Fiat, a mainstay of the Italian economy, is in the sick bay and losing money by the bucketful. It has even sold a share of its prized possession, Ferrari, as part of a recovery operation. What’s going wrong? Report by Anthony Lewis.
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When Giovanni Agnelli sneezes, Fiat catches a cold. If Fiat has a cold, the rest of Italian industry starts to feel off colour. Hardly surprising since the Fiat Group accounts for 5% of Italy’s gross domestic product.
So what are the omens surrounding honorary chairman Agnelli receiving treatment in a New York hospital for what is described as “a long-standing prostate condition”? It is a cruel co-incidence that illness prevented the head of Italy’s surrogate royal family from attending Fiat’s annual meeting for the first time in nearly 60 years.
This at a time when the company itself is so unwell that it has sold a 34% stake in Ferrari, its crown jewel, to Italian bank, Mediobanca. Last December, the company attempted to offload the remainder of its Magneti Marelli components division. This is drastic surgery by any standards, and an indication of the dire state of Fiat, once the fittest of Europe’s carmakers.
The stark facts reported at the annual meeting on May 14 are a first quarter net loss of £322m (Euro529m), compared with a profit of £119m a year earlier. It compounds last year’s red ink on the accounts, the first loss since 1993.
More worryingly, Fiat Auto – responsible for 40% of group sales – had an operating loss of £266m, which was higher than expected and caused primarily by weak sales. In June alone, its European sales slumped by more than 29% against an overall market decline of 8%.
Registrations of the small Seicento were down 29% in Western Europe in the
first five months of this year and Punto slipped by 22.5%. The recently-launched Stilo has fallen below expectations, selling an underwhelming 86,500 units in the first five months.
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By GlobalDataIn the same period, Peugeot ‘s 307, launched six months earlier, registered 184,660 sales. VW’s Golf (272,400) and Ford’s Focus (252,780) led the sector.
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Sales of Lancia, arguably a marginal marque, must be particularly worrying, down by more than 31%. Even the rejuvenated Alfa Romeo brand, torchbearer for the group over the last couple of years, has seen volumes slide by around 16%. Last year it was the undoubted Fiat star with sales up 15%.
In the UK, Fiat tumbled 24% in the first half of this year, running contrary to the tide of a market up 6%, while Alfa floundered to 35% fewer sales in the same period.
Given this dismal state of affairs, it’s scarcely surprising that Fiat Auto is planning more lay-offs and further production cutbacks.
So what has gone wrong?
Fiat Auto’s new chief executive Giancarlo Boschetti puts it down to a variety of shortcomings, ranging from heavily discounted sales to rental companies to a model range biased towards smaller cars with low profit margins. Poor product quality continued to dog the company’s image, with Boschetti noting that warranty costs were “50% over those of our competitors”.
In the UK, this is compounded by way-below-par performance in both product reliability and dealer standards. Out of 144 contenders, not one product from the Fiat stable appeared in the first 72 rankings in a customer satisfaction survey by JD Power and What Car? magazine. Another study, this time by Auto Express magazine, dumped Fiat dealers at the bottom of the pile in every category – helpfulness, workmanship, cleanliness and product knowledge.
To add insult to injury, Alfa Romeo dealers were rated as the next worst retailers. Fiat’s UK operation is currently undergoing structural re-organisation, with autonomous brand-related business units. Glyn Owen, new MD of Alfa Romeo, is the first stand-alone Alfa boss in Britain and will report direct to Turin. It’s also expected that the Alfa network will be run separately from Fiat, even if most dealers continue to share the franchises.
Perhaps the Fiat top brass anticipated trouble two years ago when a 20% stake in the auto business was sold to General Motors. The deal included an option for GM to stage a complete takeover after January 2004.
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His blueprint? A plant operating three shifts, five days a week and producing between 200,000 and 250,000 vehicles a year. “No product stays hot forever, so you need two products, ideally three years out of phase with each other, at each plant,” he said.
This is not dissimilar to Fiat’s own issues, except that its products have generally been more appealing than those wearing Opel and Vauxhall badges. Production at Turin is down from 600,000 vehicles a year five years ago to 300,000 now. The restructuring plan, unveiled last December, called for 18 factories to be fully or partially closed and the headcount trimmed by 6,000 staff.
On one strategic issue, it’s puzzling how Fiat Auto became flat-footed. It was prescient enough to realise the risk of over-reliance on the European market and established a good global footprint, into South America and beyond. It was PSA Peugeot-Citroen that was thought to be vulnerable, with a 70% concentration of sales in Western Europe. Paradoxically, the French group now commands top billing on the European stage, offering the right products at the right time, well marketed with effective joint ventures.
