Friday, 7 January 2011

Company Focus – FIAT SpA (Auto) – Divide & Conquer? Or The Emperor's New Clothes?

Unsurprisingly, the new year starts-off with debate about FIAT Group's seemingly long awaited decision to split its conglomerate structure effectively in half; creating a Cars division and an Industrials division. The rationale is to provide greater autonomy for each section, the central element of that being the ability for each to provide greater transparency for external investors, allowing greater focus and understanding about the details of the specific company accounts, its current operational condition and the strategies set in place to grow.

For FIAT SpA (Autos) that means the ability to demonstrate FIAT's need to restructure, especially so in Italy to regain competitiveness, aswell as need for timely amalgamation of stock-ownership and operational corollary with Chrysler LLC. Such re-invention necessary to try and become a greater singular automotive force on the world stage, with the dangerous counterpoint of possible long-term eventual extinction for both the European and American companies if there general health is not markedly improved.

For FIAT Industrials, today's record-high foodstuff prices and global production pressures generate an impetus to better steer the agricultural division of its 'AgCon' business, this perhaps more important than previously thought given the lacklustre construction uptake in the west and the slowing of what was frenzied infrastructure projects in EM and RoW markets. The Truck section also requires close attention, given the fragility of the sector's rebound since 2008. This means the need to rationalise its own structure into well honed core-competencies, and manage the devolution from FIAT cars with an aim of generating new alliances with regional EM players in chosen growth fields; creating similar global reach relationships to the FIAT-TATA arrangements in Cars.

Having been historically financially interwoven – under the premis that FIAT Group could offer its shareholders the confidence of an 'cyclically off-set' empire – the separation of these previous 'Siamese twins' says much about the expectations and ambitious aspirations of senior management, aswell as the seeming desire of the Agnelli descendants to cash-in and probably diversify their own investment interests, these new interests in turn, very probably acting as a bridge for latter-day involvement by the newly listed FIAT companies.

The two FIAT separate companies debuted on the Milan stock exchange on Monday. The original Fiat Auto comprising of a passenger cars operation and vans operation, and the FIAT Industrials section which spans a myriad of sectors from a medium/heavy-weight truck division, spanning the value-chain of vehicle parts and the vehicle build process itself, to its well known involvement in Agricultural and Construction machinery under a portfolio set of acquired brands, aswell as other interests.

Auto ('Cars, Vans and FIAT Powertrain') itself has had greater inter-connectivity in recent years given the strategic impetus to gain efficiencies and the market demand for small van derived cars. Though both cars and vans are largely self-governing given their largely different market focus, the new Board will undoubtedly expect to see greater philosophical alignment so as to hone reporting structures, spread best practice and reduce overhead and piece cost (especially so from FPT) as part of that remit.

Industrial ('Trucks, AgCon, Parts et al) will need to gain a greater global reach and professionalism,the new transparency gained from the split, thus forcing greater responsibility and accountability upon each sub-division.

As highlighted in a post sometime ago, when the conglomerate's split was mentioned, of secondary interest to investors will be how the Elkann's (John & Lapo) and relatives decide to re-invest via the family owned/shared investment vehicles - Exor SpA (previously Giovanni Agnelli's 'IFIL' and Giovanni Agnelli e C. Sapaz, its close collaborating 'parent' vehicle).

As highlighted by investment-auto-motives at the time of the accidental series of Ferrari 458 fires, these holding groups act as a leading light for FIAT (Group), taking stakes in companies that prove of value-added worth to themselves and FIAT, ideally with mutual benefits. At the time investment-auto-motives noted the swapped holding interests in Switzerland's SGS - a the quality methodology and assurance company – which could be leveraged to ensure product and process improvement across the FIAT-Chrysler.

And unsurprisingly, Exor undertook new interests inside India and China through 2010, signing a private equity partnership agreement 6 months ago, and looking for additional – no doubt synergistic – opportunities.

[NB Exor appears to hold a narrowly diversified interest – excluding the breadth of (34.5%) FIAT Group – which pertains to: global property via 2 funds, business services via 2 companies, financial services via 3 companies, and tourism and entertainment via tour companies / a new tv/media 'space' entity / and major holding in Juventus football team. Exor's structure includes Agnelli e C Sapaz's hold of 54.1% Ordinary Stock, and 39.2% Preferred Stock). (This beyond EXOR SpA's self-hold of 2.6% and 13.3% respectively)].

