When Sergio Marchionne, CEO of Fiat Chrysler Automobiles, died last month after a failed surgery in a Zurich hospital, newspapers all over the world lamented the death of a ‘rock star’ – not a moniker one would usually attribute to a hard-working manager, even when so successful as he was.
His personal style, Muratti-smoking, espresso-downing and preferring black jumpers over suits, may have contributed. But what journalists mostly emphasised was his incredible fortune to turn around – against all odds – a car maker that had been destined to collapse under a burden of debt, production losses and workers discontent.
When Marchionne was picked by John Elkann, 28-year-old heir to Italy’s crumbling Agnelli-empire, he was not an obvious choice. The former director of the Swiss goods control company SGS may have fancied fast cars but he had never worked in the car industry. He was a lawyer and accountant and anything but flamboyant. A far cry from the style icon and international playboy Gianni Agnelli, the industry patriarch who died in 2002, a year before Marchionne was called to the helm of Fiat.
Agnelli was the uncrowned king of Italy. He inspired fashion magazines and designers and fed the rainbow press with spectacular dates, from Jackie Kennedy to Anita Eckberg. He was the fitting heir of an industrial empire which in its heyday supplied the world, and 80 per cent of the Italian market, with dashing cars symbolising the resurrection of Europe after the war. To own an Alfa Romeo Spider or at least a Giulia was a 1970s dream. As a child I took pictures of every Ferrari I saw in the streets.
Fiat was of course more than just a car company. It supplied the Allies during WW1 with aircraft, engines, trucks and machine guns, and Mussolini with much of the same in WW2. It produced harvesters, tractors, HDVs, had stakes in insurance, publishing, construction, toll highways and aviation. In 1970 it built the biggest car factory in the Soviet Union, in ‘Togliattigrad’, churning out Ladas, the Russian version of the Fiat 124.
For a short time, Fiat seemed en route to becoming the biggest car company in the world. In 1973, with the Oil Price Shock, car companies nosedived. It did not help that Fiat started to use sheet iron supplied by the Soviets. Italian cars soon gained a reputation of rusting more quickly than any other car, and certainly faster than Japanese cars which started to make inroads into the European market.
When Marchionne took over, Fiat was losing money to the tune of billions per year. Costs had to come down, no matter how much trade unions would protest. Two years later Fiat was making its first profits again. Marchionne sold off non-core assets: its agricultural division, marine business, truck maker Iveco, and quite controversially, Ferrari. At his last press conference in 2018 he could proudly announce that Fiat was debt free.
Car sharing, ride-hailing and pay-as-you-go fleets will soon make even the most beautiful Alfa Romeo a dream of the past
His biggest claim to fame was the acquisition of Chrysler. Building a stake in the US car manufacturer at the onset of the financial crisis in 2009 for the sole promise of technology transfer, he bought the rest of the company in incremental steps for $6.3 billion in total, with a third paid for by Chrysler’s cash reserves and $2 billion voluntarily paid by GM for rewinding a joint venture agreement.
To put this into context: when Daimler Benz tried its luck with the struggling car maker in 1998 it had to pay $37 billion, to receive $7.4 billion nine years later when it sold out again. All its investment in training, equipment and management was to no avail. Or compare this to Volkswagen’s Dieselgate, when US fines alone mounted to $30 billion. Today Chrysler contributes 80 per cent of Fiat’s group profits.
The untimely death of the ‘rock star’ has dented the share price, as was to be expected. Although Marchionne had already announced his retirement for April next year, his successor, Jeep boss Mike Manley, will struggle to make the announced strategy to double profits by 2022 sound plausible. He has already had to admit that Trump’s steel tariffs, which increase production costs in the US, were burdensome and that China’s slashed import tariffs for cars had forced the group to re-price vehicles already in Chinese showrooms. As a result, half-year profits tumbled and Fiat shares lost more than 15 per cent on the Milan Exchange.
Many questions now remain unanswered. Will a $9 billion planned investment in electric vehicles pay off or will Marchionne’s prediction prevail, that the industry’s rush into e-investment and self-driving technology will eventually become too costly to be sustainable? Will the nomination of Manley lead to a critical exodus of key personnel? Europe boss Alfredo Altavilla has already resigned and so has the CFO Richard Palmer.
Will Manley demonstrate the same diplomatic skills as his former boss to drive the necessary further consolidation in the car industry? Will he have the same knack for opportunities as his predecessor?
The hefty fall of FCA (Fiat Chrysler Automotives) seems certainly overdone. With a share price of 14.59 the company is valued at a little more than five years’ earnings. It is worth nearly 50 per cent more than a year ago – a retreat was to be expected. If one wishes to invest in a car manufacturer, and does not want to wait for the next stock market crash, I believe that Fiat presents a good buying opportunity. Its sudden fall from grace is overdone, as we will see in the weeks to come.
Yet the questions we small-scale investors should ask ourselves are of a more general character: should we invest in car manufacturers at all?
The future of car companies lies in the conundrum how to best tackle the transport needs of the future. Galloping urbanisation makes car ownership unnecessary and increasingly burdensome. Environmental concerns will demand ever more emission efficiency – for cars and the way we produce them. Car sharing, ride-hailing and pay-as-you-go fleets will soon make even the most beautiful Alfa Romeo a dream of the past. Young people don’t buy cars as we did.
Who will win the race for self-driving cars, the internet behemoths or traditional car makers? Who will own the charging networks for electric cars, and who will produce the next generation of lighter, fast-charging and more endurable batteries? Who will make the most of all the data our means of transport will provide? What will be the fate of trade and global cooperation once Trump has his way?
The answers to these questions will matter more than impressive sales figures of yesterday’s Jeeps and Ram trucks.
Andreas Weitzer is an independent journalist based in Malta. He reports on the economy, politics and finance.
The purpose of his column is to broaden readers’ general financial knowledge and it should not be interpreted as presenting investment advice or advice on the buying and selling of financial products.