Betting The Empire

Can Fiat-Chrysler’s new CEO deal with FCA’s lopsided business or is it time to bring out the bonesaw?

FCA’s late CEO, Sergio Marchionne was at various times hailed as something of a visionary, and without doubt, he achieved the seemingly impossible once he orchestrated Fiat Auto’s audacious takeover of the embattled Chrysler business in 2009. Nevertheless, an equally cogent argument could be posited that should Marchionne’s legacy simply be that of FCA’s continued existence, then it is built largely upon failure.

Why? Because despite his efforts, he was unable to transform the business or successfully merge it with another automaker, which had been his avowed intention. Critics (myself included) have pointed out that in reshaping Fiat-Chrysler, his approach was singularly destructive rather than creative. His style was too scattergun, his attention too short-termist. And while it can be argued that he faced too many fires to fight simultaneously, in trying to extinguish all, he ended up losing more than he saved.

In July, FCA’s holding company, Exxor appointed a new CEO, tasked with filling Marchionne’s outsized shoes. Mike Manley, arguably the quiet man of Sergio’s cadre of senior executives – a group the man in the Angora sweater fondly referred to in distinctly paternal terms – didn’t figure all that highly in the fevered speculation as to who the Agnelli dynasty would choose in Marchionne’s wake.

Having passed over the hotly tipped Alfredo Altavilla and Reid Bigland, Manley’s appointment surprised some commentators (including this one), but amongst those in the know, he had always been a certainty. The Briton, who joined the business in 2000 when it was still managed by Daimler, was assigned responsibility for the Jeep brand following the Fiat takeover in 2009. Under his leadership, Jeep’s volumes quadrupled to around 1.4 million vehicles Worldwide. Three years ago, he also took on responsibility for the Ram brand, also spearheading its commercial resurgence.

Described by insiders as ‘the smartest man in the room’, he has been said to combine a gimlet-sharp business brain with the ability to quickly zero in on the details that matter. Unlike his former boss, who leavened his relentless focus beneath a veneer of bonhomie, Manley is not known for small-talk or colourful soundbites, and while also something of a stranger to the necktie, it’s likely we’ve probably seen the last of the yarns. Like Sergio however, Manley is described as a no-nonsense workaholic, who expects the same unrelenting performance and dedication to the task from his subordinates as he himself exhibits.

No fool we therefore must conclude, and just as well, because despite the positive metrics, he inherits a formidable task, one he must now execute as best he can. Why so ambivalent, you might ask? Because on paper, FCA does appear to be in robust health, with third quarter adjusted group earnings of €2 billion before interest and tax (EBIT), up 13% from 2017, margin of 6.9%, up 20 basis points, as Manley outlined to investor analysts during an October Q3 earnings call.

The carmaker posted strong growth in the US and Latin American markets. How strong? In North America, FCA achieved a 10.2% margin and improved adjusted EBIT of 50% to €1.9 billion against Q3 2017 figures – mostly on the back of Jeep and Ram.

In Latin America, where the Fiat brand remains strong, FCA’s adjusted EBIT rose by 41% to €83 million, with their share in Argentina rising 70 basis points to 12.7%, despite the country’s economic woes. In Brazil FCA solidified its number one position, increasing their share by 60 basis points to 18.2%. Further cause for optimism was news that ratings body, Moody’s upgraded FCA stock from stable, to positive.

Despite these reasons to be cheerful, it remains however, a lopsided business. Europe continues be a massive drain, Manley admitting to analysts that FCA were caught with excessive inventory of unsold vehicles prior to the changeover to WLTP emissions regulations across the EU, forcing them to discount heavily. He also highlighted the appointment of Piero Gorlier as COO for the EMEA regions. Formerly of the Magneti Marelli and MOPAR divisions, and himself a contender for the top job, Gorlier replaces Alfredo Altavilla, who rather pointedly resigned upon Manley’s accession.

Under Gorlier, margins are to be prioritised, even, Manley pledged, at the short-term cost to volumes. But while a subset of these issues are indeed of a regulatory nature, a more significant, if unacknowledged component is down to a lack of meaningful investment, sacrificed as the mothership diverted all hands to righting the ship in the US, and a massive bid to reduce group debt – legacy issues of the Marchionne doctrine.

Meanwhile, China remains FCA’s bête noir. The World’s largest car market has broadly rejected FCA’s offerings and a combination of regulatory adjustments in emissions standards, coupled with a recent slowdown in the Chinese economy, not to mention the impending trade stand-off with the US administration, means FCA’s weakness here demands fundamental adjustments. Manley explained to analysts that FCA will strengthen their Jeep proposition, reinforced by the launch of the China-only Grand Commander and a refreshed Cherokee in early 2019.

But if FCA’s overall business is lopsided, so too is it’s domestic position. Continued prosperity hinges upon the resilience of the US economy, the price of oil and cheap, readily available credit. Should the economy shrink, FCA could be (like their rapidly following Detroit rivals) perilously exposed in their current wholesale reliance upon large inefficient SUVs and trucks. And while the current US administration now looks almost certain to enact punitive tariffs against the EU, the outlook only clouds further. Furthermore, Latin America, while habitually volatile in the political sphere, has entered a new phase of uncertainty, following recent Brazilian elections.

