FCA earns more money as it sells more profitable cars

It was a good year for FCA. The company posted record results in terms of profits and reiterated its plans to be in net cash position by midyear. While the quantity of cars remained stable, they were able to improve their profitability thanks to a better mix of products, Maserati, Europe, Jeep and Ram. Last year results show a more solid company that gets prettier for an eventual buyer after Sergio Marchionne retires.

 

The situation is different from the point of view of volume. As Marchionne focuses his efforts on improving the financial situation, FCA is clearly missing its 2018 targets of selling 7 million units. The CEO prefers to leave a profitable automaker than a big one. That’s a good thing because if they don’t generate enough cash they can’t create value. But that formula can’t last forever, as FCA is a volume manufacturer and runs big plants all over the world.

A total of 4,74 million units were shipped last year. According to the company, that’s 20.000 units more than in 2016. While the volume increase was very low, the adjusted EBIT improved by 16% (+1 billion euros) with margin jumping from 5,5% to 6,4%. That’s a big improvement that is clearly appreciated by the investors. However, there are differences for the performane by region.

North America continues to be the main source of sales and profits. FCA was able to improve the profitability mostly because is selling fewer fleet cars and more expensive/profitable models. Volume fell because of the company’s decision of decreasing its dependence on fleet sales (from 24% of total to 19% last year). But the upturn in profits has a bad side: two of its key brands, Chrysler and Dodge, continue to shrink because of lack of products.

In Latin America, they sold more cars but the increase was not enough to gain market share. This is quite disturbing as Fiat brand is losing its leadership as Jeep climbs in the ranking thanks to its SUVs. No SUVs for Fiat will mean fewer market share in the future. This is having a positive impact on profits, as the increasing sales of Jeep is improving the mix. Brazilian crisis changed the focus of FCA from volume to profits. However, volume cars (Mobi, Cronos & Argo) are still very important for FCA. Jeep and bigger pickups like the Toro are a key for the profits of FCA in Brazil.

APAC is still a big challenge for FCA and its future growth. As long as the company doesn’t enhance its Asian operations, it won’t be able to fulfill its plans of becoming a big player. Localized production has brought more sales, but the growth rate is still too timid. The increasing sales of Jeep in China and India was offset by higher investment related to the localization of the production and more costs associated to the launch of Alfa Romeo. Jeep had a great year but needs more volume and more products.

In Europe, the improvement on the mix (more expensive Alfas and Maseratis) was totally offset by more incentives. At the end the margin grew from 2.5% to 3.2% mostly because of purchasing and manufacturing efficiencies. In other words, the profits coming from Maserati and Alfa Romeo premium products are being squeezed by more incentives for the mainstream models, that must be offered in order to keep the market share as there were no big launches in 2017.

Maserati did great but only because of one product, the Levante. Thanks to the new SUV, the brand increases sales, revenue and margin. However, the improved profitability is very vulnerable as it only depends on the Levante, which is already posting sales decreases in some markets. In fact in Q4 sales fell by almost 10%. A deep restyling for the Levante is expected to be shown in Geneva this year.

Although the margin improves everywhere, the truth is that only NAFTA region is having a real impact on the company’s health. Margin is still too low in EMEA, APAC and LATAM, and Maserati sells very few cars. North America continues to drive most of the growth. And this is trend is expected to accelerate in 2018 as the tax savings coming from the Trump reform will improve the income.