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Fiat chief finally unlocks cars business

April 22, 2010

by Guy Dinmore in Turin and John Reed in London

Published: April 21 2010

Fiat’s status as a big, sprawling conglomerate has long been a thorn in the side of Sergio Marchionne, the Canadian-Italian who became its chief executive in 2004.

Italy’s largest industrial company, from its founding in 1899, grew up around a core competency – engines – to build almost all the things they power, from automobiles to trains, aircraft, trucks, tractors and construction equipment.

But while Fiat no longer makes all those things, its conglomerate status has long rankled with Mr Marchionne.

He sees his defining challenge at the company as making its core cars division – which operates on razor-thin margins – sustainably viable.

The two parts of the business – cars and the non-automotive units – had hugely different capital requirements, business profiles and implied valuations on the stock market. Fiat’s cars business weighed on the rest of the group’s credit ratings.

Since taking the helm at Fiat, Mr Marchionne has spoken of spinning Fiat Auto off from the rest of the business in order to unlock value at both.

Towards the end of a six-hour presentation of Fiat’s five-year business plan in Turin on Wednesday, the announcement analysts and media had long been awaiting finally came.

Fiat’s boss said that the group’s non-automotive units – including Iveco trucks, the Case New Holland farm and construction-equipment unit, and its industrial and marine engines business – would be spun off from its mass-market cars business and the Ferrari and Maserati luxury brands.

He described the demerger as “a fundamental game-changer on the cars side”.

Yet even as he laid out a plan to split the two parts of the business, Mr Marchionne also laid out a blueprint to make Fiat Auto itself much bigger with the help of Chrysler, its US alliance partner.

The core of the five-year plan comprised details of how Fiat’s carmaking division will work with Chrysler in areas such as purchasing, development, engineering and sharing of common parts and components.

“The 2010 to 2014 plan for Fiat Group Auto is about becoming a real competitive global player in conjunction with Chrysler,” Mr Marchionne said.

He last briefed investors with a five-year plan for Fiat in 2006.

On Wednesday, he highlighted Fiat’s achievements in bulding sales, repositioning its brands and shortening vehicle development times, which allowed the company to go from being “tail-end Charlie to one of the best in class” in its industry.

However, he also highlighted the work Fiat still had to do, including building sales at its underperforming Alfa Romeo and Lancia brands and leveraging unused capacity at its Italian production plants.

Mr Marchionne also laid out demanding targets for Fiat’s overseas businesses.

While trumpeting Fiat Auto’s business in Brazil – which edged out Italy as its biggest market last year – he also spoke of its missteps overseas, including in China.

The company has trailed behind rivals in China as it searched for a suitable joint-venture partner.

He said that the company aimed to sell 300,000 cars a year in China, or 2 per cent of the market, by 2014.

Fiat and Chrysler would now work together on engineering and manufacturing. Fiat would now also take advantage of Chrysler’s expertise in building large vans and sports utility vehicles, he said.

Chrysler would benefit from Fiat’s mini, small and compact vehicle platforms in order to enter new segments. Without Chrysler, Mr Marchionne said: “Fiat Auto would have remained a marginal player for the rest of its life.”

Fiat’s Lancia brand would be integrated with Chrysler’s own marque with a full line-up which the two brands would develop together.

Mr Marchionne had last come closest to spinning off Fiat Auto a year ago, when he planned to merge its autos division with Chrysler and General Motors’ European Opel/Vauxhall and Saab businesses in a plan later rejected by GM.

On Wednesday, he declined to say whether he was still in the market for a third alliance partner.

However, he said the demerger gave “strategic optionality” to both sides.

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