Meanwhile Europe, despite being a mature market, remains a large and lucrative one, worth maintaining a presence in. Currently in the throes of a fundamental shift in vehicle usage and propulsion, all carmakers competing there face enormous challenges and vast expense but having ceded significant volume to rival manufacturers, FCA have shrunk into being a comparatively small player.

Brand Fiat was probably holed below the waterline well before Marchionne took the reins in 2004, but under his rule, an enviable array of valuable and cherished nameplates have since been either irrevocably debased or neglected to a highly damaging degree.

However in plans outlined on Thursday to journalists by Pietro Gorlier, the downward trajectory is nominally at least, to end. These include Fiat’s Mirafiori plant being refitted to produce a new-generation battery-powered 500 model, while the Pomigliano facility in Naples will retain a hybridised version of the Panda.

Fiat’s Melfi plant will build a facelifted 500X crossover, also in mild-hybrid form. Melfi, which also produces the closely related Jeep Renegade, is soon to be joined by the larger Compass model, previously sourced from FCA’s Toluca plant in Mexico. This is intended to substitute for the cessation of the long-running Fiat Punto.

The Compass employs FCA’s Small-Wide 4WD platform – basically that of the Renegade with a 70mm wheelbase stretch, and is itself a derivative of the Small/SCCS platform first seen beneath the Grande Punto and Corsa D. Derided upon these pages as “a cynically concocted vehicle intended to increase the brand’s penetration into unsophisticated markets”, the fact that it is now believed to underpin a new Alfa Romeo branded crossover to be built at Pomligiano can only be seen as an act of either folly or desperation.

This author would not be the first to describe such a vehicle as Alfa Romeo’s E-Pace, but in reality, the prospect appears a good deal worse than that. Aficionados of the Scudetto appear to have little else with which to console themselves apart from the prospect of facelifted Giulias and Stelvios being readied for production at Cassino.

Making liars out of us all, having reported the prospect of a Maserati Levante-based, Alfa Romeo branded crossover, the news for il Tridente instead appears to centre around a Stelvio-based, Cassino-built compact crossover. Maserati’s Modena factory gets a GranTurismo replacement at last, while Grugliasco will build facelifted versions of the Ghibli and Quattroporte saloons. All Maserati offerings, including the current Levante will also gain plug-in hybrid options.

There are several problems with what on the face of things appears to be the answer to FCA’s European division’s fervent prayers. Firstly, even with the best will in the world, given the current political instability within Italy and its increasingly troubled relationship with the EU, a prudent Global automaker might possibly think twice before investing more than €5 bn in its Italian plants and workforce – at least if they were in it for the long-haul.

“These are investments that are capable of being implemented and kick off tomorrow morning,” Gorlier told Automotive News Europe, before adding that additional plans for Italy and other plants in Europe would be announced later. Not a statement which bears a great deal of scrutiny, if one drills into the semantics.

Secondly, while Jeep sales have surged to close to a million vehicles in North America, Europe has been slower to embrace the all-American offroad icon. The Compass in particular has not set Europe’s sales charts alight (59,084 in the year to September) and switching production to Melfi seems unlikely to materially alter what Autocar described earlier this year as a car “doomed to mediocrity”.

It’s difficult (if one is not to be cynical) to envisage how these plans can be seen as more than an attempt to re-utilise Italian car plants – certainly, there is little here that suggests to this writer a motor business carefully planning for a sustainable long-term future. Instead, as a set-piece of window dressing prior to a for-sale sign being erected, it starts to look more plausible, assuming of course that the up-front investment can be recouped by the likely sale price.

Sergio Marchionne gambled upon certain outcomes and while some came up roses, (notably in the US) a good many others were blighted by the swing of fate’s pendulum. Surely his successors will not repeat the mistakes of the past? Because if FCA’s ‘smartest man in the room’ is to successfully grapple with the drag of his malfunctioning European arm, it’s going to cost more than he appears willing to spend.

Meanwhile, much bigger chickens could conceivably be coming home to roost back in the US, as FCA’s Ford and GM rivals appear to be in a state of irreversible contraction, unprecedented in their respective histories. Such is the paradigm change that far from being haughtily rebuffed as Marchionne was by GM’s Mary Barra only two years ago, it’s increasingly plausible that a supra-merger could form amongst one or even both of the US big three.

Surely such machinations are not compatible with an underperforming and capital-hungry European car arm, no matter how storied or potentially profitable. If Ford could walk away from its PAG portfolio a decade ago, FCA could (and according to many analysts) should do likewise. Will any of it happen – who can say? The one thing we do know about FCA however is that it has heretofore confounded better informed soothsayers than myself. However, were I a betting man, I know where my money would be.

_{Sources: Forbes/Detroit News/ANE}