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Fiat Revamp to Avoid ‘Carmageddon’

John Reed, Financial Times
Wednesday, 31 Oct 2012 | 2:58 AM ET

Sergio Marchionne has outlined a strategy for Fiat to survive a European "Carmageddon" by focusing on export markets rather than closing plants, as it seeks to break even on the continent by 2016.

Source: Chrysler

In response to plummeting demand in its home market, Fiat's chief executive said the Italian carmaker would revamp its product line and reserve 15 percent of its European capacity for exports.

The change in strategy came as Fiat reported higher third-quarter earnings, but suffered a trading loss of about 700 million euros ($907 million) in Europe and cut sales and profitability targets. Investors also reacted badly to a 1 billion euros increase in Fiat's debt pile during the period, sending its shares 5 percent lower.

Mr Marchionne said that Fiat "could have taken the traditional route" and closed one or two car plants to cut costs, but instead would move away from its traditional reliance on sales of small cars across southern Europe. "We had to stop chasing our tail on [Europe]," the chief executive said. In a presentation to analysts on Tuesday that pointed to strong demand in the Americas, the group also noted that "it isn't immune to the effects of the European 'Carmageddon".

The announcements mark Fiat's most significant response yet to the euro zone crisis and a flurry of consolidation and capacity cuts by its rivals. Car sales are down 40 percent from their pre-crisis 2007 peak in Italy, and Fiat faces intense political and union pressure not to close plants.

Addressing what Mr Marchionne called a "bi-polar market" split between profitable premium carmakers and lossmaking mass-market ones, the Italian group will refocus on its premium Alfa Romeo and Maserati brands and the Jeep marque produced by Chrysler, its US unit.

Production of Fiat-brand cars would be pared back to variants of just three models: its 500 and Panda small cars and the Freemont small sport-utility vehicle.

Mr Marchionne played down a Bloomberg News report that Mr Marchionne had approached PSA Peugeot Citroën and General Motors earlier this month about a pan-European carmaking combination, saying only that Fiat had historically strong relations with the French car maker. GM rebuffed an earlier advance by Mr Marchionne in 2009.

Fiat had recently spoken of beefing up its exports from Europe, where its plants are running at just 45 percent capacity. The Italian group said it would need two to three years to implement the restructuring plan, which would allow "full utilization of our blue-collar and white-collar work force by 2015".

Fiat on Tuesday reported an operating profit of 951 million euros for the third quarter — 12 percent higher than a year ago and better than analysts' average forecast of 910 million euros, lifted by Chrysler and Brazil.

Some investors were alarmed by the company's net debt forecast for the full year, which was raised to 6.5 billion euros from 5.5 billion euros to 6 billion euros previously. Credit Suisse analyst Erich Hauser wrote that Fiat's quarterly earnings were "in line, but balance sheet risks are building".

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