Fiat and Chrysler: they need each other

Fiat and Chrysler VEBAThe Fiat-Chrysler merge has become a big issue not only for Sergio Marchionne, but for both companies and its employees. Last time Fiat bought a part of Chrysler was in July 2012, completing 58,5% of Chrysler ownership. The remaining part was supposed to be gradually sold by VEBA fund based on a price agreed by both parties. After that what it was supposed to be an easy task has become a tricky negotiation game in which Marchionne and VEBA want to demonstrate their best negotiating skills. Fiat can buy up to 16,6% in tranches of 3,3% each, exercisable every 6 months between 2012-H2 and 2016-H1. No agreement means no Chrysler cash availability for Fiat, and means no completed merge of the two companies. Toyota leads world’s market with more than 8 million cars sold, VW heads to the first position thanks to its solid position in China, and GM continues to increase its business in third world markets. Fiat knows it must hurry in its plan of joining its activities with Chrysler if it wants to survive as an independent car maker. European mess has affected its operations and has forced the delay of new launches. So no merge means no new cars for Europe.

The Dart is one of the new products fully developped by both groups.

The Dart is one of the new products fully developped by both groups.

In the other hand there is Chrysler that was wisely saved by Marchionne and his team. Since 2009, the American car maker has benefited from Fiat’s know-how regarding small and efficient engines, and the US market recovery. Besides, it has been able to refresh its range of products and expand its business through Fiat’s dealerships in Europe and Brazil. Jeep is the biggest privileged brand as it will soon start production in China and Italy, and it has been able to boost its sales in Russia, Australia, China and soon in India. The collaboration between the 2 groups has brought to life the Dodge Dart, the new Jeep Cherokee, and the rebadged Fiat Freemont, and big Lancias, while Fiat brand was able to return to the US market with the successful 500. In other words, both companies have benefited after 4 years working together and now they need each other more than anything. That’s why the agreement is necessary for both.

The alliance allowed Fiat brand to return to US market. The American 500 is built at Chrysler's plant in Mexico.

The alliance allowed Fiat brand to return to US market. The American 500 is built at Chrysler’s plant in Mexico.

Chrysler wouldn’t survive without Fiat’s know-how and its position in Italy and Brazil. Without Fiat, Chrysler would be rapidly absorbed by Ford (GM must pay its public loans first). Its business is highly concentrated in North America, so it wouldn’t have many chances as an independent car maker. Even if Chrysler’s financial result are quite good, it only sold around 2,2 million units last year, and more than 90% of these sales took place in North America. Fiat is in the same position even if its financial situation is different. The group sold almost 2 million cars in 2012, and was severely affected by European car industry crisis. The Brazilian brilliant division can’t do it alone. The three markets, North America, Italy and Brazil are good reasons to complete the merge, while a fourth region, Asia, is coming. The issue has become so relevant for Fiat that even the Italian labor unions are looking to solve the problem by meeting the VEBA leaders. This is the result of Marchionne’s latest announcements regarding a possible delay on Italian investments (the start of production of new models, such as the new Alfas). No investment means no work, no money and more economic problems for Italian labor force.

Jeep is perhaps the most privileged brand with the collaboration between Fiat and Chrysler. It has now a better presence in Europe and gets ready to expand its business in Russia, China and India.

Jeep is perhaps the most privileged brand with the collaboration between Fiat and Chrysler. It has now a better presence in Europe and gets ready to expand its business in Russia, China and India.

At the end, both parties will agree. None of them wants the IPO. Fiat wants to buy the whole package (100%); VEBA prefers to sell directly to Fiat; and third-party investors wouldn’t buy a 16% of America’s third automaker.

