Four months before Fiat agreed to take management control of Chrysler Group LLC, Chief Executive Officer 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 Dec. 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 chief executive officer 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.
Latest Vision
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 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 vowing to resign if he didn’t meet them.
On Oct. 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.
Rough Going
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, 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 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 health-care fund owns 67.7 percent, with the U.S. and Canadian governments holding the rest.
Too Early
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, the 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.
Gutted Budgets
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 compact 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.
Cultural Challenge
Ghosn’s challenge at Nissan was partly cultural. He was the first Westerner to run a major Japanese automaker. Seeking to fit in, he learned conversational Japanese, ate $4 bowls of ramen noodles in the Nissan cafeteria and rode the same elevator as regular employees.
Learning Japanese helped Ghosn win credibility with executives and workers accustomed to lifetime employment, said labor boss Akira Takakura, as Ghosn set about restructuring Nissan. By March of 2003, Ghosn, dubbed “Le Cost-Killer” by the French media for his previous efforts at Renault, had closed five factories, and laid off 21,000 employees, or 14 percent of the workforce.
Renault shares are down 1.4 percent since the beginning of the year while Fiat shares are flat. Out of 34 analysts rating the French carmaker’s stock tracked by Bloomberg, 12 have a “buy” rating, while nine advise holding the shares and five recommend selling it. Of 34 analysts following Fiat and monitored by Bloomberg, 12 advise buying the shares, 12 suggest holding them and 10 recommend selling. Chrysler is closely held.
‘Overweight’
Adam Jonas, Morgan Stanley’s lead European automotive analyst and the No. 1 rated analyst under “Bloomberg’s Absolute Return Ranking,” ranks Fiat as “overweight.” In an April 22 note, Jonas said Chrysler would help Fiat compete.
“Herein lies one of the biggest buckets of value currently ignored by the market,” Jonas wrote.
Cantor Fitzgerald’s Pope has a “sell” recommendation on Fiat shares. He said the Fiat brand had limited global potential, especially in China.
Marchionne was born in Chieti, Italy, and moved to Toronto when he was 14. He holds dual Canadian and Italian citizenship and is as much at ease unveiling new Fiat models for Italian dignitaries as he is grabbing junk food with United Auto Workers’ Vice President General Holiefield.
A chartered accountant, barrister, and solicitor, Marchionne began his career in Canada, where he worked as an accountant and tax specialist for Deloitte & Touche. In 1994 Marchionne joined chemicals and pharmaceuticals group Alusuisse Lonza Group Ltd. Three years later, as CEO, he spun off the pharmaceuticals business to create Lonza Group AG, where he tripled profit in three years.
Turnaround Artist
Marchionne consolidated his reputation as a turnaround artist at SGS SA, the Geneva-based product testing company, and Fiat, which he joined as CEO in 2004. He returned Fiat to profit in 2005 after four years of losses by wringing about $2 billion out of GM to unravel an alliance between the two, laying off 19,000 workers, slashing product development times to 18 months from four years and introducing new models such as the Punto.
While analysts say Marchionne continues to find ways to cut costs at Chrysler, much of that work was done when he arrived in Detroit. The 6-week trip through Chapter 11 last spring, which Marchionne called a “washing machine” bankruptcy, left Chrysler a leaner entity. Chrysler shed 8 factories, real estate, equipment leases and 789 U.S. dealerships.
Improving Morale
Marchionne gets credit inside and outside Chrysler for improving morale, laid low after a revolving door of owners, including Daimler, which sold the company to Cerberus in 2007.
“After 10 years of tyranny between Daimler and Cerberus, the creativity at Chrysler had been pushed very far underground,” said IHS Global Insight’s Wolkonowicz. “Now Marchionne is bringing it out and he will put his mark on it.”
One of Marchionne’s first acts was to reach into the ranks and promote 40-something managers to prominent positions. That’s what he did at Fiat.
“I look for people who have two fundamental abilities--to embrace change and to lead people,” Marchionne, who declined to be interviewed for this story, said during a March 30 speech in New York.
Last October Marchionne named Ralph Gilles, 40, chief of the Dodge brand, a job that entails deciding what kind of cars to build and how to market them. Before Marchionne arrived, said Gilles, department heads made presentations to the executive committee and left once the senior staff began discussing the pros and cons. Now, Gilles said, he and other department chiefs are expected to join the debate.
“All the people that need to make something happen are in the room,” he said.
Linchpin Model
Morale is one thing; new product another. With little to show, Marchionne is pouring resources into a new version of the Jeep Grand Cherokee, which is scheduled to go on sale at U.S. dealerships in June. He has called the sport utility vehicle a linchpin model that could spur sales and cast a halo over the entire company.
“It is the signature car for Chrysler,” he said March 30. “This needs to be the badge for all new models that will get introduced.”
Marchionne has said the new Grand Cherokee must be flawless and of much higher quality than its predecessors. Making the SUV a success falls to Mike Manley, 46, president and CEO of Jeep.
“It’s the first vehicle out of the gate,” Manley said. “I feel a huge amount of pressure to get this right.”
Analysts say that while the new Jeep may help Marchionne boost sales in the short term, the gaps in the product lineup will be difficult to solve.
‘Dubious’
“We remain dubious that Fiat can deliver great new Chrysler product,” Bernstein analyst Warburton wrote in an April 15 report. “For 2010/11 all the company has, apart from the new Grand Cherokee, is some refreshes and facelifts.”
Since becoming Chrysler’s CEO, Marchionne said on March 30, he has been working seven days a week and shuttling between Turin, where Fiat is based, and Michigan.
“You can’t do this forever,” Marchionne said, adding that reviving a car company after a trip through bankruptcy requires relentless focus.
While IHS Global Insight’s Wolkonowicz acknowledges Marchionne has a “very tough assignment,” he said the man who turned around Fiat also could revive Chrysler.
“I think he’s doing everything humanly possible,” said Wolkonowicz. “He’s 2 people in 1. He gets all of it.”
Ultimately, said Cantor Fitzgerald’s Pope, Marchionne will be measured against Ghosn, who declined to be interviewed about a competitor. While sales at Renault-Nissan have suffered in the economic slump, analysts continue to praise the alliance’s architect.
“He’s got a world-class ability to handle two big companies,” said Yoshihiro Okumura, who helps oversee the equivalent of $365 million at Chiba-gin Asset Management Co. in Tokyo. “I’m not sure if there are others who can follow him.”
When asked about Ghosn, Marchionne called himself “just a metal basher,” and said: “He’s much better than I am.”
