Fiat and Chrysler’s New York listing seals radical conversion
When shares in the combined Fiat and Chrysler begin trading on Monday, it will seal the conversion of the quintessential Italian small-car company into a US-focused manufacturer powered by 4x4s and pick-up trucks.
The carmakers formally completed their merger at the weekend, but the New York listing is only the start of the challenge for Fiat Chrysler Automobiles, as it seeks to meet the ambitious five-year targets set by chief executive Sergio Marchionne in May.
FCA wants to increase global shipments by more than 50 per cent to 7m vehicles by 2018 and ring up annual sales of €132bn versus a forecast €93bn for 2014, while achieving an operating margin of around 7 per cent compared with 2013’s 4.1 per cent.
To support those aims, FCA will launch a product offensive as part of the €48bn plan, unleashing 30 new models, including new Alfa Romeos and a Maserati sport utility vehicle, as it seeks to expand in India and China – virtually from scratch.
All this at a time of uncertain global demand for cars, with the US thought to be nearing its peak, Europe stalling and Brazil – where Fiat is the market leader – firmly in reverse.
“The targets themselves are obviously extremely challenging in what’s a worsening growth market in terms of global auto demand,” says Stuart Pearson, analyst at Exane BNP Paribas.
As if the targets were not challenging enough, Fiat is carrying €9.7bn in net industrial debt and is second only to PSA Peugeot Citroën in terms of total adjusted debt to operating earnings, according to Morningstar Equity Research.
The company has ruled out a rights issue to fix its balance sheet and Mr Marchionne says the growth plan does not require additional capital, though FCA plans to sell €800m of treasury shares into the US listing. The board will discuss the capital structure later this month in a meeting at its new London headquarters.
But Mr Marchionne – who is credited with reviving both carmakers from near-death experiences – has a habit of setting outlandish targets, aiming to stretch the organisation rather than guide financial markets. The latest five-year plan follows similar projections in 2006 and 2010, neither of which were met.
Analysts said the real challenge was pushing Maserati, Jeep and Alfa into relatively untapped emerging markets from Fiat’s Italian manufacturing base. It is a particularly risky strategy for Alfa, as it seeks to compete with locally produced BMWs.
Stefano Aversa, co-president at AlixPartners, a consultancy, said: “You add the logistics costs, the working capital for all the cars on the ocean . . . It is increasingly difficult to successfully implement an export model the more you move from luxury Ferrari and Maserati to premium Jeep, and Alfa to the volume brands – Fiat and Chrysler.”
The US is also central to FCA’s strategy. The irony is that Chrysler, which was on its knees when it was rescued by Fiat after massive losses in 2008 and 2009, now contributes the bulk of profits in the wider group – thanks to the striking success of its Jeep SUVs and Ram pick-up trucks in their home US market.
SUVs, pick-up trucks and luxury vehicles account for 14 per cent of worldwide car industry sales but 70 per cent of profits, according to General Motors, Chrysler’s biggest competitor in the US market.
However, the most audacious aspect of the company’s plans for North America is its effort to revive its moribund Chrysler marque, which has suffered from years of poor quality and fierce competition in its mid-market sedan segment. The company’s business plan calls for North American sales for the brand to rise from 350,000 in 2013 to 800,000 by 2018.