Contrast this with Fiat. Its Polish-built sub B model, the Seicento, remains a good car, capable of holding its own against Ford’s Ka and Renault‘s Twingo. Yet western European sales in the first five months quarter of this year were down 29%; its Lancia Y cousin’s were down 28%. To be fair, Twingo and Ka also slipped but not so far and they are not as critical to their brands as Seicento is to Fiat.
Punto has for long been Europe’s best-selling supermini, a title it has lost to Peugeot’s 206 and it is likely to slip further as the new Ford Fiesta and Citroen C3 make their mark.
Stilo arrived last autumn but, rather than leapfrogging the competition, it was a case of playing catch-up; galling for a company so often used to being hailed as a trend-setter.
The radical, quirky, low-volume Multipla, launched in 1998, is now fading fast. After initially beating its conservative sales target of 40,000 units a year, sales in the first five months of 2002 were 48% below the same period last year.
Nevertheless, Multipla’s innovative space frame construction platform will form the basis of Fiat’s future manufacturing template. But there are obvious gaps in the line-up. Plans for a mainstream compact Stilo-based MPV are reported to have been suspended.
This would have competed with heavy hitters, the Opel/Vauxhall Zafira, Renault Scenic and Citroen Picasso. Instead, a Punto-based MPV is expected by spring 2004, while Punto itself gets a major facelift early next year. An estate version of Stilo is due in November this year and a full-size SUV in spring 2004.
A great deal of corporate energy has been channelled into Alfa Romeo which had sales last year of 202,031 against 174,956 units in 2000. Alfa is promised ten new models between now and autumn 2007.
This is all part of a restructuring plan announced by Fiat Auto boss, Giancarlo Boschetti. Boschetti moved from Fiat’s Iveco heavy truck division to replace Roberto Testore, who fell on his sword as – along with Paolo Cantarella – a victim of the corporate malaise.
Within a couple of months, Boschetti had shaken up his management team, passing over sales executive Juan Jose Diaz Ruiz, who had been recruited from Toyota Europe in September 2000. Diaz Ruiz was moved to a dealer development role, reporting to Boschetti. Yet Diaz Ruiz was seen as having done a first class sales job at Toyota and previously with Audi.
Meanwhile, the familiar palliative of artificial market stimulus through Italian government incentives, including tax preference for lower emission cars, has reared its head again. Fiat says it will match the incentives with price reductions or cheap finance. Inevitably home team Fiat will be the main beneficiary, just as it was in the late 1990s when the car scrapping scheme boosted Turin’s fortunes.
Paolo Fresco, Fiat Group chairman, has vowed not to take the previously unthinkable step of ending Fiat SpA’s role as a carmaker. After all, it is the world’s seventh largest car and truck producer with over 2m million units a year. But sheer size no longer masks the simultaneous crises permeating operational competence and overall governance.
The conclusion is that Fiat’s manufacturing needs to become leaner and more flexible. Most of all, though, a complete overhaul of sales and marketing strategy must be amplified with a strident wake up call to its lacklustre dealers. They cannot afford to oversleep this particular alarm.
Who succeeds Agnelli? Giovanni Agnelli, honorary chairman of Fiat and undoubted patriarch of the empire, turned 81 in March. Five years ago his appointed heir Giovanni Alberto, son of his younger brother Umberto, died of cancer. Three years later tragedy struck again when Agnelli’s son Eduardo, 46, who had never taken an interest in the firm, committed suicide by throwing himself off a bridge on a motorway near Turin. The Agnelli family holds 30% of Fiat SpA group shares. Giovanni’s daughter, Margherita, 55, is a painter, while Umberto, 67, who was ousted as chairman of Fiat Auto by his older brother in 1983, is thought by many to be too old. Umberto is also understood to favour Fiat Auto’s sell-off, which would count against him among the fiercely proud Italian industrial hierarchy. That leaves Giovanni’s grandson, 26-year-old John Jacob Elkann, son of Margherita by her first marriage to the French writer and broadcaster Alain Elkann. John Jacob is known in the family as Jaki and was drafted onto the Fiat board at the age of 22, the same age that the ‘old man’ joined the board. Born in New York, Jaki grew up in Paris and studied engineering in Turin and worked at Fiat Auto’s Poland plant and in the French sales office as part of his apprenticeship. One outsider is Luca Cordero di Montezemolo, 54-year-old chairman of Ferrari, and charismatic godson of Giovanni Agnelli. His glittering CV includes managing Cinzano, co-ordinating World Cup Italia 1990 and being architect of Ferrari’s Grand Prix success in the mid 1970s and a key player in the current Formula 1 and road car renaissance, while also rebuilding Maserati. |
By Anthony Lewis – additional reporting by Hugh Hunston.
