Will Fiat’s World Headquarters Move to Michigan?
“It is always good when a man has two irons in the fire.” –Francis and Fletcher, John Beaumont, The Faithful Friends, Act 1.
While there’s certainly something to be said for the value of multitasking (though studies have proven that the human brain actually cannot focus on more than one task at a time), Sergio Marchionne has proven that it’s very difficult to juggle management of two multinational automobile companies as he shuttles between Chrysler and Fiat.
Few would argue that Marchionne got a great deal when he managed to acquire a large stake in Chrysler – not in exhange for cash, but in exchange for management talent and technology that Fiat already possessed. Also, few would argue that without Fiat’s intervention (plus that of the US Treasury), there would be no Chrysler today.
By most measures, Chrysler’s resurrection has been a success story, albeit one that is not yet complete. There is still plenty of work to do in refreshing the lineup (a credible midsize sedan to replace the mediocre 200 (nee Sebring) is high on the to-do list, as are additional smaller models and a minivan replacement) but Chrysler’s sales are growing, it is turning a profit, and its prospects are better than they have been in years.
Meanwhile, on the other side of the pond, Chrysler’s parent company, Fiat, falls into the “have nots” category in the struggling European auto market. While Volkswagen, Daimler, and BMW dominate both in the Old World and abroad, Fiat’s Europe-heavy (and particularly, Italy-heavy) sales mix is a recipe for disaster. The Italian economy is among the weakest in the Euro Zone, and that’s making the new-car market there – and Fiat’s sales – swirl around a bathtub drain to near-oblivion.
Marchionne is very much facing a yin-and-yang situation for the companies that he’s managing.
He is also becoming pretty unpopular in Fiat’s home country, thanks to his announced desire to right-size Fiat’s production capacity (which means closing plants and laying off workers in an environment where that rarely happens). This past week, he was summoned into the office of Italian Prime Minister Mario Monti’s office for a five-hour meeting to explain what his plans are for investments in Italy. Marchionne left that meeting pledging to increase exports from Italy. If he can pull that off, it’s good news for Italy, since the domestic market doesn’t really want any more Fiats than they’re already buying. Left unsaid is that when Italy-built Jeeps and Chryslers (plus a handful of Fiats, Alfas, and the like) are not built in the U.S., that is directly impacting Chrysler’s North American employees, who are then not building those cars. Robbing Peter to pay Paul?
Fiat had committed to investing €20 billion in boosting Italian production (from about 650,000 in 2009 to 1.4 million by 2014), but it appears that those plans are not on track. With just over two years to the end of 2014, Fiat’s Italy production is trending in the wrong direction. Last year, it produced just 500,000 cars in Italy, leaving just two years to nearly triple production if the company ever hopes to reach 1.4 million units by 2014. Even the Jeeps and Alfas that are to be exported would only make a portion of the shortfall (“up to” 280,000).
Automotive News ran a piece today contrasting the popularity of Mr. Marchionne in Italy against his standing the U.S. In Italy, he’s been the subject of protests and criticism by the media and government. In Detroit, however, he’s seen as the savior of Chrysler, and it is not an exaggeration to say that his standing in the U.S. is almost completely the inverse of his standing in Italy. In Canada, where Chrysler still cannot reach a collective bargaining agreement with the CAW (at this point about a week after GM and Ford have already completed that), he’s probably somewhere in the middle. Meanwhile, Chrysler’s contributions to Fiat’s bottom line cannot be ignored. With Chrysler’s contribution, Fiat’s overall profit was €737 million through the first half of 2012. Removing Chrysler from the equation, and Fiat would have fallen to a €519 million.
On the headquarters question, there are a few things that have to be done before tackling it. First, although Fiat owns most of Chrysler, the two companies have not merged. They are sharing many managers, but are not officially part of the same company. The hangup on that is that Marchionne wants to buy out part of the unions’ (UAW and CAW) stake in the company (which the unions acquired as part of the bankruptcy restructuring in 2009), but they’re not willing to part with what they own at a fire-sale price.
Second, Fiat needs to get its European operation stabilized, including capacity and cost cuts. From my point of view, it appears that the cost cutting may have gone too far in Europe, because Fiat’s aging lineup is not going to sell well, yet Marchionne delayed the introduction of some critical new models to conserve cash. Short-term, that may have been an OK move, but long term, not so much. He risked eroding consumer interest in Fiat further, making it harder to pull out from its current slide. It seems that there would be much better odds of wringing concessions from Italian stakeholders if there was still any kind of hope that Fiat would remain an Italy-based company.
It’s important to note that Marchionne has gone out of his way to rule anything out regarding the location of Fiat’s future global headquarters. And that’s smart; he’s going to have enough egg on his face when Italy’s Fiat production is little more than a third of its target by 2014. (Marchionne himself is saying that the market will not recover before 2014, so it’s hard to see how he’d score another million units of production in a market that he has said is not going to recover).
But reading between the lines, it’s not hard to imagine Auburn Hills, or Detroit, becoming the center of Fiat’s universe in by the middle of the decade. He didn’t deny that it might move to the U.S., saying this past February that no decision has been made, and that the issue won’t be on his agenda before 2014. The U.S. doesn’t care whether Fiat is headquartered in North America or in Europe (sure, it would be nice, but Americans have gotten accustomed to foreign ownership of domestic firms, and particularly Chrysler, which had been foreign-owned since 1998 except for the Cerberus private-equity fiasco). I’m sure Michigan would love for Fiat to move its headquarters to its state. But Marchionne has no reason to string American along the way he does the Italians.
This is not to say that Turin would not remain a critical piece in Fiat’s empire. It would almost certainly remain Fiat’s European headquarters, and would maintain a sizable piece of its employee base – including engineering, finance, design, etc. But the nucleus of the company’s decision making would move to the U.S. It would be a great coup for an industry that was nearly left for dead in late 2008 and early 2009, but don’t expect the Italians to let it pass without a fight. But I really think that it’s what will happen after Fiat gets what it wants from Italian labor.
Meanwhile, I wonder if anybody else is interested in being hoodwinked for a few billion dollars by Marchionne the way GM was years ago. That $2 billion would certainly help a lot in paying for the investments in Italy – that is, if they actually all happen. Frankly, it would be foolish for Fiat to dump €20 billion into expanding Italy production when it clearly needs less production there. The company would be better off spending that money on severance pay and new-product development.