With specific regard to the newly floated FIAT companies, major stock-price fluctuation at their appearance in Milan has been essentially as expected. Though not privy to the exact details given the manner in which the road-shows would have been marketed to an Italian orientated investor base - which itself may have had a level of political expectation hoisted upon it given FIAT's importance to the economy. So the 5% rise by FIAT SpA (Auto) and the 3% rise by FIAT Industrial on the first day of trading (to their E7.00 and E9.00 levels) were essentially foreseeable given the absolute need to best orchestrate the launches to keep all new and old stakeholders satisfied; their combined Market Capitalisation, then slightly higher that the old FIAT Group valuation.

[NB The fact that floatation investors envisaged 25% greater value in the Industrial company relative to the Cars company highlights the over-riding attitude relative to each's present competitive (global) position at this point of the 're-emergence' economic cycle].

The Car company's immediate 5% rise could be said to equates to the handling/experience of GM's re-floatation, though it managed only 3% in early trading. Yet whilst FIAT SpA did manage greater initial impact, much of this must be purely speculative as stocks partially traded across domestic and international institutional hands. Yet, with lesser orchestrated tail-winds that GM, flat-line trading looks probable for near-term trading given the real headwinds facing FIAT.

The present pertinent question of course relates to the future, and the ability for FIAT Spa (Auto) to achieve its ambition and so provide credible stockholder interest and future confidence.

Presently, beyond the very tough European challenge, and much needed boost from FIAT's S. American division, a great portion of that – theoretically at least - lies with Chrysler and its expected 're-bound' position.

As mentioned by investment-auto-motives' recent blogs and the Christmas direct marketing campaign, Washington's ongoing reliance on additional financial stimulus so devaluing the US$ effectively creates a a context for global FX 'stage management'. GM is a prime beneficiary, as is Ford and of course, one imagines, Chrysler - as Detroit's #3. Unsurprisingly this ongoing pseudo-protectionist move by the US administration is the less than popular amongst world leaders, given the economic and social ramifications it causes.

Nevertheless, the desire to deflate the US$ via QE2, provides a dual boost to the US economy, at home and abroad. At home it of course circulates greater domestic money levels (esp credit access – the modern equivalent for many of fiat currency), whilst internationally it allows for 'US pricing-power' vis a vis local competition. This move can only be of massive indirect assistance to Detroit, especially GM and Ford which can enjoy boosted repatriated earnings given the effective FX arbitrage..

[NB Critically, the advantageous FX leverage provides an ability to offer a discounted pricing strategy to its foreign markets, and/or enhanced product-spec provision to attract buyers on product grounds within those regions it wishes to avoid any subsequent 'pricing crush' by better positioned large local competitors].

Equally, the ramification for the world's other (non-US) auto-manufacturers is that the profit boost generated by inflated US sales demand will be only be deflated when the income stream is converted back into homeland currency. Furthermore, there will be at an initial competitive loss outside the US – at home and abroad – until the Europeans, Japanese and S. Korean's can restructure their own domestic and trans-plant's cost-base.

This is the prime drive for the likes of VW and Nissan to locally produce with the US or NAFTA, an action already under way by FIAT itself with Mexican production of the vanguard FIAT 500 for the USA, and its intention to use Chrysler factories to latterly co-produce FIAT and Alfa Romeo branded vehicles.

The rush for Marchionne et al is to create a Chrysler that can benefit from FX stage-management, thereby undermining GM and Ford's own attacks in Europe and S. America on FIAT.

However, unlike GM's or Ford's truly global footprints, Chrysler is at best patchy, with general world-wide coverage but far less in-market presence than its foes – mutual piggy-backing with FIAT (and vice versa) central to the alliance ambition.

Chrysler has had a history of world-wide expansion, over-reach and subsequent contraction; this the case with its Valiant brand in Australia in the 1960s, the failed efforts of loose alliance with the UK's Rootes Group and France's Simca-Matra in the 1970s and the formal marriage with Daimler in the 1990s. The 1960s effort failed due to the inability to fight GM & Ford in the far reaches of the globe. In the 1970s from 'combined doubled troubles' and in the 1990s from an unwillingness to relinquish Detroit control even when under the parental strictures of Daimler. (This last element being due to a mixture of improved profitability through the buoyant era and a politically over-sensitive German owner).

