Steering Clear: Auto Outsider Gets Fiat Going By Flouting Industry Traditions - Marchionne Keeps All Plants Open, Cuts Discounting, Sells Technology to Rivals - Taking an Axe to Management
 
By Gabriel Kahn and Stephen Power - The Wall Street Journal / Thursday October 26, 2006

At the headquarters of Fiat SpA here, an auto industry outsider is engineering a turnaround of a company considered the biggest mess in the industry two years ago. He's doing it with an in-your-face taunt: The leaders of many of the world's largest auto firms have lost their way, says Chief Executive Sergio Marchionne. If you're going to fix a broken car company, call in an amateur.

When Fiat hired him in June 2004, the company acknowledged it was just months away from running out of cash. It had lost about US$2.4 billion the year before. A four-year-old alliance with General Motors Corp. was on the rocks. Mr. Marchionne had never worked in the auto industry. He was running a century-old Swiss company that inspected and certified goods moving in trade. He was Fiat's fifth CEO in three years. Labor leaders and analysts figured there would soon be a sixth.

Today, Fiat is on a tear. Sales were up 19% in the first nine months of this year. Its auto business is profitable. The stock has doubled since a year ago. "All of this sounds like a miracle," Mr. Marchionne said at an industry conference in June. "But it is not. And it is explainable." The newcomer mocked the auto-industry dogma that factory closings were the answer to the industry's problems. Instead, he took a knife to the bureaucracy. He bucked the standard industry practice of hoarding one's best technology. Mr. Marchionne pushed to sell as many of Fiat's engines and other parts as he could, even to competitors. He boasted that Fiat at first would be selling fewer cars, not more, as he stamped out steep discounts. They are a common practice in the industry, particularly in the U.S., where GM and Ford Motor Co. have often pushed cheap financing to keep sales up. Mr. Marchionne figured that though such promotions buoyed Fiat's market share, they widened its losses and cheapened the brand.

He also insisted that designers and engineers radically speed the process of bringing out a new model, skipping the step of building a working prototype. The result was to shave six months off the standard design-to-market time of 24 months or more. Finally, instead of seeking a rescue through a broad alliance - as Renault SA and Nissan Motor Co. have, and as GM considered doing - Fiat has pursued smaller, targeted joint ventures.

Fiat's turnaround isn't finished, and analysts caution against overstating it. Much of its sales surge reflects the success of just one model, a small, sporty sedan called the Grande Punto. Many analysts doubt Fiat can ever fully overcome the hurdle of being a builder of small cars, on which margins are thin, in a high-cost place like Europe. "We believe that Fiat is an overvalued turnaround story in which the market is likely to lose faith," wrote one analyst, Stephen Cheetham of Sanford C. Bernstein & Co., this month.

Yet it's clear Mr. Marchionne's unconventional approach is producing results so far. He maintains that his overhaul has revolutionized the culture in a way that will keep the company competitive in the long term, even against lean Asian rivals. Besides its main unit, Fiat Auto, the company makes Iveco trucks, Case New Holland farm equipment and two expensive car brands that aren't part of Fiat Auto, Ferrari and Maserati. Although Fiat's flagship brand left the American market years ago, Ferraris and Maseratis continue to be sold in the US.

The auto industry normally cultivates its executive talent from within. But the bleak conditions in some corners of the industry have lent appeal to the idea of an outsider who can shake things up with new ideas. Ford has also gone outside for a CEO, hiring Boeing Co. executive Alan Mulally. When Mr. Marchionne arrived at Fiat, many expected him to use its financial crisis as a lever to force unions to accept a factory shutdown. Fiat's European factories were running at just 60% of capacity, analysts estimate, far below the 80% to 90% thought needed for profitable operation. Other companies, such as GM and Ford, are attacking their woes through extensive plant closings and worker buyouts.

But Mr. Marchionne pledged not to shut any of Fiat's Italian factories, even a chronically inefficient one in Sicily that was slated for closure under prior management. One special situation made this easier. An Italian law permits an industrial company that's financially on the ropes to send workers home temporarily and pay only a portion of their salary. Still, Mr. Marchionne's decision not to close any factories astonished industry analysts and even fellow Fiat executives. Labour is only 6% to 7% of the cost of making a car, Mr. Marchionne told a group of industry insiders in June. "Therefore," he said, "the real reason for large operating losses at Fiat Auto must be found elsewhere." He figured that the industry's constant focus cutting factory payrolls was an excuse to avoid tackling tougher problems.

He looked to the management ranks. Fiat's controlling shareholders are the Agnelli family, known for style and formality. This sensibility was mirrored, to some degree, in the Fiat hierarchy. Executives who worked in the same hall would schedule appointments to speak to each other through their secretaries. That wasn't Mr. Marchionne's style. An intense man who rarely wears a tie, he spends much of the day when in his Turin office in nonstop meetings, smoking a steady stream of Kents, often with Bach playing in the background. At his first major outing as CEO, in July 2004, Mr. Marchionne was blunt about Fiat's management. It was "inward looking," he told analysts and journalists, and its approach to business "needs to change and change drastically."

He said Fiat, which was selling 30% fewer cars than a few years earlier, no longer needed the same number of managers. Of more than 700 at the car unit, 30% were sent packing, for an annual saving of about US$160 million. At the corporate level, he dismantled a 300-person management layer that monitored the company's truck, tractor and car units. "It showed we've taken responsibility from the top for the problems," says the head of human resources, Francesco Garello.
 

