Fiat Chrysler’s Goal for Alfa Romeo Slipping – Wall Street Journal
Last June, in a lavish ceremony featuring tenor Andrea Bocelli, Fiat Chrysler Automobiles
NV Chief Executive Sergio Marchionne unveiled the first new Alfa Romeo model in six years—the centerpiece of Mr. Marchionne’s plan to revive the group’s jumble of underperforming brands.
Today, the chief executive’s plans to transform Alfa Romeo into a success like Audi
are delayed. Meanwhile, growth has slowed in China, tanked in Latin America, and some analysts say the frothy U.S. car market could begin to plateau as soon as this year
All that is baring the cracks on Mr. Marchionne’s highly ambitious five-year plan for Fiat Chrysler—dubbed “fantasyland” by Sanford C. Bernstein & Co. analyst Max Warburton—and creating a fragile backdrop for a company struggling to lessen its dependence on selling sport-utility vehicles and pickup trucks to American buyers. Moreover, its huge debt and thin profit margins add challenges for it in an industry spending heavily on autonomous and electric cars.
Fiat Chrysler’s “business profile isn’t as strong as Ford and GM,” said Yasmina Serghini, a senior credit officer at rating firm Moody’s Investors Service.
“The cash flow they generate internally might continue not to be sufficient to meet large capital expenditure requirements.”
At the moment, Fiat Chrysler, which can no longer count on the outsize profit from recently spun off Ferrari, remains almost entirely dependent on its Jeep brand for volume gains. That has Mr. Marchionne’s Italian-American mashup relying heavily on Jeep and the U.S. to offset lackluster results from other brands and regions.
Amid the best sales growth in the soaring U.S. market, Fiat Chrysler’s operating profit margin remains 40% lower than General Motors Co.
and Ford Motor Co.
Recalls of more than 11 million Fiat Chrysler vehicles last year will further depress earnings, the company has said. At the same time, Fiat Chrysler’s inventory is increasing, according to data provider WardsAuto.com; its 86 days of unsold cars on dealer lots in the U.S. at November 30 was almost 50% more than the industry average there.
‘We’ll update the plan to reflect things we know now that we didn’t know in 2014.’
Later this month, Mr. Marchionne will present a rejiggered version of a 2014 plan that called for a 50% jump in world-wide revenue over five years and a more than doubling of operating profit. The original plan targeted sales of 7 million vehicles in 2018, a 60% increase from 2013.
“We’ll update the plan to reflect things we know now that we didn’t know in 2014,” Mr. Marchionne said earlier this month, while pledging to stick to financial targets even if volumes are below target.
Mr. Marchionne has already redirected investments and likely will announce delays in the rollout of new Jeep and Maserati vehicles. He has already dialed back ambitions for Alfa Romeo, but a sales expansion to 400,000 vehicles in 2018 is a cornerstone of his plan to beef up Fiat Chrysler.
Blaming the Chinese slowdown and the country’s import duties, Mr. Marchionne said the €5 billion ($5.46 billion) that Fiat Chrysler had planned to spend on Alfa Romeo though 2018 will now be spread a year or two further out with delays in several model launches.
“A relatively significant portion of our volume ambitions for 2018 for Alfa were China driven,” Mr. Marchionne said in late October. “We need to be very careful not to create excessive expectations about what China can contribute to [Alfa Romeo’s] objective.”
But some wonder whether the new Alfa Romeo models will ever come to market.
“The structure of the Chinese market hasn’t really changed at all,” said Stephen Reitman, an analyst with Société Générale SA, who points to other problems with the expansion, including Fiat Chrysler’s lack of a local Chinese partner for the Alfa Romeo brand.
Fiat Chrysler declined to comment further.
Mr. Marchionne’s plan to squeeze more cash out of other legacy Fiat brands has stumbled as well. Two new Maserati models meant to compete with German luxury cars have done poorly with volume and revenue down by a fifth in the third quarter compared with the same period the year before, while Maserati’s operating profit withered to just €12 million from €90 million. The company still plans to launch the first Maserati SUV at the Geneva motor show in March.
All that has left Mr. Marchionne woefully short of money to fund his expansion. Financing vehicle rollouts with debt rather than cash flow is problematic as Moody’s and Standard & Poor’s have a below investment grade rating on Fiat Chrysler. The company’s €7.8 billion in net debt makes it expensive to borrow further. By contrast, GM is sitting on $18 billion in net cash and Ford has $9.4 billion.
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