From The Sunday Times
July 1, 2007
Fiat - back from the brink
The Sunday Times meets Sergio Marchionne, the man who saved Italy’s top car firm
ON Wednesday the city of Turin will hold an allnight party for 250,000 people. It will be celebrating the launch of a new Fiat car. There will be an extravagant son et lumiere and firework display on the banks of the River Po and special events in public squares and bars and restaurants all over town.
The following day, Turin’s Olympic stadium will be the base for 1,000 journalists from all over the world to test the new car through the city streets.
This kind of thing used to happen regularly in Fiat’s home town, but in recent years the mood in Turin has been depressed. The Agnellis, the ruling princes, are gone. Car workers have been laid off. This week’s event signals the arrival of the new Fiat 500, a modern mini-car designed to resemble the tiny 1957 Cinquecento that put many Italians on four wheels for the first time. It is symbolic of the renaissance of Italy’s largest industrial enterprise. Turin is saying: Fiat is back.
Perhaps it is too early to proclaim the return of la dolce vita, but Fiat has achieved one of the most remarkable turnarounds of recent times. The man responsible was an outsider. Sergio Marchionne is Italian by birth but was brought up in Canada and until he joined Fiat had never worked in Italy. When he was appointed chief executive in 2004, Fiat’s financial position was bleak. That year it was €10 billion (£6.7 billion) in debt and had made a €1.9 billion loss the previous year.
In 2006, the Fiat Group made a profit of €2 billion and paid €2.5m in dividends – the first in four years. Debt was below €1.8 billion and Fiat had €8 billion in cash. Its share price soared. The Italian business community is unanimous: Marchionne has worked a miracle.
How did he do it? The man himself said it was because the desperate situation at the company allowed him to take drastic action. “I had a huge amount of freedom because of the condition the company was in. They had tried everything else.”
Before Marchionne arrived, Fiat had seriously considered getting out of the car business or at least merging with another manufacturer. Once Europe’s largest carmaker, it had lost its 50% share of the Italian car market. Its once-revered brands – Fiat, Alfa Romeo and Lancia – had a terrible reputation for quality and reliability. Fiat Group had diversified into everything from banking and insurance to energy and seemed to have lost its way.
The decline had been long and gradual, but came into focus when Gianni Agnelli died in 2003. He was chairman of Fiat Group, which is 30% owned by the Agnelli family. Gianni, grandson of Fiat’s founder, was one of Europe’s great statesman-indus-trialists, presiding over Fiat’s postwar growth. In his heyday he was, arguably, Italy’s most powerful man.
The Agnelli family has been dogged by tragedy and misfortune. Umberto Agnelli died three years ago at 69, not long after he had taken over the Fiat chairmanship from his brother, after battling cancer. Umberto’s son Giovanni Alberto, who was being groomed for high office, had succumbed to stomach cancer in 1997 at the age of 33. Gianni’s only son Edoardo committed suicide by jumping off a bridge in Turin in 2000. With no direct line of succession available, Luca di Montezemolo, the chairman and chief executive of Fiat-owned Ferrari – whom Gianni had treated almost as a son – was invited to become chairman of the family firm.
Montezemolo appointed Marchionne, who quickly identified that while Fiat’s other businesses, which include CNH Case New Holland, the American supplier of construction and agricultural equipment, and Comau, a maker of automated machinery, were in good shape, the car division was fading fast. Herbert Demel, chief executive of Fiat Auto, was relieved of duty and Marchionne took direct control of the automotive business as well as his group responsibilities.
Rather than calling for mass redundancies and plant closures, he set about a radical restructuring, dismantling Fiat’s management and bureaucracy.
“This was a company that had a very long tradition. When I arrived I ran into this amorphous structure, and I asked a lot of irreverent questions,” he said.
Marchionne, 55, isn’t a traditional chief executive. He rarely wears a suit and has a comfortable, unkempt appearance: long straggly hair, cords, open-neck shirt and a plain black sweater, always accompanied by a pack of cigarettes and a mobile phone – a marked contrast with the stylish and urbane Montezemolo.
It also makes for an interesting juxtaposition with the young managers whom Marchionne plucked from further down the organisation – “they were not ingrained with the old system” – to run the separate business units for each of Fiat’s car brands. Fiat brand chief Luca de Meo, 40, who will take centre stage on Wednesday, Alfa Romeo’s Antonio Baravalle, 42, and Olivier Francois, 45, the head of Lancia, still wear suits but are quick to get their ties off when the boss calls one of his quick brainstorming meetings.
The change of company culture was important, but the key to the revival of Fiat Auto was Marchionne’s renegotiation of a deal done with General Motors back in 2000. The then-prosper-ous GM had taken a 20% shareholding in Fiat’s car business, folded its European engine division into a joint venture in Turin, and, crucially, agreed that if Fiat so wished, at a later date it would buy 100% of Fiat Auto. In February 2005, when Fiat was at its lowest ebb, Marchionne flew to Detroit to see GM chairman Rick Wagoner. His objective: to get GM to buy itself out of Fiat.
