Fiat’s Sergio Marchionne Is a Savvy Dealmaker—but Can He Sell Cars? – Businessweek

Posted: Thursday, October 09, 2014

Photograph by Francesco Nazardo for Bloomberg Businessweek

On a gray Tuesday morning, Sergio Marchionne takes one of his half-dozen Ferraris—a black Enzo—for a spin around Fiat’s high-speed test track near the village of Balocco, 40 miles east of Turin, Italy. “When you’re pissed off, there’s nothing better than this,” Marchionne, the chief executive officer of Fiat (F:IM) and Chrysler Group, says as he pushes the car from a comfortable 120 mph to something over 200.

Marchionne will be all smiles when he and Fiat Chairman John Elkann visit the New York Stock Exchange on Oct. 13 to mark the debut of Fiat Chrysler Automobiles (FCA), the company he’s cobbled together from Italy’s venerable Fiat and American icon Chrysler. But he’s still got plenty to be angry about. Fiat’s Italian shares have fallen more than 20 percent since April. A nascent recovery in Europe’s car market—which still accounts for a quarter of the combined company’s deliveries—is flagging after sales contracted to a two-decade low in 2013. And the much ballyhooed return of Fiat’s Alfa Romeo brand to the U.S. will be delayed until at least 2016, other than a few hundred of a two-seater introduced this year.

The trans-Atlantic marriage of the two struggling regional players will likely be the capstone of Marchionne’s career; he says he’s only committed to staying at Fiat through 2018. So how quickly he gets the new company on its feet during these last laps may well determine his legacy. “The idea of revitalizing an American company was particularly appealing to him, and you can see it in how he’s built up Chrysler,” says Ron Bloom, a vice chairman at asset manager Lazard (LAZ) who helped run the team that oversaw President Obama’s bailouts of General Motors and Chrysler.

Fueled by a dozen espressos a day and packs of Muratti cigarettes, Marchionne is moving fast to develop cars he expects will lure buyers into showrooms from Boston to Bologna to Beijing. By 2018 the combined company plans to spend about $60 billion adding more than 30 models, including subcompacts and a Maserati sport-utility vehicle. That, he predicts, will help FCA boost annual sales 60 percent, to 7 million cars, and churn out a profit of €5 billion ($6.33 billion) in 2018.

“If you dream of peanuts, you get monkeys.”—Marchionne on why he perennially sets aggressive targets for Fiat

“We’re moving as fast as we possibly can,” Marchionne says, though he acknowledges that “in the car business, sometimes you crash.” The 62-year-old executive knows. In 2007 he smashed up his own $350,000 Ferrari on a highway in Switzerland. Yet he argues that moving any slower would be even riskier. FCA will be the world’s No. 7 auto group by deliveries, and Marchionne has long said there’s room for just a half-dozen or fewer major actors in the industry.

His plan has legions of doubters. More than half of the securities analysts who cover Fiat recommend investors sell its shares, arguing that Marchionne’s sales goals are unrealistic and its €10 billion in debt is too high. Researcher IHS (IHS) expects the company to fall short of its 2018 target by about 1.8 million cars. “To develop new models is one thing,” says IHS analyst Ian Fletcher. “To attract customers is another.”

Sipping espresso on the veranda of the 19th century farmhouse at the center of the Fiat test track, an unperturbed Marchionne says, “I’m used to incredulity.” He sets ambitious targets, he says, because aiming lower would be “to establish mediocrity as a benchmark of the house. If you dream of peanuts, you get monkeys.”

After taking over Fiat in 2004, Marchionne pulled the company back from the edge of bankruptcy by cutting costs and eliminating bureaucracy. In 2005 he played a game of chicken with General Motors (GM), threatening to enforce a contract that would have made the struggling American company buy an even-more-troubled Fiat. He walked away with a $2 billion cash settlement. Four years later he took over Chrysler, ultimately spending only about 10 percent of the $36 billion Germany’s Daimler (DAI:GR) paid for the company in 1998. “I’m a car freak,” says the longest-serving CEO of any major European automaker, looking over the lineup of Maseratis and Ferraris under the portico of a converted stable at the Balocco track. “But my survival instinct is stronger than my addiction to cars.”

That instinct has led him to largely abandon the mass market in Europe, which he says is too crowded to offer a significant profit. Instead, he wants to transform Fiat’s underutilized Italian plants into export machines for more expensive cars. In 2000, Fiat made 1.4 million vehicles in Italy. By 2013 its Italian output had dropped to fewer than 400,000. “We did a lot of soul-searching, to try to see how best to utilize what we had in Italy,” says Elkann, the great-great-grandson of the company’s founder, Giovanni Agnelli.