This history will be undoubtedly well understood by Marchionne, hence what seems a firmer grasp upon Chrysler, very necessary given the circumstances.

Chrysler proved its ability to bounce-back in the late 1980s with government assistance and Iaccoca leadership, a dual impetus that gave the freedom to produce truly contemporary products, as seen by its cabin-forward sedans and (Matra inspired) MPVs. But it does not enjoy such a free-hand today, nor does it have the grasp on the US market it had 3 decades ago. Indeed FIAT's very rationale for platform engineering hardpoints, bundled sub-systems and parts-bin efficiencies indicates ultimately a greater alignment of product types between the companies – even if masked as well as possible - so as to generate as large an economy of scale as possible. Its a platform sharing philosophy that worked so well for GM in the distant past, VW in modern times and sets the global standard. But it is also potentially prohibitive for Chrysler in recapturing its independent spirit and being Detroit's 'radical forward thinker', the role it has undertaken to historically rebound.

Moreover, the present Chrysler product line is at best uninspiring, the previous value-destruction and Chapter 11 re-structuring period prohibiting the much needed broad product investment; investment which FIAT now offers, but with its own strings. Indeed, after a dearth of new vehicles, near-term new product launches emerging thus far are the Chrysler 200C, and latterly new 300C (seen at Detroit this week). The former is important as a core product in critical midsize sector, but in itself is only a natural replacement for the mid-size Sebring, and so constrained by overtly conservative project business case pressures, given its critical role in insuring steady 2011 cash-flow. As also expected, the face-lifted 300C looses its uniqueness, now matched to the 200C to provide a fresher unifying corporate face - at least cost - but in the process loosing its original appeal, and expected to become a US rental fleet staple which whilst ensuring income unfortunately also damages the very usedful 'perceptional niche' old 300C had created.

The 200C's gestation period experienced much internal 'politicking' as Chrysler management initially tried to engineer the model from the higher-cost platform of the more expensive 300C, presumably to try retain the lead design rights and so maintain an element of internal power. This, not surprisingly failed. Yet unable to gain timely development access FIAT's own platforms or its prime R&D programmes, the new 200C is essentially a re-skin of Sebring. Thus whilst enjoying a) the definite benefit of amortised tooling costs, b) other 'in-house' efficiencies, and c) product launch scheduling that matches US demand up-tick for mid-size vehicles, the new 200C itself is rather lacklustre versus its competition. This is something FIAT and Chrysler undoubtedly recognise internally, the role of the model to strategically 'tread water' until the new batch of cars arrive 18 months later.

However, this in turn will put pressure on dealers to generate sales, which although aided by a reduction by $875 over old Sebring at launch, may in turn call for incentive programmes to meet (the probably over-estimated) 200C sales projections, and to set against GM and Ford's own larger leverage of customer credit availability. US customers also recognise their own bargaining position and so Chrysler, in its comparatively weaker state, may have to settle with 'less bucks for the bang' per unit. With this the case for 200C and later 300C the remainder of much of the aging product-line may also see likewise.

With this danger coming after the previous poorly received mid-size Dodge Avenger - which itself saw a cost-efficient 2010 facelift - the top-line revenue stream continues to come under pressure. Part of the damage limitation exercise will be to have 200C attract migratory customers as an in-house alternative, with perhaps even bigger Avenger trade-in give-aways to purchase the new 2010 Dodge Journey CUV.

Moreover, until Chrysler-Dodge's compact & small cars appears in early 2012 and 2013 there is nothing to fend-off its Detroit peers with their own more convincing line-up, (Ford in stark contrast able to enjoy the financial fruits of its precursing global platform efforts, latterly followed by GM).