"We haven't put the blame on the factory workers but on the decision makers. That had an enormous cultural impact." While laying managers off, Mr. Marchionne promoted others. Soon after arriving, he knocked on the door of Luca De Meo, director of Fiat's Lancia car brand. "He walked into my office and said, 'Who are you?'" says Mr. De Meo. The two talked for 90 minutes about the company's problems. Weeks later, Mr. De Meo was put in charge of the core Fiat brand, even though the 39-year-old had been at Fiat less than three years. "He hadn't been with the organization long enough to pick up any bad habits," Mr. Marchionne says. Mr. De Meo espoused the unorthodox approach. He hired consultants from Swedish retailer Ikea to give stodgy dealerships an airy, consumer-friendly feel.

But Fiat faced a roadblock. An alliance it had made with GM in 2000, as a way to catapult itself into the orbit of the world's largest car maker, had turned acrimonious, with both sides threatening lawsuits. In the deal, GM had taken a 20% equity stake in Fiat Auto and agreed that if things went badly, Fiat Auto could sell the rest of itself to GM. At the time, with Fiat healthy, no one expected this clause to matter much. But by 2004, with Fiat on the ropes, GM worried that the Italian company might exercise the clause and force GM to absorb some US$8.8 million of Fiat debt. Mr. Marchionne, at a meeting with GM CEO Richard Wagoner in January 2005, insisted that GM pay to get out of what was in effect a put option. Mr. Wagoner agreed to pay US$2 billion.

The cash gave Fiat some breathing room, but the end of the alliance left it a pint-size player in the global auto game. Mr. Marchionne gave the manager who had overseen the GM relationship a new mission: Find some new alliances, but narrower ones that would plug Fiat's weaknesses and leverage its strengths. He told the executive, Alfredo Altavilla, to steer clear of equity investments, for a simple reason: "We had no money." They also didn't have much respect. Mr. Altavilla recalls that as he talked with industry executives, they kept asking, "Will you still be around in six months? Will you be able to supply spare parts in three years?"

But Fiat had some strong technology to offer, including a highly efficient 1.3-liter diesel engine. Mr. Altavilla signed a deal to produce small cars jointly with Ford, at a Fiat plant in Poland. Ford would get a small car powered by Fiat's engine and built on a Fiat platform. Fiat, in effect, would get to sell the use of some of its technology and facilities, collecting more revenue from its plants. Most car makers hoard their best technology rather than let rivals have access to it. Mr. Marchionne thought that was "crazy," says Mr. Altavilla, figuring that "your competitor will just go to somebody else to buy" something equivalent.

Mr. Altavilla has signed nine deals, helping Fiat both to widen its model lineup and enter new markets. One arrangement is with the car division of Russian steelmaker OAO Severstal, which will sell Fiats through its dealership network in Russia. Another is with Turkish auto maker Tofas and France's PSA Peugeot Citroen SA to make a small cargo vehicle. By next year, the fast-growing Indian car market will include two brands equipped with Fiat's small diesel engine: cars from Fiat and Tata Motors Ltd. in Mumbai.

Mr. Marchionne was baffled by what he says is the industry's tendency to be "capital happy" - rolling the dice on costly new models without first doing lots of market research. He says this habit was especially bad at Fiat: "We only listened to the customers after the cars were launched." The result was sales projections that could be badly off the mark. Five years ago, Fiat launched its Stilo model, expecting it to sell as many as 360,000 a year. It peaked at 160,000 in 2002. The result was huge excess production capacity and parking lots full of unsold cars. Moving them required steep discounts that cannibalized sales of other models. Mr. Marchionne told product-development people to sharply understate sales projections. Instead of designing a model that could make money only if it sold 300,000 a year, they had to design it to be profitable if it sold half that many. It was up to the designers and engineers to figure out a way. At the same time, he required more market-testing, even of car interiors. On the Grande Punto, he approved a bright orange interior even though he hated it, because consumer focus groups liked it.

When Mr. Marchionne arrived, Fiat Auto's engineering and design department had five independent units and two international divisions, each developing products on its own. There was little communication or synergy, and morale was abysmal, says Harald Wester, a new product-development chief the CEO hired. Fiat was preparing to replace the Stilo with a model called the Bravo, of a size similar to compacts in the U.S. Mr. Wester says the Bravo was "mediocre," had no "wow factor." He ordered it redesigned, a move that engineers said would mean a six-month delay in its launch. No delays, Mr. Wester retorted. In fact, he demanded, the Bravo must be launched six months earlier than planned.

To do so meant adopting an entirely new engineering process that skipped the step of building prototypes. "A healthy company would never have thought about doing it like this," says Mr. Wester, but "extraordinary situations lead to extraordinary solutions." He says Mr. Marchionne approved the plan, except for one change: "He asked us to deliver it one month earlier." The Bravo is set to go into production next month.

Labor unions at Fiat have a history of strikes and even violent confrontation with management, but Mr. Marchionne's openness appears to have softened attitudes a bit. Recently, he stood before hundreds of union officials to answer their questions. "We had never seen anything like that before at Fiat," says Giorgio Airaudo, secretary of the Turin section of a left-wing union, FIOM-CGIL. The company and unions operated for years with no contract after the last one expired. For 10 years, unions had been pushing for a new one. They were astounded when Mr. Marchionne proposed a new one, with a clear formula for bonuses, which would be based on quality, productivity and financial results. It was signed in June.

Mr. Marchionne concedes that Fiat isn't out of the woods. But its progress so far has led to a surge of self-confidence and a change in how the company is regarded. "We were considered the biggest losers in Europe," says Mr. Wester. Now, "my people don't get teased at the bar anymore for being from Fiat."

Report courtesy of The Wall Street Journal