This feature by
Gabriel Kahn appears in the Wall Street Journal
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.
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