The truth of the matter also is that Dodge's brand/product management has been ever more compromised over the years, given its #3 status versus is siblings, so affecting co-developed vehicles and thus brand integrity. Although re-awakened names like Charger hoped to recapture the glory days, as is 'New Challenger' the mixed milieu of vehicle types and characters only tied-together through the loose connection of stylised radiator grilles and at best style-influenced lamps. Amongst the international competition this now seems almost a parody of itself, increasingly on now a par with the latter-days of Pontiac before being extinguished as a GM nameplate. That action was no doubt welcomed by Dodge seeking Pontiac's pseudo-sporty clientele, but it is also a massive wake-up call for Marchionne. Also, the ability to exploit the Jeep brand will have to wait until 2013 when a new suite of vehicles arrive, thankfully seemingly re-injecting the characterful 'Jeep machismo' lost on Compass and Patriot, albeit done so for the urban enclave and thus smaller cars. The Ram pick-ups, whilst long in the tooth will derive a modicum of sales success from the slow 'American rebuild', however the previous Dodge van section - which used Daimler vans – has been discontinued, FIAT not able to provide a new generation of FIAT derived vans until 2012, and so creating an income vacuum.

In short, Chrysler's real attractiveness as a value-creating vehicle manufacturer does not dramatically increase until at the earliest mid 2012. Thus whilst Marchionne's hope for a 2011 Chrysler floatation is no doubt still on course, investors will have to wait 6-8 months to see the beginnings of real earnings traction generated from sizable input cost reductions, the up-tick in US demand and an ability to offer true 'US market relativity'.

Thus investors in both FIAT SpA and latterly Chrysler may have to 'factor-in' a stock price discount for Chrysler's floatation, waiting time until the all-new products arrive.

Just over a month ago FIAT provided a press release to clarify its position relative to its stake in Chrysler, the core message being that to raise its current 20% ownership level by a further 15% requires the achievement of 3 distinct 'performance events' to be obtained before 2013, each pertaining to additional 5% tranches. These being when:

1. the regulatory approval (and FIAT commitment) to produce the 'FIRE' engine family in the US
2. Chrysler gains $1.5bn+ revenues from outside NAFTA, inc Mercosaur distribution agreements
3. the regulatory approval to produce a US made vehicle using FIAT platform giving 40mpg+.

(These supposed hurdles however do not appear as onerous, part of the expected FIAT strategy to gain US and NAFTA access. However, much depends upon the state of the US market through 2010/2011 at both wholesale credit supply and consumer demand ends. Aswell as of course is the ability of FIAT to expedite these projects– which given its powerful position with the US senate as FDI propagator, and Mercosaur governments as well established corporate cornerstone, is achievable).

Interestingly however, even if not achieved, FIAT has the recourse to use a primary call option to acquire the additional 15% from 2013. Furthermore, FIAT can also access a second call option at the 2013 mark which gives an additional 16%, so giving an effective 51% ownership. (However a provisional part of the agreement with the US & Canadian governments is that not more than 49% may be gained until the outstanding UST loan remains unpaid, thus negating the all important additional 2% that tips ownership rights until so). The 'Considerations' of these call options payable at a rate commensurate with an EBITDA multiple calculation taken from other automakers' 'average reference EBITDAs' though not to exceed the FIAT multiple.

Thus as the FT highlighted, it would be in FIAT's interest to favourably manage its EBITDA and so share-price relationship at a lower-value to latterly pick-up the Chrysler shares. Though this is far easier theorised than actually done, unless Marchionne has a truly prolific and well detailed plan to re-build FIAT's capabilities base - and so set its overall cost base – in close marginal alignment with its global revenue curve. Thereby intentionally under-cutting the Plan's Trading Margin projections for the next few years, perhaps with the implicit backing of Exor / Agnell-Sapaz and other Italian institutional share-holders who support his ambitious long-term 'bigger picture' ideology (this appearing the case given the choice of only trading both the new FIAT stocks only on the Milanese Bourse, although old 'SpA car' stock remains on Paris & Frankfurt exchanges). Part of the incurred cost-base of that ideology, that possibly intentionally tames margin spreads, appears to be the large 30% increase in European retail sites, these probably 'factory owned' to also take advantage of the gradual increase in commercial property values over the next 5 years or so.

As capital markets once again start to become jumpy, the deferring of could be a tempting tactic indeed. Since to do so would negate the need for heavy direct investment in the US prior to the market's TIV being seen to be truly steady, a new low-level but real concern that emerges on the back of recent worries about the contagion of national and regional debt. If these concerns do emerge as increasingly sound, or even appear to be from press reporting, the probable course with Washington consensus would be to focus upon S. America first and foremost, so building US aligned political bridges via FIAT-Chrysler elsewhere in the SA region. US foreign policy could well turn to generating a notion of the 'Americas homeland' much as it did in the 1930s with autos and cinema - especially so given seeming increasing US foreign relations discord with the rest of the world.