A decade ago, the 38-year-old Elkann hired Marchionne from Swiss testing company SGS (SGSN:VX), which the Fiat heirs controlled. Now he’s counting on the CEO to protect his family’s legacy. When Marchionne says he’s a “fixer” of troubled companies, Elkann quickly adds, “And he’s a builder, too.” The plan is to build up Jeep in the U.S. and Europe as well as to develop markets such as Brazil, India, and China, where it plans to start making the Cherokee SUV by 2016. The pair want to double Jeep sales, to more than 1.9 million vehicles, largely by quintupling deliveries in China, where Marchionne says the brand “is credible and is understood by everybody.” He expects Alfa Romeo and Maserati to steal high-end buyers from BMW (BMW:GR), Mercedes-Benz, and Volkswagen’s (VOW:GR) Audi (NSU:GR) line.

Marchionne’s team is working to ensure that each brand stands for something. That’s easy with Ferrari: Its really fast cars can cost more than the average worker earns in a decade. And it seems doable for performance cars such as Alfa, Maserati, and Jeep. More troubled, Marchionne says, are the company’s namesake brands. “Fiat is the toughest nut in Europe, and Chrysler is the toughest in the U.S.,” he says.

Chrysler, which previous management had sought to position as a near-luxury nameplate, is being shifted down-market. A new sedan called the 200—best known as the car driven by rapper Eminem in a 2011 Super Bowl ad with the tag line “Imported From Detroit”—has been well received. But the brand currently has only three models, and its U.S. sales have dropped 6 percent this year. In the U.S., Fiat is making its name as the producer of the retro-hip 500, intended as an answer to BMW’s Mini lineup, but outside the U.S. and Italy its identity is muddled.

Marchionne and Elkann are eager to show the cross-pollination of their brands. In the farmhouse courtyard, a new Jeep, the Renegade, sits next to its Italian cousin, the 500X, both to be built at a Fiat factory 100 miles east of Naples. “This is a real SUV,” Marchionne says, slapping the tailgate of the diminutive blue Jeep. “It’ll take you anywhere.” In industry jargon, the vehicles share a platform, which means most of the stuff you can’t see in a car—the engines, axles, air-conditioning ducts, window-winders, and the like. It costs about $1 billion to take a car from designer’s sketch to dealer’s showroom. Adapting a platform for a new model can be done for less than $300 million, Marchionne says.

Marchionne (right) with Fiat heir ElkannPhotograph by Francesco Nazardo for Bloomberg BusinessweekMarchionne (right) with Fiat heir Elkann

Fiat says the cars share about 40 percent of their components, though they look nothing alike. The Renegade is boxy and muscular, with a wide stance and the six-pillared Jeep grille, which make it look like it just forded an Idaho stream even when it’s tooling up the Via Veneto in Rome. The 500X, while also featuring four-wheel drive and the high carriage of an SUV, has the seductive curves of the original Fiat 500; it’s intended to ooze La Dolce Vita insouciance even at a mall in Chicago or Shanghai. “This is urban, civilized,” Marchionne says, running his hands across the cream-colored five-seater. “It’s Italy at its best.”

Italy’s biggest union, Confederazione Generale Italiana del Lavoro (CGIL), has criticized Marchionne’s focus on operations overseas as an abandonment of Fiat’s Italian roots and the workers who made the company strong. Diego Della Valle, chairman of shoemaker Tod’s (TOD:IM), has long said Marchionne seeks only to enrich himself at the expense of workers. He reiterated those criticisms on Sept. 26 on Otto e Mezzo, a popular evening talk show, just as Marchionne was holding a news conference with Italian Prime Minister Matteo Renzi six time zones away near Detroit. Della Valle called the Fiat chief a sola (a Roman curse that in polite company might be translated as “liar”) who “doesn’t respect any commitment.” Marchionne’s response: “I found it offensive. The problem with this country is that everybody is an expert.”

Marchionne has support at the highest levels in Italy. Former Prime Minister Mario Monti helped Fiat inaugurate the production lines that will make the Renegade and the 500X. And Renzi on Sept. 26 spent the afternoon with Marchionne at Chrysler headquarters in the U.S. After a tour of the facility, Renzi said Marchionne’s Fiat turnaround could serve as a model for all of Italian industry. “For me the most important thing is not the headquarters and where they hold their annual meeting,” Renzi says, “it’s the strategy of making investments in the country.”

While Marchionne says Fiat can manage his huge investment plan on its own, he would consider another alliance if the right opportunity arises. Without identifying potential partners, he says he sees the possibility of a merger that would create a company larger than Toyota Motor (TM), the world’s biggest carmaker. “The industry needs it,” Marchionne says. “This is still a very fragmented industry for the level of capital you have to invest.”

If such a deal happens, Marchionne doesn’t expect to stick around beyond 2018 to make it a success. He says he’s grooming several members of his team for the top job—Elkann says he’s not interested in combining the chairman and CEO titles. “You’re asking me if there are other things I like to do apart from this? Phenomenally, yes,” Marchionne says, lighting another Muratti. “I like to be able to think, and that’s not always possible in this job.”

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