he's aired the possibility of an IPO of Ferrari, a Fiat brand. According to one person familiar with his thinking, he believes that the luxury brand is worth some 5 billion euros, more than $7 billion.
"Marchionne knows very well that there is a phase when you can promise and a phase when you must deliver," said a former close aide.
"He is a real 'maestro' in managing expectations and is suggesting a range of options to show the company has got many alternatives. But his time is not indefinite." He added that the delivery phase could not be stretched beyond 18 months.
Marchionne has made no secret of his desire to raise Fiat's stake in Chrysler to 51 percent, a goal he has deemed his "Christmas wish." But before that is possible, Chrysler must pay back its U.S. and Canadian government loans per its 2009 bailout deal.
A refinancing package is now being considered by Chrysler's board of directors, Palmer told Reuters, adding that the company is still in talks with the U.S. Department of Energy for low-interest loans.
People familiar with the matter say Marchionne's overarching priority is for Fiat to gain majority control of Chrysler as he is loath to invest a single cent until he owns it and can carry out a proper financial integration of the two companies.
Fiat currently owns 25 percent of the U.S. automaker and can increase its holdings to up to 35 percent without spending capital by reaching milestones agreed with Washington and intended to put Chrysler on sounder footing.
It would need to buy a further 16 percent to have a majority stake in Chrysler.
"The year 2011 will be like the crossing of the desert," said a second top Fiat source. "Marchionne knows he has got few new models. But this is the year in which he will focus on buying Chrysler."
For Chrysler, Marchionne was the last hope.
By late 2008, the No. 3 U.S. automaker was going under and its owner, private equity firm Cerberus Capital Management, courted several possible buyers including Renault , Nissan and General Motors Co with no success.
Under Cerberus, Chrysler had churned out some of the most poorly rated vehicles in the industry, including the Chrysler Sebring and the Dodge Caliber, matched by equally lackluster sales.
Inside Chrysler, engineering teams stopped working, and some divisions lost more than 200 people. From 2006 to 2009, the number of Chrysler employees fell 41 percent to a little more than 47,000.
Inside the cars, cheap painted plastic had replaced stamped aluminum.
By the time Fiat took over in June 2009, around one third of the people in Chrysler's hometown, Detroit, were living below the poverty line compared with just under 14 percent nationwide.
The company had scant goodwill among consumers, almost zero cash and a starved product line: "We had like $4 billion in cash, no product for 12 months," Palmer said of the moment when he started to examine the books as newly appointed CFO.
"I was, you know, worried. Not worried like tearing my hair out worried, but you know, there was a long time to get through without any product in the pipeline." At one point, Cerberus chief Steve Feinberg offered to sell the automaker for one dollar to the U.S. Treasury.
The offer was dismissed as a "joke," former autos task force chief Steven Rattner said in his 2010 book "Overhaul." Marchionne had the kind of clout a dealmaker could only dream of and drove a hard bargain, refusing to put any money down for an initial 20 percent stake in Chrysler and a path to majority control.
The United Auto Workers union now owns a 63.5 percent stake in Chrysler through its affiliated VEBA healthcare trust. The U.S. government owns 9.2 percent of Chrysler and Canada 2.3 percent.
Throughout the discussions Marchionne maintained a combative stance that frustrated his counterparts, keeping U.S. officials wondering until the last moment if the deal would ultimately get done.
The truth is that Fiat needed this deal just as much as Chrysler.
The Italian firm's reputation for quality was not high, particularly in the United States where Fiat had been mocked as standing for "Fix It Again Tony" before leaving the market in 1983.
It may have avoided bankruptcy, but it was still too small and by 2008, when Lehman Brothers went down, things were looking shaky.
At a meeting in Wisconsin in October that year, Marchionne greeted his executives with a slide reading: "The storm is approaching, batten down the hatches." Backed by the Agnelli family, he wanted a partner that would help Fiat achieve 6 million units in annual sales, which he has said is the volume needed to survive in the increasingly competitive car business.
Fiat and Chrysler together sold just over 3.6 million vehicles globally last year, well short of the target and a far cry from the more than 8 million vehicles sold each by Toyota Motor Corp and GM last year.