Wednesday, 21 January 2009

Industry Structure – Chrysler Fiat - “35% Down, Nothing to Pay & Maybe Even More Cash On the Way!”

There are some wonderfully sweet deals to be had from the car industry at the moment, a buyer's market no less. But perhaps none compare to the outline deal FIAT SpA has struck with Cerberus & Chrysler to take an initial 35% of the Detroit company (and a possible latter-day 55%). A successful resolution to the ongoing conversation throughout 2008.

That enthusiasm was demonstrated in the markets yesterday as FIAT's share-price rose 4.5% on the news. So the clink of champagne glasses was abound yesterday in Turin and Detroit, toasting Washington for Congress' $1.5bn assistance package to Chrysler (approved only a few days ago) as much as for the incoming President.

Given the level of American tax-payer assistance given to its auto-sector, European carmakers continue to forward their case for assistance during these depressed times and both national and EU levels. Marchionne's adroitness and charm have propelled him to as the voice of the EU auto-communitym and he has been most fervant in stating FIAT's and its peer-set's case for EU aid to the powers that be in Brussels.

A re-appropriation of Dick Fuld's now infamous words - to " keep dancing whilst the music plays" - seems very apt for the savvy FIAT boss so keen to bolster the balance sheet, retain large-cap investor confidence and politically maintain European automotive leadership on the world stage. And who can blame him in non-ending search for maximised efficiencies and minimised cost of capital at both company and sector levels?

So at this watershed time, the unmistakably clear raison d'etre for Robert Nardelli and Sergio Marchionne to join forces is to capture the mutual ambitions for a synergistically enabled product and foot-print expansion.

Whilst there is industry talk of the normal high ideals to platform share, the very urgency for Chrysler to earn revenue as soon as possible means there is a very real possibility that it has to return to its yesteryear tactics of short-term badge-engineering to fill the vehicle line vacancies. Grande Punto and Bravo (& possibly Lancia Delta & Musa) grafted with Chrysler design elements such as the wing-adorned classic grille. Whilst Panda and Doblo (and possibly Qubo) spawning Dodge 'cross-hair' grilles to take the respective roles of 'baby-Nitro' and help broaden Dodge's commercial vehicle arm (ably assisted by the 'Professional' commercial vehicle division) beyond present badge-engineered Daimler/Mercedes Sprinter. [Multipla does not fit into the US migration equation given its unique styling and ageing platform, not initially package protected or easily adapted to fit US regulations. Instead it has been sold to the Chinese firm Zotye].

Looking from the opposite angle, Chrysler will undoubtedly endeavor to try and persuade its new partner to evaluate the potential for a return swap of its own vehicles. Main focus will be on mid-size and full-size trucks given the painful level of present manufacturing under-utilisation and the high margins available even at reduced ex-factory (transfer) prices. It will hope FIAT can add these heavily de-contented vehicles to its own successful South American & RoW operations. Although Obama's stimulus plan will undoubtedly encourage domestic pick-up sales from building sector, infrastructure, agriculture & mining fleet customers, the time lag involved until such demand appears demands that other options be sought. Chrysler long remembers the e 1980 when soon after its then government bail-out it had to rely on Defense Dept. spending on military 'light-green' 'COTS' truck orders. This may be the case again in the interim along with FIAT persuasion. And from a cars perspective, Chrysler may hope that FIAT decides to use an adapted version of the European ratified Sebring in the short term as a low cost replacement for its disappointing Lancia Thesis large car, before the joint development of a new large car platform.

For FIAT such a deal means a strong foundation for a credible 21st century re-entry into the world's largest single nation car market, and dramatically assists its fully fledged global ambitions. But whilst the industry cogitates about FIAT badged cars being exported and assembled by Chrysler plants, we imagine Marchionne will take a carefully planned step-by-step approach toward conquering the US. That means not flooding the market with FIATs (which themselves would too closely resemble Chrysler's new entrants) but instead using Maserati's powerful halo effect for Alfa Romeo to build a new presence geographically orientated around (though not in) Maserati's 45 dedicated 'solus' dealers and possibly its 9 multi-franchise dealers.
Marchionni recognises that to enter and stay in the US the Italian brands must build brand equity, both individually and as a coherent price-ladder family. That means a top down strategy from Maserati to Alfa Romeo to Abarth and eventually FIAT's high-volume range.

Also importantly for FIAT the new alliance provides stable and on-going access to a broad 4WD technology base from Jeep, one that encapsulates both progressed traditional 'hard-core' off-road systems from Wrangler, and at the other end of the 4WD spectrum, CUV/car aligned technology derived from Patriot & Compass. That is an important proprietary-enabler for FIAT and something it has been short of, having to badge-engineer a Suzuki vehicle as is own for the Euro-fashion mid-size 4WD market and fund its own drive-train for specialist Italian and UN military purposes. Quid pro quo, FIAT could re-badge Dodge's CUV's for its domestic and European markets.

