Analysts don’t trust mould breakers. They don’t conform to the templates of the industry that they research. If the chief executive of Fiat says that he can do things with the profitability of the company that have never been done before, he is going to have a tough time getting it past the regular soldiers on the beat whose job it is to spot the charlatan before he does any damage to the investors.
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Last week, Sergio Marchionne spent two days at the microphone as captain of the Fiat team selected to take the wickets and hit the boundaries. It was unusually detailed, thorough and candid. The first day began with: “I am the fifth CEO in two years. There have been too many disappointments, too often.” It ended with: “This has been an incredibly long day. I’m tired and hungry. Let’s go for dinner.” But not before this: “We have met or exceeded our commitments. We have taken the company from a loss in 2004 of US$2m a day – including weekends! – to a profit of EUR5m a day.”
He then predicted – accurately, that analysts would no doubt be asking whether the Fiat leadership could achieve its targets within an industry where growth was extremely limited.
Marchionne was aware of the aggregated forecasts of volume for all competitors in Europe which means that output would cover today’s market by 1.5 times. But Marchionne thinks he is special: “This is a different house. It has a very flat structure and is a lot faster. Margins of 4.5% to 5.5% is what a company like this in this industry should be able to make.
“We have been doing this sort of stuff in a number of different industries and we have always broken the taboos of the industry.”
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By GlobalDataIt was brave but akin to backing Southend against Manchester United [see note at bottom of the page]. You know it can be done but it takes a lucky break. Max Warburton published a research note when he got home to UBS Warburg which said: “Hitting Fiat’s hugely ambitious 2010 targets looks at least as complex as splitting the atom.”
Fiat Auto’s official target margin of 4.5 – 5.3% for the year 2010 depends on sales rising by 1.38m units or 65% by then. “Beyond ambition,” says Warburton. “We doubt that the market will be willing to make this leap of faith.”
Marchionne’s right to make such extraordinary forecasts arise from the near-miracle of the last three years which have taken the company from near bankruptcy to viability. However, with a newly stripped and lean organisation, and a hot product in the Punto Grande, it is only making a margin of 1% on trading profit of EUR1.3bn and makes a loss on its European operations. It is some step then from there to 5.3% on EUR5bn in three years’ time.
PSA Peugeot Citroen has been here. The outgoing Jean-Martin Folz has had to make three profit warnings this year after forecasting profits that were outside the normal range for the volume car industry at this point in its demand cycle. The reigning industry hero, Carlos Ghosn is off the pace with his forecasts for Renault. VW, Ford and GM are all squealing at the tight structure of the competition in the European market.
Impressive and entertaining guy, Mr Marchionne. He has an incentive package that ties him to staying with Fiat Group till 2010 (but he drops his Fiat Auto CEO responsibilities next year) and delivering his forecasts. Fiat has been a basket case for so long that it would be wonderful to watch him succeed.
Rob Golding
Editor’s note
For the benefit of those not familiar with developments in English football, Manchester United (one of England’s biggest football clubs) recently played a lower league minnow of a team, Southend United, in a domestic cup competition. Underdogs Southend won the game 1-0 – a major upset.
