2016 results: good but not enough

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FCA has finally communicated its financial results for the year 2016. The first impression is that the group met most of its targets and overall financial situation is better. Sergio Marchionne has certainly made used of the American good momentum, while his counterpart in Europe, Alfredo Altavilla, has brought Fiat back to life. Brazilian and Asian operations continue to struggle, but they don’t burn money anymore. Growth is still associated to Jeep brand, and the luxury hub, composed by Maserati and Alfa Romeo, may have finally taken off. Margins improved, but the company’s corporate goals for 2018 are still far away.

The best of 2016 is that even if sales and revenue did not grow, profitability improved thanks to a better product mix, fewer fleet sales and lower warranty costs. FCA sold more high-ended cars like, boosted by the new Maserati Levante SUV and the Alfa Romeo Giulia. It also sold more Jeeps and RAMs, which is usually a strong profit generator. At the same time the company refocused its sales target in order to reduce the fleets’ penetration. All of this is certainly good news as the group became more efficient with the same structure.

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Even Brazil performed well considering the country’s current economic situation. Fiat was able to gain money again (positive EBIT) despite the 18% drop on its shipments (-100k units). Costs reductions helped the company to adapt to the new conditions, and new and more expensive products (compact pickup Fiat Toro, and SUVs Jeep Renegade and Compass) contributed to the result. China was other source of profits. While demand for the locally produced Fiat Viaggio and Ottimo shrunk, the company was certainly right by producing Jeeps in this market. It took a while but it was worth it.

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The question now is how good all of that is. FCA is now more profitable because it is making more SUVs, Trucks and luxury cars, in line with global trends. However, this won’t be enough to achieve the ambitious goals of 2018, even if the company just confirmed them. FCA sold 4,72 million cars last year, consistent with prior year. That is two thirds of 2018’s goal of 7 million units. This means that the car maker must increase its deliveries by 2,3 million in only two years. That is impossible based on the following facts:

  1. Jeep’s growth started to slow down. The brand of the SUVs will be boosted by Chinese increasing demand, but its volume should stabilize this year in the US and Europe.
  2. In the short-term there is not any big launch of a popular model. Fiat launched the Mobi in Brazil last year, and the Tipo in Europe, but this year there won’t be any Punto successor nor a new 500.
  3. Maserati and Alfa Romeo’s success will depend mostly on how the new Levante and Stelvio are received by the market. Even if the forecast is quite promising for both SUVs, the truth is that they won’t be enough to generate the increasing volume expected to meet the targets (especially in the case of Alfa Romeo).
  4. Chrysler continues to lose ground without a big product offensive coming in the short-term. Dodge has only two SUVs in its current range and there is no evidence there will be more in the coming months.

Whether this personal prediction becomes true or not, FCA needs to move faster. Sergio Marchionne is good at that, but not the company he manages. Time will tell us.

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4 responses to “2016 results: good but not enough

  1. Good analysis Juan. I agree that FCA moves too slowly. I don’t know if Marchionne really does move fast or is more of a hinderance to his ‘teams’ ( I think he delays things to maximise amortisation on existing product). We’re only now just getting the Giulia in Australia almost 2 years after it was first shown – it doesn’t seem like a new car release as it’s been so long. The Stelvio – who knows when it will actually appear in showrooms?
    Jeep Compass replacement to critical profitable markets is another long drawn out process. The American brands in Dodge and Chrysler, after getting their Dart and 200 cars totally wrong, now have to wait several years for new product.
    FCA moves at a glacial pace because it is cash strapped, but the automotive industry and competitors move at a rapid rate leaving FCA several steps behind and falling further back, compounded by FCA often making poor decisions that cost more in the longer term.
    I keep thinking back to the Alfa Kamal concept of the pre Marchionne era and how it never got produced because Fiat Auto seemed to have a poor grasp of the market and the changing buyer preferences. I expect Alfa would have been in a significantly different financial situation now if they were releasing their 3rd iteration of the Kamal instead of being the last entrant into the market.
    Maserati is another disaster in the making. Huge delays before their sports cars are replaced, and the Levante receiving very lukewarm reviews. Basically, Maserati has fallen to the old FIAT Auto trick of using too much from a low category brand and pretending it’s premium (re-engineered FIATs as Alfas) by having too much visible Chrysler bits and pieces.
    The other problem for FCA is that it’s seemingly incapable of improving their products’ quality or reliability. In the US, their brands are always at the bottom of satisfaction surveys. Whether the quality and reliability is inferior to others is real or perceived, it doesn’t matter, because all motoring website blogs have huge numbers of people that refer to poor FCA build and reliability, something that just doesn’t happen to the same degree for other manufacturers. These bloggers are perpetuating the poor image of FCA products and they have plenty of statistical evidence to draw on.
    Here in Australia, FCA sales are tanking, primarily because Jeep sales are falling through the floor. Last month in Australia, Porsche sold more cars than Jeep and Alfa combined – what a difference in profitability!
    Anyway, I want the Giulia to be successful. It’s received very good reviews thus far, but Giulia, Stelvio and an old Giulietta alone aren’t going to make much of an impact in sales charts. FCA says it wants more Alfa models to increase its profitability, but can they really develop more models quickly or will it be a repeat of the last decade, where 2 new models are released in a 12 month period and then nothing for another 5 or 6 years? I really don’t know what future product FCA will show at Geneva in a month’s time, but it’s not looking too promising.

    • You hit the nail on the head. It’s not FCA’s staff that’s moving slow, but Sergio has been delaying product launches for financial reasons. He may be producing great bottom line numbers in the short term, but destroying key brands and long-term prospects in the process.

      How long can Chrysler survive with two models and Lancia with only one? How long can Dodge survive simply tuning dated products? How long can Fiat survive when it’s once market leading mainstream product (Punto) is now in it’s 13th year? How long can Maserati maintain it’s momentum, as impressive as recent sales increases have been? And the jury’s is still out on Alfa Romeo’s relaunch, as product has been painfully slow reaching dealers.

  2. Your four points…

    1. Jeep must (according to Sergio) add additional between half a milion and 600k per year in the next two years. So 1.9 or 2 millions Jeep per year globally. IMO, it’s doable. And I expect much bigger growth in 2018.
    Mexican built Compass will then be produced at the full speed both for NAFTA end Europe.
    Actually in the Europe it will be introduced in the second half of 2017. And Jeep executives are expecitng that it will be best sold Jeep in Europe which will double Jeep’s European sales.
    In 2018 will be available facelift of current Jeep Cherokee with available much higher capacity and they will go more agressive globally. Cherokee is in the process of changing its plant.
    Same with Wrangler. It will have higher capacity in 2018.
    In Chine there will be introduced a Jeep codenamed K8. A 3-row Jeep Cherokee.
    And finally later this year they will start production of new Jeep Compass in India.

    2. This year they will launch X6H in Brazil. If it’s substitute for both Punto and Palio then it’s attractive. We can expect it also from India together with Jeep sibling codenamed 526.

    3. Levante is going excellent, above any expectations. China is the biggest market for it. I’m also confident in Stelvio.

    4. It will be interesting for both Chrysler and Dodge in the future. With demise of Dodge Grand Caravan and Dodge Journey Chrysler brand products will took over their place, in case of Grand Caravan capacity wise and in case of Journey in terms of market placing.
    Dodge products rely on Giorgio platform. All RWD line-up.

  3. And you are overlooking the most important thing. Production numbers are not crucial. It’s all about money. And they are achieving their plan 100% in financial terms.

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