So the product and market story convinces, but what of the operational integration of the 2 distinctly different entities?

The cultural affinity between both leaders, given their Italian roots, may have provided an implicit 'oiling of the negotiational mechanism'. However, the melding of 2 men's visions and mutual respect vs the complex convergence required to attain the big-picture commercial ideals is never easy to marry, no matter how well considered process execution looks on paper and how great the intention to avoid political friction. Merging very separate corporate tribes has always proved a problem and so individual cases demand individually tailored organisational solutions. But at least the experiences and lessons learned from both sides over the years should allow for the creation of a JV Board that can agree the details from budget allocation to distinct areas of management competance that should build a convincing unified roadmap - one that Congress will wish to view and probably oversee.

Chrysler's position of near bankruptcy and FIAT as recent capital markets darling would appear to put them at odds, but preceding FIAT's impressive resurgence it too was close to collapse. Thus FIAT should theoretically be more understanding than most, and be able to offer valuable 'turnaround' advice.

[With typical Marchionne strategising, FIAT looks to have positioned itself in a win-win position whether Chrysler recovers or not with a US bridge-head and the possibility to acquire its US partner's assets cheaply if liquidated].

But for now the apparent show of support in coming to Chrysler's aid and the reported future aspirations for a majority share-hold gives Chrysler confidence at this dark hour, and importantly it would be put back into the hands of a like-minded 'owner-operator', after the hamstrung period where Cerberus had to understandably take care of its own troubles engendered by its shrunken value holdings portfolio. So although back with a VM partner, one that on the surface appears more synergistic than the 'ex-bride' Daimler.

But of course, this is only very early days and much depends upon line by line contract agreements for all aspects of the new marriage: from R&D to Procurement to Assembly to Distribution. As ever, the devil will be in the detail, but hopefully the last 6 months and upcoming few months will have been used to provide clear and distinct lines of philosophical agreement that underpin mutual expectations via well-defined high-line strategic and supporting operational pathways with robust phase by phase measures. For it is only by using a very robust and open process, reciprocal roles and responsibilities can be considered, agreed and attained.

[NB although required to ensure the ultimate turnaround success of Chrysler there is a chance that FIAT's gateway process and accordant measures are set very high indeed so as to lessen its burden and possibly demonstrate Chrysler's lack of capability. If this is judged as so by the US partner and the newly appointed Car Czar believes it to be the case there could be further political turmoil futher down the road].

Much will of course relate to strategic operational structure, and the ability to agree and execute recommendations to the benefit of both parties. So Chrysler and FIAT (and perhaps the Car Czar) must look to replicate those examples of best practice organisational models that have demonstrated worth and build true financial, intellectual and cultural value for both parties.

To date, Ghosn's Renault-Nissan collaborative structure appears to have generated the best results by creating a mirror-set of functions and executive seniority levels on both sides of the R-N hierarchical pyramid. Given the Daimler-Chrysler debacle, that would be a very necessary first step to encourage both parties that the agreement is indeed this time one of equals.

A first order of business should be the realistic reigning-in of Chrysler's near-term ambitions as a global player. Although previously seen as necessary so as to avoid reliance on the NA market, the company must return to its US focus so as to re-group and re-strengthen. Its products will naturally wain in many export markets in coming years as they age (many of which already 'old'), so to try and keep up the same level of external momentum would simply sap through fiscal bleed the good being done at home as a result of the FIAT alliance. However, although US earned revenue should be largely retained domestically to strengthen its position in the all important home-ground, China, Russia, India and Brazil campaigns and JVs should be given adequate support given their TIV market growth records and future potential.

In truth Chrysler must undertake a hard look at itself and its true potential in a very competitive global market that has a consumer bias many other brands, since 2 of the 3 of its brands retain little brand equity/power on the global stage beyond the US. Chrysler and Dodge have historically been less than credible bit-part players, ebb and tide enabled expansions provided only by a periodically buoyant global economic growth in which they have been able to temporarily obtain small national market shares via regional M&A or as those foreign buyers sought something 'different' to their homegrown vehicles or usual import offerings. The1960s Australian Valiant, 1970s European Chrysler Avenger, 1980s US/Australian Galant, 1990s Neon and 2000s PT Cruiser & 300C are all differing examples of the same story. Thus there has been an ongoing tidal-esque attempt at international expansion for nigh on 50 years, but serially unable to create the required, well plotted firm foundations a fully fledged credible global enterprise needs.

Looking back at its NA operations and Chrysler-Dodge-Jeep could utilise FIAT's new eco-marketing campaign called 'EcoDrive'. It is essentially a computer-based service product that utilises the data storage of a transferable USB stick (between car and home) to provide a personal portrait of one's driving style so as to encourage (with the aid of tutorials) improved eco-driving techniques and general behavior. It appears more of a dedicated educational device as opposed to marketing gimmick, so the European uptake and accordant customer feedback should be keenly monitored.

