A possible solution to troubled Italian sales

Photo by: ilgiornale.it

It is my belief that during difficult times such as current European car industry crisis, any idea looking for solving it is welcome, no matter the impact it may have. The situation is that bad that European authorities are finally considering Sergio Marchionne’s idea of assisting the industry and control over capacity problem. But even the most optimistic previsions indicate that next year will be at least as bad as current one. The reasons for this scenario are well-known by everybody but not the possible solutions. Not all car makers are struggling to sell their products. In one side there are French, Italian and American brands trying to resist. In the other side there are VW, BMW and Mercedes, relatively comfortable as they keep earning money in China. That’s why getting to a common solution is difficult, well interests are different and VW, the European leader, is some how benefiting from the mess in which Fiat, PSA, Renault, Ford and Opel are nowadays. In the case of Fiat, the Italian car maker has two big problems: its Italian factories working at 50% of capacity (and therefore the problems with union labors) and the sharp drop of Italian car registrations (along with Spain, Italian fall is the worst of big European markets). Italy represents 54% of Fiat’s sales in Europe. YTD figures show that Italian market has dropped 20% and of course Fiat, as the leader of that market, experiences a big fall too.

Looking for solutions implies understanding the problem. Italians stop buying cars because of economic situation and the bad perspective for coming years. The country is part of a deep recession in most of Europe which is the result of high public expenditure, low revenue and high government inefficiencies. After years of this terrible combination, European governments finally decided to execute a severe austerity plan, firing public employes, and increasing taxes. Italy is part of that austerity plan and Italians are suffering the consequences: less money to save as they have to pay more taxes, and the worst, less job offer. Those looking for a job are coming thru a difficult time, while those having one struggle to keep it in an economy that will shrink 2.4% this year, with unemployment rate around 11%, according to predictions of Confindustria, Italy’s employers’ lobby group. The uncertainty that reigns among Italians is big enough to diminish their spending of everything that is not strictly necessary. Cars is part of that decision and Fiat knows that. If people are not sure of their economic future they cut expenses and they begin with the things that are not vital. Cars are not a basic need so when someone is not sure of keeping his job in coming months, one of the last things this person will think about is buying a car. It explains why Italian market sinks and will continue to do it as far as the economic situation and job offer don’t get better.

The problem is that Fiat can’t wait till things get better. They need to sell cars and increase production levels of its Italian factories and must do it as soon as possible. Understanding the client’s needs and behavior is always a good way to have the appropriate approach in order to sell. And that’s exactly what Fiat should do at least in Italy, its homeland. If the problem for a big part of the population is keeping its job in coming months, then Fiat could use its strategic position as the major private company in Italy to offer some buyers the possibility of buying their new cars with a sort of unemployment insurance. I mean, Fiat as a big player of Italian economy, is able to neutralize the risk of possible future unemployment of potential buyers. They can offer clients to buy their cars (through a credit) and give them the possibility of suspending monthly payments if they ever become unemployed. Of course, it would not apply to everybody, and only in those cases in which Fiat, using its strategic position, makes a close analysis of several companies that could be considered candidates as they might not have problems in the future. That is, Fiat would assume part of the risk the client has of becoming unemployed and so in case that happens (Fiat should only work with those companies with less than 10% of probability of collapse), that client could suspend payments for the time he does not get a new job. The client that could be benefited from this should pay certain quantity of money down and of course a higher interest rate for the credit. For this, Fiat should make a deep analysis of all industries and companies and then make a classification according to their economic situation and future perspectives. Only those buyers working on those companies with low risk exposure could applied for this particular purchase. And in case they become unemployed, they would keep their debt and will be able to use the car. In other words, Fiat would be offering the opposite of normal credits without any money down: instead of not receving the money now, Fiat would get it now but might not receive it in the future, if things get bad for the client. Anyone could say that this could be a good idea of buying a car and then stop paying for it. But when anyone becomes unemployed the very first thing this person looks for is to find a job immediately.