This was risky; GM might have decided to exercise its right and Fiat would have been over. But GM’s fortunes had also fallen since it had made the deal and Marchionne guessed it might be keen to get out of it. The result: GM agreed to hand back its Fiat shares and to pay €1.5 billion to be free from an arrangement it could no longer afford.
Reflecting on this recently in conversation with The Sunday Times, Marchionne admitted that it was a big gamble and that the timing was critical. GM would not have wanted to pay the agreed price for a company that was close to collapse – and Marchionne needed the €1.5 billion to keep Fiat afloat.
Back in Turin, the break-up of the Fiat-GM alliance was presented as a triumph. Fiat placed advertisements proclaiming “Fiat is all-Italian again”. It was about to launch the Grande Punto – a sharply-styled, larger version of the mainstream Fiat model – and buyers in its home country got the message: Fiat’s market share took an upturn.
Unlike some of his counterparts in the industry, Marchionne is not a “car guy” (even if he does own a Ferrari Enzo). Asked what he would do if he were asked to start a car company from scratch, he said: “Lie down until the feeling passes.” But he recognises that the products are all-important; sometimes good cars don’t sell, but manufacturers don’t survive if their products are sub-standard.
Cars cost a lot and take a long time to develop. Marchionne wanted to know why and to see whether the time and cost could be reduced. The follow-up to the Grande Punto was a replacement for the slow-selling Fiat Stilo. Marchionne reckoned the car being readied for production was dull. He sent it back to the drawing board – or, rather, the computer screen – for a redesign.
At the same time his newly-appointed engineering chief Harald Wester was investigating whether sophisticated computer simulations could eliminate the need to build and test expensive prototypes and thus reduce development time. The result was the new Bravo, which went on sale in Britain last week. It progressed from design to production in a record 18 months, about half the usual time.
In parallel, Marchionne embarked with great energy on a series of cooperative ventures and technology licence deals with other companies around the world. While he had no money for major investment, these deals brought income and reduced costs. Fiat diesel engines and transmissions made in a joint venture with Tata in India are used by both companies there and Tata dealers also sell Fiat cars. Fiat will buy petrol engines from the Chinese manufacturer Chery for its cars made in China and elsewhere. And a deal in Russia will see Severstal-Auto build the low-cost Fiat Albea for local markets.
The Fiat 500 launched in Italy this week will be made alongside the 2008 Ford Ka at the Fiat factory at Tychy in Poland. Apart from making a useful profit for Fiat, as the two cars are mechanically identical the engineering costs could be shared.
“We don’t need to make expensive cars for the credibility of the brand. I’ll beg and steal whatever I can from our heritage,” he said.
At the end of 2006, when Fiat doubled its profits over the previous year, Marchionne declared that this was the end of the turn-round and the start of a new growth phase. De Meo put it succinctly: “Fiat is a brand that has regained its sense of direction.”
Fiat is succeeding with small cars – its speciality – on which other manufacturers find it hard to make money. Marchionne said: “There’s profit in small cars if you become really efficient at making them.”
The 500 seems likely to be a success as a premium small car of the same kind as BMW’s Mini – though less expensive. BMW positions Mini as a stand-alone marque, but for Fiat its smallest model becomes its “halo” car, the epitome of the brand. This has been described as “bottom up” marketing.
The bigger and more expensive cars of Alfa Romeo, Lancia and Maserati are now demanding Marchionne’s attention. “Alfa Romeo is the biggest challenge I have,” he said, “because it competes directly with the Germans [Audi, BMW and Mer-cedes]. People say Alfa is a great brand but they don’t buy the cars.” A complete revamp of the range and the dealer network is under way; Britain is one of the markets where Alfa is expected to grow.
Marchionne’s sales target for 2010 for both Alfa Romeo and Lancia, Fiat’s traditional luxury brand, is 300,000 cars a year – more than double the current volume of either. Those are tall orders, as is his similar ambition for Fiat in China. There, in the world’s fastest-growing market, Fiat sold only 38,000 cars last year. Marchionne has accused its Chinese associate, Nanjing Automotive, of taking its eye off Fiat as it builds up its own MG business but, even if Fiat changes partners in China, achieving an eightfold increase in three years seems unlikely.
Marchionne is a hard-driving man. He aims to make Fiat one of the top three car producers in Europe by 2010 (it is currently No 6, way behind fifth-placed Renault). Its market share in Italy, now 32%, must rise to 35% and for Europe as a whole from 8.5% to “double digits”. “I’ll be happy with 10%,” he said. It was thought that when Fiat Auto, or Fiat Group Automobiles as it is now known, turned the corner, Marchionne would go back to concentrating on other activities in the group, but he shows no sign of giving up the day-to-day running of the car business.
Actually, he seems to be revelling in it. In a rare moment of raw emotion, he enthused about the baby 500 that will make its grand entrance amid the lasers and fireworks on Wednesday night: “That car is a lot of what Fiat is. I am ecstatic about it. I can’t think we can do a better job.”
On his performance to date, Fiat shareholders might say the same about Marchionne.