Fiat's Game of Poker

Fiat's Game of Poker

by Pininvest Analysis

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In our "Fiat Chrysler on the March" note, we summarized the guiding principles of Fiat Chrysler’s strategy, so successfully implemented by Mr. Marchionne, the company’s former CEO who died in July ‘18

Calling for ever deeper integration and component sharing on a large scale, the strategy is also the car industry’s paradox

  • ‘Commonality’ – as defined by Mr. Marchionne in 2015 – was about common research and shared constituents – a trend the massive R&D costs for new power systems (electrification, batteries and fuel cells) is bound to accelerate
  • Profitability however requires brand identification, curtailing the sharing just short of commoditization

The balancing act – getting the sharing just right while reinforcing brand recognition – has been a success for Fiat Chrysler 

However, regulatory pressure favoring solutions of ‘clean transportation’ is adding a new dimension, potentially upending the automotive industry under the guise of political urgency

Pressed for results, Fiat’s cautious evaluation of alternative technologies will have to account for this new reality while bringing its key strengths to the fore




Fiat’s strategies, a work-in-progress

Following the acquisition of Chrysler in 2009, Mr. Marchionne became a strong advocate of merger with General Motors in 2015, arguing, not without reason, that two strong US based manufacturers (Ford and GM-Chrysler) would command the capital needed to face the onslaught of foreign brands on America’s home turf (currently holding on to less than 50% of the US market, down from close to 100% 30 years ago)

Undoubtedly correct on principle, further integration was politically unfathomable in America, as the pushback by the US banking system, by key investors (with W. Buffet in the forefront) and by the American government, as well as by GM itself, made clear

Taking the US merger off the table, Mr. Marchionne may not have entertained alternatives on other car markets

  • by setting Asia (mainly China) aside, because it was too late to enter the market otherwise than as a token commitment; the 30-year long effort of the leading German car industry would be impossible to repeat and the tight relation of GM with its Chinese partner SAIC was probably unique
  • with reluctance to entertain partnerships on the European market with its French competitors struggling, decade after decade, with a poor image on foreign markets

Mr. Marchionne’s untimely death left Fiat’s merger strategy a question mark…or just an open book, a one-way street to America

Brand recognition, on the other hand, has been the driver of Fiat’s market success, with Jeep sport-utility vehicles, Ram pickup trucks and a more recent Dodge line-up of ‘muscle’ cars (Charger and Challenger) in the US, Alfa Romeo and Maserati in Italy (and Ferrari, separately co-owned by the Agnelli family, Fiat’s major shareholder)

At approx. 2/3 of Fiat Group’s turnover, revamping the manufacturer’s assembly lines to crank out Jeep’s, Ram’s, Alfa Romeo’s, Maserati’s and Ferrari SUVs rather than pedestrian Chrysler and Fiat sedans, brands are the true legacy of its former CEO

If brands have been the pivot securing Fiat’s grip on its core markets (Europe and the US), the new technologies powering the cars of the future could be seen as the means, never strategic goals by themselves…

…since there was, and probably still is, reason to hold back, given the uncertainties

  • about the alternative technology coming out on top, and how soon…
  • about the actual shift in consumer demand, and how fast…

However, though brands remained the priority, Mr. Marchionne might have been assailed by doubt as regulatory drive kept moving target dates for ‘low-carbon emission’ and ‘all-electric’ powertrains closer, shortening time frames unexpectedly across the world


The essence of time lines

Passing up on the complexity of combustion engines, China has made full use of regulations to drive the foreign manufacturers deeply engaged in the country into full support of battery-powered car technology

Stringent sales targets for alternative powertrains have left no alternative for the German car makers (Volkswagen , BMW and Mercedes ), GM and the Japanese manufacturers (Nissan , Honda and – reluctantly – Toyota ) to the launch of electric-powered line-ups, from 2019-2020 on

Planned roll-outs in Europe and in the US may spread the R&D costs across the world markets and – propitiously – satisfy the expectations of politicians eager to burnish their eco-conscious credentials

Whether the cost of the EV line-ups, their true environmental foot-print and adoption rates by the consumer will live up to expectations is uncertain

As recently as 2017, the car industry was planning for fairly balanced markets – projecting equal weights for combustion engines, hybrids and electric by the late 2020’s

But ever more stringent European regulations, as discussed in our note ‘Rolling Thunder’, buying political support for environmental activism, and the growing wave of cities intend on blocking access to diesel engines, are upending the industry’s estimates

How the job losses will be managed across the board, from parts suppliers (putting their entire client base at risk) to car assembly lines (vastly less work intensive) to car repair facilities (at a loss of their client base as well) is not known

But the 100 000’s jobs at stake will not go down easily

Shortening his company’s time frame for an EV line-up to 2025, Mr. Marchionne may have assumed that in this tug-of-war between environmental activists and heavy job losses in the car industry, eco-conscious consumers might – unintentionally – push the industry over board….

A poker game even Fiat’s former CEO was reluctant to play although common sense commanded a carefully monitored technological shift – by itself very hard to pull off

Credit Unsplash - Alfred Twj

While it is impossible to foretell if – and under what terms – Mr. Marchionne would have tweaked Fiat’s independence, the company’s strengths in America and its successful implementation of brand strategies gain much weight in the new geopolitical context

The – still uncertain – industrial trends and FCA’s valuable stake in the U.S. market are the guiding principles of a strategy protecting Fiat’s most valuable assets, as we hope to discuss in our ‘Open Letter to John Elkann’