Given little opposition by Washington and recognised as a long-term industrial ally, FIAT could feasibly take its additional 15% worth of call options and start to 'walk-up' to a possible hefty 49% before the UST is fully paid-off, then acquire at relative low cost the remaining 2%. As was set-out in its initial negotiation with Washington prior to post Chapter-11 involvement, flexibility and freedom was baked into the arrangement.

Set within this macro-perspective is the central role of FIAT Powertrain (FPT) as a critical enabler to both FIAT SpA (Auto) and of course Chrysler given the obvious 'disadvantageous hole' it presently poses in relation to US and increasingly global CAFE regulations. As such it is an innate component of the new growth engine, for the company itself aswell as the American economy.

Particularly so, because the new FIAT SpA company can now 'play macro and micro tunes' with FPT. Firstly via its macro-promise of weighty FDI potential as itself seeks US growth and the desire to climb the value-ladder (so training the workforce), and secondly, the micro-ability to better manage the transfer pricing of engines and transmissions between FPT and assembly plants. This done through both 'purchase levers' of increased order numbers, greater direct control of FPT's own strategic course within a FIAT SpA strategic context, the ability to hard-bargain with its own now semi-remote FIAT Industrial supplier base, (eg Teksid for castings etc) and the opportunity to use such Italian-centric cost-cutting agreements as a pricing/service template for supplier deals elsewhere. This of course most pertinent to those agreeing to serve any new FIAT-Chrysler engine factory in the US, since FIAT could use its own counter-ploy of creating/expanding its FIAT Industrials production base in the US. It would be rationale to using the (AgCon) Case New Holland Company's tractor engine supply sub-division as a base location for any exploratory project team, given the close links between FPT and CNH engines. Even if though on surface inspection the specifications are technically very different, the engine procurement, build and test regime is essentially the same, so promoting the thesis for same-site or regional located car engine production

Thus whilst Autos and Industrials are publicly listed in Milan separately, to not leverage their inter-relationship in whatever way feasible is hardly creditable. investment-auto-motives suspects that Exor & Giovanni Agnelli e C Sapaz, seeks to maximise near-term exploitation of the AgCon element of FIAT Industrial, especially so for the CNH Company given its advantageous position as a high-value, high-demand US exporter, exploiting the FX differential and the present record-pricing of agricultural commodities and so sector interest in farm machinery. Hence FIAT's rebuttle of competitor AGCO's acquisition interest in CNH.

This then, from a prime FIAT shareholder perspective, would form a follow-on US cyclical play of initially AgCon and latterly Autos, using the shoulders of the former as a strategic enabler for the latter. In essence typical conglomerate behavior, but undertaken by a now 'loose' corollary.

The reality is that the 'singular head' of Exor, Giovanni Agnelli e C Sapaz actioned through Marchionne and his senior generals was always designed to provide the best of both worlds for a partially dismembered FIAT as it fights for its global future; a reality not lost on the market and industry observers.

However, the formal separation of Autos and Industrials – the latter now unprotected by Cars – theoretically gives the ability to negotiate greater BoM (Bill of Materials) flexibility for FIAT-Chrysler, not just from the Powertrain value-chain, but across the full stretch of vehicle systems and vehicle build operations, so drawing better deals from Magneti Marelli and Comau. This applied not just in Italy, Poland, Turkey and other present build centres, but critically serving its US ambitions.

Those foreign ambitions, made clear by the automotive transplants - with the Bursa, Turkey factory now also acting as a contract production centre for Opel AG - set the dour but realistic tone for homeland FIAT workers. Although union rhetoric of resistance continues, staff undoubdtedly increasingly recognise their own squeezed position between a competitive outside world and the decline of political and social support from a previously left-leaning nanny state. Thus it is a given that Marchionne will win the day in achieving Italian reforms that reduce the FIAT cost-base, boost domestic productivity and so aid much needed European production & sales centre profitability.

[FIAT has established new companies to run both Mirafiori (Turin) plant and the Pomigliano d'Arco (Naples) plant, with only the FIOM union to be persuaded. The Mirafiori deal will be put to the vote of workers this month, but FIOM announced that its members will down tools for eight hours on January 28 against the separate agreements; largely seen as an symbolic but essentially empty protest to save face].

