9.21 Fiat Group Automobiles S.p.A.

In 2004, after a hundred years of car-making, Fiat was facing bankruptcy. The design of its Panda model hadn't basically changed in twenty years, market share was being eroded by European and Japanese models, and losses in the preceding five years amounted to $12 billion. Even the attempt to sell the car business to General Motors had stalled: GM had bought 10% of Fiat stock but its put (buying) option for the remaining 90% remained in abeyance while GM itself faced falling sales. Fiat meanwhile had diversified into banking and insurance, making uncertain its commitment to car-making — which was again reflected in car sales and relationships with its workforce.

First Steps

Share holders first appointed a new CEO, Sergio Marchionne, who had no car manufacturing experience but did have good track record of bringing faltering companies back to profitability. He conceived a twofold plan:

1. Solve the put issue with GM, and buy time from creditors.
2. Leverage the key assets of Fiat design and engineering.

Step 1 was accomplished in February 2005 when:

1. Marchionne got GM to pay $2 billion for their put option.
2. Banking creditors were shown a credible business plan, which made car manufacturing the key business again.
3. Banking and insurance holdings were reduced or sold off to provide cash flows for new business development.
4. Focus was again placed on Fiat core skills: innovative cars, user-friendly and with a distinctive Italian design.

Assessment

Marchionne started by replacing several top managers by younger, more dynamic and market-attuned managers, often in their thirties or forties. He set clear goals for growth and profitability, and monitored their implementation by management. He looked at Fiat core skills and found that innovative design and engineering were still very much alive, but undervalued. Fiat Engineering in the 1990s, for example, had developed the jet-stream turbo-diesel system (JTD) that made diesel engines more flexible, powerful and fuel efficient than traditional engines, but had sold the technology to Bosch and so to Fiat rivals. Cash flow problems had made the sale necessary, but the move lowered staff moral and jeopardized relations with factory workers and unions.

New Models

Focusing on design, Marchionne hired Frank Stephenson from Ferrari, and initiated the production of new (small sized) Punto and (mid-sized) Bravo models: completely redesigned, but retaining 60% of the components of previously unsuccessful models. Manufacturing costs were reduced by sharing components with other car manufactures (Ford, Suzuki, Tata) through private industrial networks. Engineering was brought closer to Marketing, and users were invited to share ideas through customized web sites. Campaigns were launched to understand what drivers and passengers really wanted, and new dealerships were opened all over Europe charged with supplying customer feedback through a customer relationship management system.

New Relationships

With these changes, improved working conditions in factories, and better relations with unions on finding the company was again committed to producing world-class cars, Fiat fortunes significantly improved. Profits were made in 2006, and financial results the following year were among the very best of its hundred years' history. The Fiat 500 was awarded the '2008 Car of the Year' Award in Europe, and demand exceeded company expectations by 70,000 units.

Industrial relations had improved sufficiently for Fiat to introduce part-time working in 2008, when oil price hikes and the economic downturn hit most car manufacturers. Fiat prestige allowed Marchionne to sign a Memorandum of Understanding with BMW for the manufacture and sale of the Mini (owned by BMW) and Alfa Romeo (owned by Fiat) brands in the profitable market of compact fashionable cars, his 35th strategic and operational alliance with other car makers. In 2010, Fiat bought 28% of Chrysler stock value in exchange for their access to Fiat design knowledge and Fiat's access to the American market. Fiat now owns 53% of Chrysler.

Early 2011 saw major restructuring, and Fiat hived off its agricultural and construction equipment, and most of the rest of its non-automobile operations, to the newly created Fiat Industrial. 2012 sales of Fiat-Chrysler models were strong in the US, but not in the troubled European market, and least of all in Italy where the revamped Punto 500s lost out to the Toyota Yaris and Peugeot 208. {7} Recession took its toll in 2012, and 2013 targets have been cut. {8}

Points to Note

1. Leadership is a key (and scarce) resource.
2. Key resources (design skills) can be hired or bought in.
3. Importance of Internet technology.

Questions

1. Explain the situation at Fiat S.p.A.when Sergio Marchionne took over.
2. What was Marchionne's two step approach, and what were the key factors to the success of the first step?
3. Why was Marchionne able to forge better relationships with the trades unions?
4. What Internet technologies contributed to Fiat's recovery?

Sources and Further Reading

1. How Do We Get There? Strategy Action Framework: 'Action Engine' by Ananth Iyer and Alex Yelikovsky, in Orchestrating Supply Chain Opportunities: Achieving Stretch Goals, Efficiently, edited by Stephen Namias. Business Expert Press. April 2011.
2. The miracle of Turin: the lessons that other carmakers can learn from the fixing of Fiat. Economist. April 2008.
3. Fiat plays double or quits with Chrysler: Sergio Marchionne reckons that Chrysler can help save Fiat from itself and from Italy. Economist. November 2010.
4. Fiat. Company home site with Research & Innovation, News & Events, etc.
5. Outcry over Fiat may end with a debt of gratitude by Paul Betts. FT. October 2011. Fiat's labor relationships.
6. Interview: Italy Union Mulls Second Legal Action Against Fiat. WSJ. September 2011.
7. Fiat-Chrysler 2012 First half results analysis by Juan Felipe. Car Industry Analysis. August 2012.
8. Fiat Industrial Cuts 2013 Targets as 1Q Misses Expectations by Gilles Castonguay. Fox Business. April 2013.