Fiat Scion’s Strategy Toward GM: Patience – Wall Street Journal
MILAN— John Elkann, chairman of Fiat Chrysler Automobiles
NV and scion of Italy’s Agnelli family, isn’t giving up on forging a partnership with General Motors Co.
, despite being rebuffed by his Detroit rival twice in the past four years.
Mr. Elkann and Fiat Chrysler Chief Executive Sergio Marchionne had approached GM in 2012 and again earlier this year, arguing that steep new technology investments will push the highly fragmented car industry to consolidate.
“GM hasn’t been put to rest,” the 39-year-old Mr. Elkann said in an interview in a Milan conference room where he presented himself as a determined and patient believer that Fiat Chrysler, with €96.1 billion ($106.81 billion) in annual revenue last year, eventually will find a partner. “GM is not the only option, but no doubt from a feasibility and quantum point of view it is by far the best.”
On Monday, a GM spokesman reiterated the company’s lack of interest in a merger. Its chief executive recently said the largest U.S. auto maker has ample scale and would focus on achieving returns on invested capital of more than 20%.
A deal with GM, which has a market value nearly three times that of Fiat Chrysler, would be a crowning achievement for Mr. Elkann who has transformed his family’s holding company by moving into new industries and diversifying outside of Europe.
Mr. Marchionne, 63, has been the public face of Fiat Chrysler’s merger campaign. Mr. Elkann, the great-great-grandson of Fiat’s founder, largely has remained behind the scenes in developing the consolidation strategy for Fiat Chrysler, in which the family’s holding company Exor SpA owns a 29% stake.
Some analysts say Fiat Chrysler, the seventh largest auto maker by volume, needs a merger more than its peers. Its debt load is tops among big car makers, its profit margins are half that of bigger rivals, and it is now suffering troubles in Brazil and lacks a major presence in China. Analysts say its troubles could worsen if the industry were to slow from here.
“They have a lot more scale than what they used to have but what they used to have was abysmal, and what they have now is just bad,” said Morningstar Inc. auto analyst Richard Hilgert.
Last year, Mr. Marchionne promised Fiat Chrysler would address many of its weaknesses by investing €48 billion through 2018 to roll out dozens of new models and boost sales by 60% over 2013’s 4.4 million. Some analysts say the plan is unachievable, pointing to high sales goals and recent delays in producing new vehicles.
But Mr. Elkann, who is on the board of News Corp,
which owns The Wall Street Journal, insisted rivals will come around to Fiat Chrysler’s thinking and discussions would begin. “There is no pressure on time,” said Mr. Elkann. “In 2012 we had a conversation [with GM]. In 2015 we had a conversation. We might have a conversation in 2017 or 2018.”
‘There is no pressure on time.’
That belief in the inevitability of industry mergers has strengthened his bond with Mr. Marchionne. Earlier this year, Mr. Elkann appointed his former mentor as Exor’s vice chairman amid a $6.8 billion hostile bid for Bermuda-registered reinsurance company PartnerRe Ltd.
“Having him closer to us is both a sign to recognize what he has done, but also to have Sergio help build our future,” said Mr. Elkann.
Mr. Elkann is the grandson of Gianni Agnelli, the businessman who chaired Fiat for three decades and was the country’s most well-known industrialist. He was thrust into the family business at 21, when he took a seat on Fiat’s board and became the heir-in-waiting to Italy’s leading industrial group.
Known as Jaki to friends and family, Mr. Elkann was 26 when Mr. Agnelli died. A year later, Gianni’s brother, Umberto, died, leaving Mr. Elkann to cope with a car maker that had racked up €6 billion in losses in 2002 and 2003. Italian banks, which held a $3 billion loan that the company was unable to pay, were pressing the family to sell.
“Most of us [in the family] said we’d do anything not to find ourselves in that position again,” said Delfina Rattazzi, the daughter of Gianni Agnelli’s sister Susanna. “The family has never been closer and the support for John has never been stronger.”
‘Sometimes extreme situations like a crisis force things to happen. I’d rather us not have to do something within those circumstances.’
Instead of selling, Mr. Elkann got the family to invest more money in Fiat—€1.43 billion since he took the helm—and hired Mr. Marchionne. The pair stanched Fiat’s sizable losses and took over a bankrupt Chrysler in a move that reinvigorated both companies.
Messrs. Elkann and Marchionne approached GM on a merger in 2012. At the time, GM was pursuing a European partnership with France’s PSA Peugeot Citroën.
Mr. Elkann noted to GM’s management that an earlier such arrangement with Fiat had ended in acrimony with the American company paying $2 billion in 2005 to get out of an obligation to buy its Italian partner’s car business.
“We were trying to say, ‘why do this [partnership] which has not worked with us?’ try and do a combination that has much more opportunities of working,’ ” Mr. Elkann said, encouraging GM to agree to deeper ties than the first GM-Fiat venture had allowed.
He said that GM’s management countered with a list of Fiat’s weakness as a merger partner, including: Fiat Chrysler at a time didn’t fully own Chrysler, it was losing money in Europe, and Jeep, Alfa and Maserati were aspirational brands without much growth potential.
GM and Peugeot went ahead with their deal in 2012, but the savings were well below the pair’s original targets. GM quickly sold its 7% stake in Peugeot that had been acquired as part of the alliance.
Since Mr. Elkann’s 2012 approach, GM’s shares are up 30%, while Fiat Chrysler’s have tripled. That split highlights the “missed opportunity,” said Mr. Elkann.
Earlier this year, Messrs. Elkann and Marchionne tried again, presenting a laundry list of Fiat Chrysler’s accomplishments since 2012. Fiat had gained complete control of Chrysler and was making money in Europe after more than seven years of losses. Jeep sales had almost tripled to more than one million and Maserati was growing strongly.
In short, the pair’s message was “let’s merge and make the real GM, the biggest and most profitable car company in the world, which will be based in the U.S.,” said Mr. Elkann.
But GM CEO Mary Barra was unmoved by Mr. Elkann’s latest reasoning. Instead, GM’s board believes the No. 1 U.S. auto maker can continue to grow on its own. With capacity to build 10 million vehicles annually, GM’s chief says the challenge is to “merge with ourselves,” hemming together the company’s broad patchwork of operations.
While he waits for another opportunity, Mr. Elkann is keeping the door open to another merger partner, although he said no talks are currently under way. Ford Motor Co.
isn’t a good match because it isn’t interested in a broad multibrand strategy, he said.
“Sometimes extreme situations like a crisis force things to happen. I’d rather us not have to do something within those circumstances,” Mr. Elkann said.