Thus in Europe FIAT is making progress, but the question remains as to if this progress will be undermined by the dark near horizon of future EU car sales, FIAT perhaps more prone than any other Euro-manufacturer given its overt reliance on the economic fortunes of Italy and its contracting Mediterranean neighbours (the now infamous 'PIGS'). Thus the Italian efforts, whilst worthy may only serve to keep the company's European operations' 'head above the water' in the short and medium term.

As is well recognised, the new FIAT SpA (Autos) must achieve turnarounds and marked progress in all its global operations, this not did-counting profitable cost-centre of Brazil and other portions of S. America, which have served as the cash injectors for the company over the last few years. As their economies slow due to slightly declined commodities exports to China/Asia, so the unit margins of present production will be proportionately undermined, thus requiring ever tighter production scheduling and reduced overheads to match prevailing demand, this undertaken as the slow-down is used to plan and build a second Brazilian factory in Pernambuco between 2011-14, adding further capacity to the 800,000 units currently available in Minas Gerais state.

The all important 5 Year plan presented by Marchionne in April 2010 was extremely well timed, riding the buoyant sentiment of capital markets that had re-bounded at an amazing rate over the previous year, driven partly by 'disaster-avoidance relief' and partly by pure rally speculation. Thus impeccable timing with the use of the last 8 months to tell the 'FIAT separation story', illustrating the consummate professionalism of himself, his team and more pointedly FIAT's investment banking advisors which were able to 'read' the recent period; and taking the opportunity to exploit that window of opportunity when presenting the new FIAT SpA and FIAT Industrial companies.

[NB Dow Jones reported on 13.12.2010 that both companies had signed a EUR4.2 billion financing package with a group of banks, the Italian stock exchange filing stating that the package includes a three-year Euro1.6 billion revolving credit facility with a syndicate of 23 banks and a Euro2.4 billion term loan with a one-year maturity and a one-year extension option, which is not syndicated. The monies used for 'general corporate purposes' and working capital needs. The operation's lead arrangers and bookrunners were Intesa Sanpaolo SpA's Banca IMI SpA, Barclays Bank PLC's Barclays Capital, BNP Paribas, Citigroup Global Markets Ltd., Credit Agricole, Societe Generale, Royal Bank Of Scotland and Unicredit].

That April 2010 plan set out the challenge and opportunity for FIAT Group, the 2010-2014 period planned to see the Group Balance Sheet is planned to move from holding a Net Debt of Euro>5bn, to provide a Net Cash position of Euro3.4bn by 2014. This driven by Group Revenues planned at a CAGR of 13.1% per annum, giving Euro93bn in 2014, Group Trading Profits rising from 2.2% in 2010 to 7.3% by 2014, and providing a Group Net Income of Breakeven in 2010 and Euro4.9bn in 2014 giving an EPS of Euro3.80 to investors.

For Autos alone, the '6 Pillars' of the Plan are:
1) European TIV rebound to pre-crisis levels by 2014 (16m cars & 2.2m LCVs),
2) Optimal use of FIAT-Chrysler facilities without fiscal drag of new plant CapEx.
3) Full integration of FIAT & Chrysler product portfolios
4) Commitment to develop Alfa Romeo as a Premium 'full line' brand.
5) Strong growth in Latin America
6) Optimal allocation of product development (costs) between FIAT & Chrysler.

Present conditions indicate that:

1) the European TIV will not rebound to pre-crisis levels given the consumer demand ramifications created by the sovereign debt crisis, any new TIV buoyancy to be seen in Germany, France, UK and Scandinavia, which will see their 'national champions' prevail due to renewed nationalistic attitudes and improving wholesale credit conditions available to and homeland and major German, Japanese and Korean producers. Thus creating an environment for a sizable 'FIAT Fight' as VW, BMW, Renault and Ford seek to increasingly quash the squeezed European abilities Opel and FIAT.