Click here to see the full study-case Fiat-Auto-Chrysler-The-IPO-That-Will-Never-Happen by Bernstein Research

Thanks to my friend Tom Haapanen for the document

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19 responses to “Fiat and Chrysler: they need each other

  1. “Marchionne’s latest announcements regarding a possible delay on Italian investments”
    Actualli Marchionne freezed Fiat’s investments in UE market since 2009.
    No new Punto, no new Bravo, no C-segment crossovers or MPV, etc

  2. Yes, FIAT needs Chrysler’s cash to jump start investments that have been on hold since 2009. Unfortunately the merger deal is far from done, and may fail if VEBA doesn’t bend. As the report says, if a deal is not reached FIAT may decide to sell its share of Chrysler -not that it wants to, but to gain funds needed to develop their own products. This would actually put FIAT in a more vulnerable position than Chrysler, as they will need to burn even more cash than they do now -to renew their own brand portfolios.

  3. Fiat is gaining dividends from Chrysler. So indirectly is receiving cash from it + dividens from Ferrari, Maserati, Brazil, Magneti Marelli

  4. Hyunday doesn’t own 100% of Kia but the alliance works better than Fiat-Chrysler.
    Same for Renault-Nissan.
    What is different? The CEO.

    • Where did you get that Hyundai doesn’t own the totality of Kia? they make part of the same group. Is Renault doing better than Fiat? you think so?

      • DeWitte is correct. The last information I have is that Hyundai owns 34% of Kia through a complex shareholding arrangement. They are the same group just like Fiat-Chrysler are now the same group, even though Fiat doesn’t own 100%.

      • Renault- Nissan = > 7 million cars sold making more money than Fiat-Chrysler and they are still investing in cars, not as Fiat is doing in Europe.

  5. I agree that FIAT has been too focused in buying Chrysler and neglecting it’s own product development. Yes, it’s better owning part of Chrysler -than all of Chrysler at the cost of destroying their own brands. If they had invested funds planned for the Chrysler buyout into Alfa Romeo instead, Alfa dealers would have new product on the floor already…

    Instead they keep loosing money and market share because of the product development freeze. This fixed idea of owning 100% of Chrysler was not the only road forward, they could have chosen to an alliance path like Renault-Nissan as mentioned.. But it may be late for that now, as with each day FIAT becomes poorer the need for Chrysler’s cash becomes greater..

  6. I can’t believe that many people here just don’t “get” the Fiat strategy even after all this time. They only seem to think of their personal frustrations about “NO new Alfas”. Come on guys look at the bigger picture. Today Fiat group’s future has been secured only because of Chrysler. They have critical mass as a group only because of the Chrysler tie up. If they focused on loss making EU instead they would have now ended up like PSA. Probably with the Chinese. Renault is kicking only because of Nissan’s global foot print. Not because of their loss making EU foot print. The idea of owning 100% Chryco is the only way forward. And the deal will happen. VEBA have got a bit greedy after seeing the resurgence of Chrysler but Fiat already has controlling interest and can influence so many things in the company. That’s why the threat. However I am very sure that the deal will go through in the near future. All of a sudden we should hear the news that the two have come to a settlement. Both parties are set to lose if the deal does not or delays. For those who are still blindly bitter about the lack of new products in EU, ask yourselves where would you invest your hard earned money? In a declining low margin EU or in a growing good margin US?

    • The VEBA’s greed may just be what ends up sinking both ships (Fiat and Chrysler). But hey, it’s for a good cause…

    • The question is not so much Europe but maintaining their global brands. Yes, Fiat and Alfa are sold globally and they could have been reaming in profits from Asia and South America if they had developed new products.

      You can’t just focus on one market and ignore others. Unfortunately FIAT has put all their eggs in Chrysler’s basket and with VEBA shaking those eggs who knows what the outcome will be…

      • Cannot agree Classic Bob. There is close to zero presence in Asia, there was zero presence in North America. Those are the two hottest markets in the world. Now they have a foot hold in NA. You cannot erase decades of poor management in a couple of years by simply busting your limited resources on new models in a declining market. That is what PSA did and it has proved suicide. When one has limited resources (owing to decades of poor management) and your competitors have kept growing into very healthy giants who can squash you, one has to decide where to focus it’s investment. And that is what was done. VEBA urgently needs money and Fiat urgently needs to merge the two companies. A deal will happen……soon.

      • VEBA has no immediate need for cash as they are playing for the retiree’s long-term benefit. They can afford to wait for the IPO next year or a court decision a few years.

