If Fiat is to establish itself as a true global player with a manufacturing footprint to match, it needs to establish a recognisable presence in China and look to move its winning small-car line-up into the country as quickly as possible, Global Insight analyst Paul Newton said in a research note.
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His comments came after Fiat chief executive officer Sergio Marchionne, speaking in Buenos Aires at the launch of the Brazilian-made redesigned Punto in South America, provided more details of the company’s global growth strategy, which involves planned investments of EUR17bn ($US23bn) worldwide to increase production capacity and launch new models.
The investments will be made in the period from 2008 to 2010 and will entail the introduction of 16 to 20 new models in Europe during this period, including some updates and redesigns of its current range.
Fiat will also invest a significant amount in China to establish its recently announced joint venture (JV) with Chery, the company’s second in the country.
“The market in China is difficult to understand. Despite knowing that the results for Fiat will only come after 2010, those who do not enter [that market] will regret it,” Marchionne said.
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By GlobalDataNewton noted that Fiat’s deal with Chery is still in formative stages but there are ambitious plans for the new alliance, with an initial production target of up to 175,000 units a year while the partnership will see Chery supply Fiat with 1.6- and 1.8-litre petrol engines.
The analyst said the tie-up was “highly significant as Chery has long held a position as China’s largest independent carmaker with no JV alliance with a foreign carmaker, although it has signed an agreement to supply Chrysler Group with B-segment vehicles for export.
“Chery’s domestic sales growth has been impressive in recent years and the company has a ready-made dealership, service and distribution structure that Fiat may tap into with the models resulting from the JV.
“It is also a highly significant development for Fiat, which has been hamstrung in the Chinese market by its underperforming JV with Nanjing Automotive, which manufactures a number of variants of the 187 ‘world car’, including the Palio, the Siena, and the Perla,” Newton said.
In 2006, the JV sold a total of 31,300 units, giving Fiat around 0.7% of the Chinese passenger car market. Fiat has a publicly stated target of selling 300,000 passenger cars in China by 2010, and the deal with Chery now makes this a potentially realistic target, according to Global Insight.
Fiat’s existing partnership with Nanjing Automobile Co. has been failing and its long-term future is still uncertain, although the JV recently acquired a new managing director.
Newton said a significant portion of Fiat’s EUR17bn investment would go towards Fiat’s Latin American operations, one of the key driving forces behind the recent good financial results of the Italian group, and a major factor in its overall recovery process during the past few years.
Latin America will receive investments valued at $BR5bn (EUR2bn) between 2008 and 2010, expanding production to 1m.
“We will expand our production capacity in the region to 1m units, new models will arrive in the market, and our market share in Latin America, which is currently between 13% and 15%, will increase”, Marchionne said in the Argentine capital, Buenos Aires, during the Punto launch.
Marchionne added that in other emerging markets Fiat will follow the partnership strategy pursued in China, and similar arrangements are planned or in progress with Tata in India, and with Russian companies.
He also touched on Fiat’s strategy to re-enter the US market with Alfa Romeo: “We know that it is the market that represents the maximum efficiency and, as such, the intensity of the punishment is the same as the intensity with which it allows growth. They do not forgive mistakes. We are looking at this large market through Ferrari, Maserati, and, in 2009, we will enter with Alfa Romeo, but we know that, during the first three years, we will not have any profits. It is similar to China, in the sense that it is as fascinating a market, as it is dangerous.”
The Fiat brand was withdrawn from the US in the 1980s and Alfa quit in the early 1990s.
Newton said Fiat’s model development investment plans would centre on maximising its expertise in the smaller segments, bringing out derivatives of its existing model range, including the resurrection of its aspirational, sporting Arbarth brand.
“Further expansion of Alfa Romeo is essential and Fiat will attack new segments with its premium brand and look to resurrect the iconic brand in the key US market, although somewhat cautiously,” he wrote. “Fiat’s model offensive will largely concentrate on defending its share in its main market of Europe. As with many European companies, Fiat is looking to grow outside of Europe in emerging markets, and this is essential for the future stability of the company.
“For Fiat to establish itself as a true global player with a manufacturing footprint to match, it needs to establish a recognisable presence in China and look to move its winning small-car line-up into the country as quickly as possible.”
Newton reckons that the Fiat brand will be the group’s main sales driver in China.
“The automaker has criticised Nanjing Automotive for a lack of commitment to their JV project, but the fact remains that the model line-up is unloved and uncompetitive and Fiat must acknowledge its role in this failure. However, the positive news is that Fiat is currently undergoing a resurgence as a result of an impressive model renewal programme that has resulted in the company returning to its core values of making excellent small cars.”
He said the new Turkish-built Linea sedan aimed at developing markets could also be built in China and is likely to benefit from the earlier deal for Chery to supply Fiat with 1.6- and 1.8-litre petrol engines.
“There are signs that Chinese consumers are ready to accept smaller, more fuel-efficient passenger cars, and Fiat is extremely well placed to meet rising demand in the market,” Newton wrote. “However, it has missed the mark in this respect with the Nanjing-Fiat range of vehicles, and this JV’s days may be numbered as a result, despite both parties having pledged additional investment earlier this year.”
Newton added that Fiat’s prospects in South America are limited only by capacity constraints. The current production limit is 860,000 units a year – 700,000 in Brazil and 160,000 in Argentina. Although it has committed to producing 1m units in the region by 2010, where the extra capacity will be installed has not been detailed.
“In line with our previous assumption that the company would have to either expand existing facilities or build new ones, Fiat could potentially purchase Daimler’s Mercedes-Benz Brazilian facility in Juiz de Fora, in its home state of Minas Gerais,” Newton said. “The recently built, but severely under-utilised plant could well be the answer to a few of Fiat’s problems, and some of Mercedes’ as well. Another possibility is expansion of its Iveco commercial vehicle plant in Sete Lagoas, also in the same state of Brazil.”
He noted that “Fiat’s cautious approach to expanding in the region” resulted from its experience after rapid expansion programmes in the 1990s left it with expensive, under-utilised plants following the financial crash in the region around 2000.