Concentrating on the eco impetus for new product development initiatives, and the alliance will greatly assist the R&D and productionisation costs of new hardware efforts towards an alternative propulsion technology future. To be candid, Chrysler's recent eco-window-dressing for Congress' – so as to access Energy Bill & TARP funding - could be considered as high in style but lacking in real substance. The 4 vehicle show consisted of:

1. An updated N(EV)-vehicle from its GEMcar division
2. A Dodge badged Lotus Europa with Tesla (EV)-powerpack (3rd party IPR application)
3. An adapted hybrid (EV) Jeep Wrangler with conceptual hub-drive (3rd party IPR application)
4. An adapted hybrid (EV) Town & Country Minivan

This overtly 'pragmatic' eco-range offering is in reality either far from production reality in the cases of Jeep and Minivan, already owned by other parties and of minimal real-world Co2 reduction impact or already part and parcel of Chrysler's business operations. However, marry FIAT's slow but sure 'proper' advances with 'micro-hybrid/stop-start' technology and the low volume adaption of small commercial vehicles to full electric drive and there is much potential for the leverage of technology transfer from Europe to North America, enabling Chrysler's efforts to really advance capabilities toward the eco-cause and give its ENVI green-tech division something substantial to work with.

[We foresee the use of Dodge badged small commercial vehicles taken from the FIAT Professional range as the base of EV taxis and small business EV vans as a rival to Ford's Transit Connect depicted as a New York cab. Perhaps Ford taking the East Coast whilst Chrysler take the West Coast?]

But how does Chrysler over-come its present-day calamitous cash problem?

That can only really be answered by the continued financial drip-feed from Washington. Undoubtedly Congress is heartened to see that their own 'American Patient' seems to have gained a major benefactor that will figure highly in the 'roadmap to recovery' plan due but March end. But still questions will be abound as to how long the requested bridge-loan must stay in place until the benefits of the JV become apparent, for that interim cash-burn dictates the ultimate size of the low cost loan.

Beyond the TARP+ funds, Congress made available a sizable amount now being allocated from the 2007/8 Energy Bill. FIAT will have no doubt had foreign-partner access to these monies in mind when it negotiated with Chrysler. That could feasibly underpin a Michigan based Chrysler-FIAT tech centre (refurbishing a present building or erecting something new) focused on the CO2 cause so close to Obama's heart and national developmental purse-strings. That in turn could as as the required impetus for FIAT to increase its latter-day investment.

Of course as of today, with an agreement in principal but no legal papers drafted, the auto-industry's typical politicking will have Chrysler reviewing its position going forward so that it does not end up 'over a barrel' to FIAT; the Italian firm either demanding increased transfer pricing for R&D, platforms and modules, or even go as far as to subtly starve Chrysler and take over its market share. Downside scenarios will have been considered and will no doubt be taken into account when contracts are drawn-up.

If all goes according to plan then both VM's will benefit substantially from the relationship, the competitive advantages gained ensuring the Detroit player's survival and the Turin player's long time ambition realised, the expected post 2010 rebound of the US car market the beginning of a renewed economic business and consumer confidence.

And as for the idea of a latter-day integrated 3rd alliance suitor, although progressed has slowed due to the dramatic Asian stock-market slow-down over the past year, don't forget that the Chinese FIAT-Chery engine manufacture JV continues to be successful, even if the Chrysler-Chery vehicle assembly JV had to be disbanded. But surely Nardelli and Marchionni will want to see the Hornet project revived to ensure that FIAT and Chrysler have access to a lowest cost small pipeline, product quality levels met with FIAT's China-made Linea and importantly re-seize more than a modicum of control over the best of China's evolving VM and OEM participants, given its loss of market momentum (relative to the dissolved SAIC-Nanjing deal).
Once the formalities are approved, both parties may well be seeking-out Chery once again to create a true triumvirate of global spanning, alliance-built strength.

With this important Chrysler-FIAT announcement, the academic and industrial interests of other industry heavyweights will become apparent.

Carlos Ghosn, who created the formational template will undoubtedly be watching closely to see how the new and revived network evolves, and Ratan Tata - a Marchionne peer on the FIAT Board - who has a raft of his own cross-division integration issues will be assessing the emergence of new associated portfolio leverage ideas - including Land Rover-Jeep possibilities in addition to the previous Jaguar-Maserati conjecture.

But for the moment, before the world of unbounded conjectural possibility can be realised, the main space to watch will be the Nardelli-Marchionne performance due at Capitol Hill. For at that point, given the 3-way stock hold in Chrysler between Cerberus, Daimler and FIAT and the possible equity and oversight demands of a vested federal government with its Car Czar, the 'shape' and autonomy of a previously independent Chrysler could be radically changed.