Friday, 1 May 2009

Company Focus – Chrysler – FIAT – A Visionary March(ionne) Uphill.

The Government set deadline of May 1st has arrived and major metaphorical shifts are underway between the tectonic plates of the North American and European auto-industries.

As a consequence of an (ill-termed)group of 'dissident' investors holding their position (and client's interests), Chrysler has entered Chapter 11 and simultaneously merged with FIAT SpA.
Vaulted as the sector's 'Superman' Marchionne now has the job of integrating the two culturally diverse Groups, and re-running the turnaround feat undertaken at FIAT in the early part of the decade for Chrysler. [Their he cleared the $8.8bn debt and slimmed over-swollen management ranks].

The recent benchmark model template in the industry's circles is widely seen as that of Renault-Nissan which sought to maintain a level of independence for each partner. And it worked on the basis of mutual respect for each-other and critically divisional self-control and responsibility. But Chrysler has been here before with Daimler and it was clear that the effective, efficient Germans couldn't instigate the level of change required even with Zetsche as Chrysler's direct CEO – Stuttgart calling into question the level of American professionalism & defensive politicking that maintained disparity and inefficiencies.

However, given the very different circumstances of the then yesteryear compared to today, the reportedly brusque but effective Marchionne may not seek (or indeed need) to overly-placate. By backing the Chrysler-FIAT deal President Obama and his economic team are looking to the Italian as the Maestro to leads and harmonise the 2 orchestras. And that can perhaps be better done under Chapter 11 as supposedly due process clears the deck with the aid of a wholly independent judge acting as the arbiter between the 3 constituent parties – Chrysler LLC, the UAW and the much aggrieved debt-owners.

[As for that latter group, there is a possibility that the 'dissident' investors - primarily consisting of the Private Equity Houses of Oppenheimer Funds, Perella-Weinberg & Stairway Capital – were infact acting equally on behalf of the more sensitively positioned Morgan Stanley, JP Morgan, Goldman Sachs and Citi. investment-auto-motives suspects given these investment bank's more sensitive political positions that the smaller creditors agreed to 'take the public flack' for Chapter 11].

Whilst this move is undoubtedly raises short-medium term concerns amongst the UAW members, it must be recognised that they should at least be satisfied as the new majority owners of the company, and with greater Board representation able to question and co-create (realistically under Marchionne) the future direction of Chrysler. [NB The new accord gives 1 seat to UAW and 3 to FIAT].

Of course the Washington Administration (Rattner, Bloom et al) will have continued oversight given the level of its 'investment' and its very position begs the issue of conflicting interests. The argument that a government set on major green/clean-tech reform and a typical full-employment agenda cannot also be commercially truly objective; so undermining the very premis of an enterprise. Indeed, with the UAW as the major owner, the government even with its 'hard stance' might need to, or be tempted to for populist gain, recede on unpopular hard decisions that provide short-term resuscitation and long-term health.

Cogniscent of this reality, that is why the well placed FIAT has been supported by Capital Hill as the guiding light for Detroit's No3 automaker, and Nardelli is to resign once Chapter 11 has been fully entered.

The strategic advantages to both companies are clear, well suited on paper regards technology and platform adoption, global geographic coverage and dealer-network synergies. Chrysler obviously gains access to modern small and compact cars, fuel efficient engines and gearboxes and access to broader international markets, especially so in EM regions. FIAT manages to piggy-back it's way back into the US with a much needed new credibility which would vitally serve FIAT, Abarth and Alfa Romeo branded vehicles that could be made domestically, in Mexico or shipped to the US from Europe under less stringent trade conditions (given the continued possibility of subtle protectionism).

But FIAT Group & Marchionne undoubtedly have a far greater vision than simply assisting Chrysler, gaining cash and equity income from its rebound in coming years and re-entering Italian marques. FIAT Group is of course a conglomerate, consisting of multi-various related and complimentary divisions. The Chrysler deal also means order book growth for:

1. Magnetti Marelli producing various vehicle modules and parts
2. FPT – FIAT Power Train producing engine and gearbox units and parts
2. Teksid producing various castings for FPT
3. Comau producing manufacturing tooling and manufacturing systems

Thus Marchionne is viewing the world of possibility for FIAT Group and its habitation of the automotive value-chain, not just an opportunity distinct to the Auto division. Moreover, growing this conglomerate platform with US accessed volume - simultaneously leveraging its inter-business ties with lower cost TATA – should result in gaining US B2B and B2C market industrial credibility. This in turn allows Marchionne to strengthen the North American operation of

5. C-NH – Case-New Holland producing Agricultural and Construction machinery

And to, with C-NH and FIAT Auto as associate marketing channels, tentatively introduce

6. Iveco Trucks producing a broad range of small to large class trucks (class 1-7)

Thus Marchionne undoubtedly is not looking to simply the Chrysler-FIAT medium term, he is viewing this highly important juncture in the US auto-industry's history to lay out ambitious plans that allows FIAT Group access the US market. The big-picture scenario created by Marchionne hopes to place FIAT as beneficiaries of Congresses TARP and TALF induced economic outcomes. Construction and Agriculture are to be major items on the national agenda as 'new-age infrastructure' and 'affordable housing' projects gain traction alongside the prescience of 'food security and affordability'.

Thus we suspect the Chrysler deal serves as the starter-motor for a far larger commercial vehicle.

The successful re-organisation and resolution of Chrysler should set at least partial turnaround criteria for GM's restructuring. Together with Ford's involvement, the new 'Detroit Reality' is being born, one that in turn sets out the requirements from the Supplier base, which itself is still going through major upheaval, consolidation (thanks to the likes of Wilbur Ross and Frank Stronach) and efficiency seeking – with the likelihood of greater Tier0.5 application.

This successful end-game still seems some way off as Chrysler (and GM) turnaround plans have been seemingly continuously submitted and re-drafted having been cited as over-optimistic regards future NA sales TIV. (It seems that overtly optimistic 3rd party conjecture - such as Grant Thornton estimating a return to 12-14m units pa as early as Q1 2010– have not painted a realistic picture. But at least Detroit knew to eventually base operating break-even plans on a far more conservative 10-10.5m units).

But Marchionne knows that the only way forward is to project credibly conservative volume expectations from a diminished market and lost Chrysler market share, so a robust business plan can be drafted that demands much of self-governed corporate efficiency from itself and FIAT-in-house and external suppliers.

“Plan for the worst and hope for the best” will be his underlying mentality to ensure that robust margins can be attained throughout the FIAT empire.

Indeed, a “Visionary March(ionne) Uphill”.... but worthwhile to a very important self-determined destination.