2) Production facility optimisation is predominantly aimed at Europe as part of that 'FIAT Fight', utilising restructured FIAT plants to add Chrysler product assembly (eg Lancia-Chrysler) and so improve European capacity utilisation, with added ambition of producing high-margin D-segment cars to boost overall per unit income levels. Thus concentrating D-segment production across 3 brands (including Alfa Romeo). Ideologically, the 3 brands mimica 'near-luxury' perceptional positioning akin to that of Mercedes (Chrysler), Audi (Lancia) and BMW (Alfa Romeo). Though this value-driven era indicates a plausible strategy, its seems inevitable that this effort may only be relatively successful for Alfa, by reducing R&D and production costs, because Lancia still remains ostensibly a niche brand, whilst Chrysler's European successes have been lower volume 'trad-character cars' such as PT Cruiser & 300C, which is now passe, thus providing the new conventional range with little European attraction. Thus the 400K per annum target for D-segment cars – so boosting margins - presently by 2011 standards at least appears untenable.

3) Integration of the FIAT and Chrysler product portfolios is a prime requirement, especially so relative to new model generation in B and C-segments. This will be the crux in deploying new product/brand faces that span broad market segments and geographies with a plethora of well-targeted vehicles. Whilst an obvious goal, the critical aspect will be execution, both in terms of direct product appeal, the overall project and unit costs and critically the need to demonstrate much improved 'quality', these ideals of course often at odds with each other as focus on one or two elements undermine the other. Whilst the FIAT baseline capabilities in all areas have improved over the last decade, the ability to deliver a polished triumvirate for itself and Chrysler remains questionable, though the opportunity has clearly arisen. Best in class global learning from both the Japanese & Germans should have been baked into the co-creational development process to ensure proportionate success-factor criteria is demonstrably integrated into this effort, Though it is appreciated that FIAT cannot easily replicate the sophisticated (decades long) technical strategy path which both its competitor nations have innately build-into their dual aspect - quality improvement & simultaneous cost-amortisation - design and production methodologies..

4) The commitment to develop Alfa Romeo as a Premium 'full line' brand is as Marchionne well knows key to the future success of FIAT-Chrysler. Having enjoyed success previously, the flailed demand for Alfa in recent years a consequence of its direct exposure to the peaks and troughs of the economic cycle in all regions and the need to re-enter B & C segments with credibility. Mito and new Guilia have achieved this, with encouraging initial sales figures. Yet this necessary strategic action to enter more mainstream segments also re-orientates the perceptional centre of gravity of the brand at a lower-level, this a consequence of the necessary reaction to macro-economic headwinds. But also notably a disadvantage avoided by the premium German marques since they introduced their B and C segment cars during more boom times when D and E segment cars maintained demand and so held their centres of gravity. This means that Alfa Romeo must add yet greater impetus in its D, E and coupe, cabrio and sportscar efforts as well as maintaining its mid-car variant expansion (hitting the US in 2012) to be seen as a truly belonging to 'premium'. An unfair result given the effort and success previously engendered but a true reflection of its challenge, especially so for credible US re-entry and impact in China, India and Asian markets.

5) Strong FIAT brands growth in Latin America – seen in the near-term - is perhaps the central element to maintain the investment community's belief in new FIAT SpA. Any lost advantage will be viewed dimly by analysts given the historic stronghold and so the accompanying spring-board effect, especially pertinent as the small yet meaningful economic headwinds facing Mercosaur should be a time of exploitation for the strongest in the region (ie FIAT, VW and Ford). Here lies the importance of the B-segment's New 'Novo Uno', created with Latin American functionality 'squarely in mind'. Though cosmetically intendedly very 'naive', to provide broad appeal, its SUV-esque overtones and higher-ride provide for an effective 'bang for the buck' statement and should engender effective Brazilian feeling equating to almost that of a new national car given its indigenous design remit.

6) Allocation of product development between FIAT & Chrysler to yield optimum cost. This seemingly the strong basis rationalisation of NPD work, pointedly indicating that C-segment being predominantly designed and manufactured in the the USA / NAFTA region, presumably given the generally smaller per unit margins based upon the level of NAFTA domestic sale volumes and the idea that the US$ will resist inflation so as to offer worthwhile export opportunities if deemed fit. This also indicates the 'theoretic reasonableness' (as seen indicated in point 2) that the higher priced lower volume D & E segment models can off-set a higher project and unit cost base relative to FIAT's own Italian competencies with more advanced large cars (eg Maserati, Ferrari) aswell as the opportunity for Pan-European JVs, aswell as an intrinsically more sophisticated European 'premium' supplier base.

