Friday, 3 January 2014

Company Focus – FIAT SpA – New Year Cheer from Milan, Wall Street and Beyond.

The obvious immediate New Year impact for the auto-industry has been FIAT's agreement with the UAW labour-force VEBA to acquire the remaining 41.46% of Chrysler LLC from the UAW's VEBA Trust. At $4.5bn the price appears an amenable level for management, union workers, and FIAT investors. As well reported it includes $3.65bn for the direct stake plus the $700m of latter-day 'top-up' incentives for union workers over the next four years.
Though from an investor's standpoint, the chatter about FIAT possibly using a new share issuance to raise the funds was always dubious, if not an outright red-herring, given the size of FIAT's E17.48bn cash-store, able to absorb the transaction and against a background of corporate share buy-backs seeking to internalise the full value-addition that is Chrysler. 

The substantial share price rise may be seen as knee-jerk reaction but infact reflects the reality that many investor types have been long awaiting the positive news as their buy-in confirmation moment since it provides FIAT with immediate access to the remaining higher margin income generated by Chrysler's full size Ram pick-up trucks and newer Jeep models.
This so, but as for immediate cost-savings on cross-operational synergies, much of the “low hanging fruit” has already been achieved as seen with the Italian originated Dodge Dart platform and the meshing of Chrysler-Lancia, and indeed in much smaller other ways such as Viper being re-cast in a pseudo-Maserati manner. But importantly the mid-size and large cars business case still remains a partial quandry as Marchionne pushes for badge engineering followed by systems sharing. In a world where non-premium large cars face headwinds; the Chinese market no doubt seen as the eventual 'absorbing' solution, alongside revived US municipal, fleet, rental and diminished private markets given X-over popularity.
FIAT then has the boost of US earnings, whilst revenue in a still depressed but improving Europe is set to remain relatively low given the intentional mid-low price band of the overtly prevelent 500 range; the Panda and Latin American Nuvo Uno; higher sales volumes for each model intended to off-set their inherent price ceilings. 

Though with what are now well amortised Ford and GM JV platform-bases, with 'only' derivative model tooling impacting CapEx, per unit margins should be much improved as variants are introduced (esp 500L's Trekking, 7-seater Living and 500X cross-over). Sales will be assisted by a natural consumer through-flow as singles and couples exit the 3-door city-car and grow with small families into the 500L mini-MPV;  likewise an aging European population seeking 'compact practicality'. Furthermore, the oft forgotten but 'early cycle' importance of its light commercial vehicles (LCV) range, likewise will be seen as overall EU business sentiment rises (as seen in PMI figures); the smaller vans similarly derived from the small-car platform(s).
But much remains to be proven by over the mid and long-term. The Italian group must retain leadership in a more heavily competitive Brazil, and as an adjunct to this create a truly viable strategy for the established and newer EM regions. (Though here FIAT does have historical advantages here for E. Europe, the Caucases, Turkey and MENA. Perhaps importantly (the then AMC) Jeep was the first western nameplate in China, but how this might be leveraged is unclear, but heralds much promise, though expansion of its JV with China's GAC Group (which produces the Viaggio compact-mid size sedan).
So most critically a tenable overall global strategy which ideally re-introduces the FIAT badge into the US someday after Ferrari, '500', Abarth and later Alfa Romeo, to a receptive audience; which itself relies upon FIAT's stewardship and success with Chrysler, Dodge-Ram, Viper. Mo-par etc
The FIAT-Chrysler consolidation steps are now successfully completed and it seems to have created a unified internal culture (unlike Daimler-Chrysler previously) thanks largely to the unifying impact of 2008 crisis. It has now created a new potentially high-power (6m unit) production engine with multi-billion dollar liquidity reserves; so industrially and financially strong. But that strength must be well directed and not allowed to possibly fracture as Chrysler seniors improve its own intra-company standing.  
As well recognised, FIAT SpA must now create and re-create: the critical corporate components of its: steering (product strategy), accelerator (brands strategy), transmission systems (retail channels), wheel grip (advertising) and attuned 'bolt-on' accessories (after-market services and affiliations). Thus overall public and industry perception (corporate persona).
Yet as of today, the shape of the here and now, and the shape of the immediate future appears healthy. And even if the 16% or so jump appears instinctively over-bought – as some take profits – the FIAT share will soon find its new and fundamentally steady floor, as Chrysler's sustaining income for the parent group is met with its own steadily improving European and RoW revenue and profits.

Post Script
It is little known that during the midst of the 2008-9 whirlwind Bob Lutz presented the idea that GM should acquire Chrysler to GM's directors. Wisely, the BoD negated the idea, given the problems GM already faced internally, and the inevitable shock to US vehicle buyers.
A merging of GM-Chrysler would have undoubtedly given massive near-term cost savings but would have no doubt run into anti-competition regulatory problems, and critically heavily degraded both marques credibility. Both would have seen a raft of brand-loyal US buyers (especially for important pick-up trucks) wholly disgruntled giving advantage to Ford, Toyota and Nissan.
[NB Though investment-auto-motives still maintains the idiom of the multi-company created All-American HD 'COTS' truck for specialist Military needs].
So, from a global perspective, FIAT's purchase of Chrysler has been the correct route forward from that period of 'creative destruction', yet finding the right internationalist approach for promoting 'Global FIAT' will be vital to release the potential.