        Marchionne has put Fiat in a position where he needs the money much more urgently. Not the best of negotiating positions…

      • Argt 21, you fail to understand that the reason their presence is weak in certain regions is not because of a poor network, but a lack of competitive product. This is clearly due to the years of neglect you referred to. Four years ago FIAT had enough cash to develop new product. Why would they freeze development at a time when they should be expanding in growth markets of Asia, South America and North America like the Germans and Japanese makes have? FIAT didn’t have put everything on hold just because Europe’s in the hole. The main reason for the development freeze was to save cash to buy Chrysler.

        It’s also the main reason we are still waiting for a renewed Alfa to show up in America, China, and Latin America. The automotive business is cyclical, and if you don’t introduce the right product at the right time in the right place, you loose. There are few windows for growth in this business, and the window’s open now..

        FIAT has been promising the return of Alfa Romeo for i can’t remember how many years already. If they’re delaying just to obtain a bag of gold at the end of Chrysler’s rainbow, there’s a danger new products won’t be launched until the next cyclical downturn, and FIAT will loose again…

        History will be played out here, hopefully better than it was with Daimler. But i think looking back a couple of years from now, FIAT would have been wiser to let VEBA simmer and put their cash in product development instead.

  7. @Classic Bob are you referring to the 2 billion Fiat got from GM when you say that they had money four years ago? That would not have taken them very far if they developed and launched models in the EU region. And you fail to realize that they in fact have expanded in growth markets such as Asia and South America. Think Brazilian Uno, Chinese Viaggio, break up with Tata and over haul in India, which is showing results. Also do not forget the the successful launch of the 500 and 500L in the US. Development has been continuous. Only launches in EU have been held back. The platforms are ready for all the Alfa models thanks to the Chrysler partnership. And what about the new models from Maserati? They were launched without spending any money? The Alfa launch was always going to be a very tough one with a reputation so poor. “Lack of competitive products” has been the case since the 1970s up to the late 1990s. There after it was a case of poor marketing/management and lack of exposure in any market other than Europe. Alfa has made so many promises before about a come-back but never really delivered. Launching new products is definitely not on in my book with such a poor reputation and low market exposure. The competitors are very strong. It had to be a carefully thought out strategy and AR had to win back some credibility. And they have done just that with the 4C. It won’t bring volumes or large profits but it shows the world what the brand is all about and capable of. And it is going to the US early next year.

    Now with the cash pile they have (or trying to have) they have enough to launch all the new models just as EU slowly comes out of recession.
    When they have control of a large US company with well accepted brands (Jeep, Chrysler and Dodge) in a growing and profitable market why on earth would you throw money into loss a making abyss like Europe? It just does not make business sense. And Fiat is a business and they have to make money to survive. And they are. In the US they either have refreshed the range or replaced aging models with new ones and the results have been phenomenal. 38 months of (profitable) sales and market share gains IIRC.
    You haven’t responded on PSA’s strategy, which is exactly what you ordered for Fiat – Stick with Europe and launch a new range of models. They might have a much bigger market share in the EU but they had to sell fixed assets to stay afloat and they are about to be bailed out by a Chinese company and the French govt.
    They really cannot let the VEBA issue simmer. They need access to that cash pile that Chrysler made under the management of FIAT. To access that they need 100%.

    Try not to think of Fiat and Chrysler as separate companies. It is now one entity. And hopefully next year it will be official.

    • @argt21, you wrote above that “You cannot erase decades of poor management in a couple of years …”

      I should note here that Marchionne has been running Fiat for 9 years now. That’s almost two full model cycles at many other car companies.

      You can read about the CEO and the three envelopes here, for example:
      http://wikibon.org/wiki/v/Prepare_three_envelopes

      • Yes thysi he has been running Fiat for 9 years and turned it around from the jaws of bankruptcy. They now control Chrysler which brings in large profits. He’s built on the strength of their South American presence and made small in roads into Asia. Look at it as a group. Europe is not the world. It’s only one part.

  8. Hopefully for Elkann’s and Marchionne’s wallet…. 😦
    Not at all for the people who still works in Europe for Fiat.

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