This feature by Gabriel Kahn appears in the Wall Street Journal yesterday:

Since he was named chief executive of Fiat Group 17 months ago, Sergio Marchionne has breathed life into a company many thought was headed to the junk heap. The Italian-born, Canadian-raised executive has sent underperforming managers packing, cut debt and pushed the stock price from its all-time low to a three-year high in September, though it has fallen some since then. Credit-rating companies have put Fiat on a positive outlook, and some analysts have issued "buy" recommendations on the stock.

On the New York Stock Exchange Thursday, Fiat Group's American depositary receipts were unchanged at $8.29, up 43 percent from their lowpoint in May. Fiat shares in Milan, which hit a record low of 4.60 euros (then $5.76) in April, reached 7.77 euros in September after the company got its lenders to turn a big loan into equity. They have since fallen to 6.95 euros, giving the company a market capitalization of 8.6 billion euros, as concerns about the auto industry as a whole have mounted. The biggest driver of change, Mr. Marchionne said in an interview, is the "radical surgery" he performed on Fiat's bloated management structure. "Without doing that we couldn't fix this."

But behind the good news lurks a long-term worry: Industry experts wonder whether Mr. Marchionne can permanently fix a company whose core business is making small, low-margin cars in high-cost Europe. The question has broad implications for other auto makers that sell cars in Europe, including General Motors Corp., Ford Motor Co., Volkswagen AG and DaimlerChrysler AG. If Fiat hangs on, it risks driving down vehicle prices and keeping market share from its healthier competitors.

"The big problem with this industry is that the losers don't exit," says Stephen Cheetham, chief auto analyst at Sanford C. Bernstein Ltd. He argues that Fiat's auto unit is ultimately unfixable -- and assigns it an equity value of zero. "This is a bit like those wildlife movies with the lions and the wildebeests, and Fiat is one of the slower wildebeests." Others aren't so glum. Last week, J.P. Morgan Chase & Co. rated Fiat Group's stock as "overweight," and set a price target of 8.50 euros, or 22 percent above current levels, noting that "the outlook for a durable turnaround remains unclear, but not long ago, the short-term outlook was even more unclear." J.P. Morgan, which trades in Fiat shares, has a business relationship with the auto maker.

The Turin conglomerate - which makes everything from Iveco trucks to Ferrari sports cars - has changed a lot since Mr. Marchionne arrived in June 2004. The patriarch of the controlling family, Umberto Agnelli, had just died. A year earlier, Fiat escaped a bankruptcy filing only when a group of banks extended a 3 billion euros convertible loan. The company had gone through four chief executives in two years. Unions were demanding that Italy buy Fiat to save it. Fiat reported a loss of nearly 2 billion euros in 2003 and nearly 1.6 billion euros in 2004. The losses were mostly because of the Fiat Auto unit, which lost almost 2.1 billion euros and 2 billion euros, respectively, and was undermining the health of the CNH tractor and Iveco truck divisions.

The company, Mr. Marchionne says, "was over-managed and under-led." Weak managers played "musical chairs," failing at one job and transferring to another, but never leaving. He flattened Fiat's hierarchical management structure, and started rapidly axing underperformers. He also deftly played one of the few cards in his hand. Fiat Group held an option to sell its ailing auto unit to GM as part of a joint venture the two signed in 2000. GM had dared Fiat to take it to court over the option, and hinted it would close the Italian car company and lay off workers if forced to buy Fiat Auto.
 

In January, Mr. Marchionne called GM's bluff, forcing the U.S. auto maker to pay 1.55 billion euros (US$2 billion at the time of the deal) to get out of the option and unwind the JV. The cash was enough to get Fiat off life support. He then forced out the auto division's chief in February and, though a novice to the auto business, took the job himself. "It is better to be dead at your own hands than be dead at the hands of someone else's management decisions," he says.

Mr. Marchionne halted the practice of selling cars through discounted channels such as used-car dealerships, sacrificing volume and market share. Quickly, though, Fiat's thin margins began to grow again. In the third quarter of this year, revenue at Fiat Auto rose by 0.6 percent though sales volumes fell by 5.9 percent from the same period a year earlier. Last month, Mr. Marchionne also got his banks to convert the 3 billion euros loan into equity. But Mr. Marchionne's miracle working doesn't mask structural problems at the auto unit, which accounts for 43 percent of group revenue. More than 70 percent of Fiat car sales in Italy are of small, low-margin models. Fiat has crucial model launches this year, such as its top-selling Grande Punto small car in September. But it faces stiff competition from rivals in Europe rolling out competing new models. Mr. Marchionne admits Fiat has much riding on the Punto, which accounts for a quarter of sales volume. "Getting it right is not going to save Fiat, but getting it wrong would have tanked us."

Fiat also has a cost structure that makes producing small cars even tougher. Like most of the industry, Fiat has excess manufacturing capacity. Analysts peg its capacity-utilization rate at 72 percent world-wide and 61 percent in Italy. "The problem here is that one thing Marchionne couldn't do is shut down plants," because it would have sparked a battle with the unions, says Marco Bicocchi Pichi, an auto-industry consultant who counts Fiat as a client.

Mr. Marchionne says large-scale plant closings are an "irrational knee-jerk reaction." He insists the real cost problems at Fiat Auto are "not the people on the line making cars, it's the rest of the paraphernalia you need to support a business like this, from engineering to legal support." The company still carries enough overhead to sell more than two million cars, but no longer can sell so many, he says. Fiat sold about 1.8 million cars last year, down from 2.4 million in the late 1990s. Improbable turnarounds of car companies have happened before, most recently during Carlos Ghosn's tenure at Nissan Motor Co. Mr. Ghosn now runs controlling Nissan stakeholder Renault SA. Mr. Marchionne says the road ahead is bumpy but believes that in five years, Fiat will rank among the top 25 percent in profitability in the auto sector.