This approach could be a good way of telling clients that Fiat understands their situation and it can support them in case they need help. Fiat would not be risking too much as they would only give this possibility to ‘safe’ companies’ employees and might increase its car registrations, currently affected by this uncertainty about job among potential buyers. The bad side of the equation is that it would not be a good message for the employed people who can’t apply for the credit. Fiat would be telling them their job is not secure and making business with them would not be a good deal. One last thing: this credit should only apply for Fiat Punto, Lancia Ypsilon or Alfa Romeo MiTo. ‘B-Segment’ is Fiat’s major problem nowadays, with the Punto that shrinks 34% so far this year, and the Ypsilon that, no matter its youth, fell 32% in October and 40% in September. And there is the MiTo, which never took off in terms of sales. Most of Fiat’s fall in sales is due to Punto’s drop as the Panda is stable, up 3% YTD. Those thinking more of their job whose income really depend of it, are considered middle-class Italians who normally buy ‘B-Segment’ cars. One person in this situation would not buy a 500, the chic and expensive citycar. They would not buy either the Bravo/Giulietta/Delta models, which are more expensive. If they wanted to change their car they would choose a Punto or Ypsilon, which are affordable and some how comfortable. So the target fits perfectly the products, and in the case of the MiTo, it needs more promotion to get a proper level of sales figures, and this could be a good idea to do it. Or what do you think of this idea?

Last year the Punto counted for one third of Fiat brand sales in Italy while the Ypsilon is almost doubles that number. YTD change for the period January-October 2012 vs. January-October 2011. Source: carsitaly.net and FGW Data basis

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7 responses to “A possible solution to troubled Italian sales

  1. Very optimistic Juan. A good idea in theory but I don’t see it working. It seems redundant offering an “unemployment insurance” to people with relatively safe jobs.

    You mentioned that the Italian market alone makes up 54% of Fiat Group’s total European sales which, as you know from reading my post from last week, I find alarming. Thus, the solution, in my opinion, is trying to get sales up outside of Italy. FG already knows perfectly well how to sell to Italians. Even though sales are down this year, their market share in Italy, at least, remains steady at 30%. Even with the down turn in sales, the Punto is still the second highest selling car in Italy at the moment, with approx. 65k units sold. And trying to sell more premium Mitos in this economy is a real struggle when it shares engines with the cheaper Punto.

    • Yes, depending on Italy is not that good, but they can’t allow to have production levels around 50%. While Marchionne’s export plans become a reality, they must do something quick to increase the sales of what used to be the best-selling model of the group. 65.000 units is nothing when you can produce up to 350.000 units.

  2. Punto is old and is becoming obsolete.
    The only solution would be a new Punto, but Fiat doesn’t want to invest the money for it.
    Probably in the future the B segment most sold car in Italy would be Ford Fiesta.
    This would make people happy in Germany where Ford UE is based, but not very much in Italy, where a lot of people risk their job.

  3. Yes, the Punto gets old but not obsolete. And sure they need more products but the market is not asking for them right now. The Fiesta may be Italy’s next year best-selling B-Segment car but they will be selling less than 6.000 units/month, which is nothing. Go and ask Belgians if they are happy after Ford’s decision of closing its plant over there. The new Punto will arrive when the demand needs it. It makes no sense to invest more than 1 billion euros to adapt current factories for a new Punto when it will be able to sell 16.000 units/month in Europe. The new Peugeot 208 is a good example. It’s a great product but it has not found the expected demand and Peugeot has already decided to cut production of it.

    • If Fiat doesn’t renew its products — like the Punto — the sales and market shares will keep dropping. At this rate, the result will be that in 2015 it will still not make sense to create a new Punto since it will be selling less than 10K units/month. And once people switch to other brands it will be harder to get them back as customers.

      It’s a vicious cycle: no new products > declining market share > less investment > no new products …

      There is only one way out of that cycle, and it’s to accept the need to develop new and compelling products. But Fiat’s 2013-2015 plan only has two new mass-market cars (Alfa Giulia and Alfa Roadster), and two new SUVs (500X, Alfa SUV), facelifts excluded.

  4. I agree with you. It’s a vicious cycle.
    And, who can says how much a new Punto will sell? Actually more than the old current one.

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