Thus the theory of the presented case underpinning the 5 year plan is hard to fault, as it appears the most – possibly only credible way forward for FIAT's growth and survival – hence Marchionne's belief and gusto. A real concern however is just how well placed this necessary demonstration of confidence actually is given the business's strategic contexts at both macro and micro levels?

After a disasterous 2008, FIAT's efforts in 2009 – boosted by massive European green-car stimulus packages – were salvaged, and it went on to enjoy the benefits of a downsized, leaner commercial entity in 2010.
Q1 2010 saw Auto's Revenues up 20% YoY to E7,334m and saw Auto's Trading Profit improve sevenfold to E196m. (NB. when grouped with a sizable CNH contribution and others saw Group Trading Profit returned into the black at E352m, and Group Net Loss reduced to E-21m (from E-411m)).
Q2 2010 saw Auto's Revenues up 6.7% YoY to E7,927m and Autos Trading Profit improve 18.9% to E270m. (NB. when grouped with CNH contribution and others saw Group Trading profit reach E651m, twice the previous Q209 period, and Group Net Profit reach E113m.
Q3 2010 saw Autos Revenues up 1.3% YoY to E7,090m and Autos Trading Profit improve by 1% to E210m. (NB when grouped with CNH contribution and others saw group Trading profit reach E586m, up 90% over Q309, and Group Net Profit reach E190m)

As depicted here and (highlighted by the FT) the Non-Autos portion of the then combined conglomerate offered the greater part of the trading profit boost given its much smaller revenue size, demonstrating itself to be proportionately greater value than Autos, hence its greater MarketCap valuation when floated.

However, what is of greater concern for Autos is the ability to match 2010 sales and income figures given the repeal of government stimulus measures which so helped Q3,Q409 and Q1,Q2 2010 and the dousing effect of hard-hit consumer confidence on as a result of constrained national budgets and its reduced support for primarily state related but also partial private enterprise, employment over 2011. The beginning of that hit may well be seen in the Q4 2010 sales figures reported on 23rd January, which ordinarily would have a contraction effect on FY2010 - precursing dashed expectatencies for a strongly continued Autos rebound in 2011.

Yet countering expectation, FIAT SpA appears to have micro-managed its reaction to events by recently announcing raised guidance for the fiscal year 2010, expecting to report FY 2010, Revenues in excess of E55bn (up from over E50 bn), Trading Profit a minimum of E2bn (up from E1.1bn) and Net Profit of approximately E0.4bn (up from breakeven). The exact details of how this is achieved will no doubt be examined carefully.

On its new floatation day of 3rd January FIAT SpA climbed 5% or so (having corrected to approx E7 on the Paris Bourse) and has traded effectively flat over the following 3 days, now sitting at E7.48 whilst the market takes time to properly re-analise the company's potential.

As a contrast FIAT Industrial opened on 3rd January at E9.03 and closed the same day up 3%, fell to E8.68 two days later and now stands at a rebounded E9.05.

The one question that analysts will be asking themselves is to what end that shared E3b loan will be used between the 2 companies, especially assuming a pattern of Revenue and Net Profit divergence between Autos and Industrials. The use of a near 0% interest loan given by Industrials to Autos at some future point, perhaps mid year, might - if found in both companies' Q3 2011 accounts – be very telling indeed.

But ultimately the need to split Autos and Industrials always made sense as we enter a very new age which presently proffers at first sight such a distinctive and profitable cyclical play for the Agnelli descendents and other follower type investors. The real interest however lies in the organisational depth and schedule timing of the operational and financial inter-plays between the now distant siblings.

The decision to 'divide and conquer' remains powerful and prescient, the only question for FIAT SpA is the ability to manage the perceptions of non-core / latter-day investors that sit outside of Italy. Since Marchionne sits as the notional FIAT Empreror, his personal ease and a wardrobe of trade-mark jumpers will need to appease any hint – warranted or not - of FIAT SpA's possible short-term 'nakedness'.

The holiday season over, the new year dance has begun, but a slow, steady Milanese Waltz - however attired - is undoubtedly more preferable to unsure present European capital markets than any immediate flirtatious Parisienne Burlesque. Yet, the inclusion of any Latin Waltz choreography would also be welcomed if much more than simply a 'Vida-Loca' tease.