Latest news on Fiat's plan to gobble up GM-Europe

Published: 15 May 2009

With just over a fortnight until General Motors’ fate is sealed, moves to rescue GM’s European car making division are accelerating. Fiat – already named as the Obama-blessed partner for bankrupt Chrysler in the US – is now wooing Opel, Vauxhall and Saab in Europe.

If successful, Fiat would overnight become the second biggest car making business in the world. If it gets it wrong, it could overnight adopt some of the sickest and cash-strapped businesses on the planet and never quite recover from the heaviest of millstones around its neck.

We’ve already analysed Fiat’s alliance with Chrysler. Now we’ve sat down with one of Fiat CEO Sergio Marchionne’s right hand men to talk about the Italians’ latest ambitious plans for world domination. This is our guide to the latest developments in Europe.

Why is Fiat seducing Opel and Vauxhall?

Marchionne sees modernised companies producing good cars that have been caught up in the financial meltdown. Opel and Vauxhall are essentially strong businesses, hamstrung by the legacy of a failed, lumbering parent company. Fiat’s boss is desperate to find partners to make Fiat bigger and stronger – the only path for survival in an industrial landscape forever changed.

Why is bigger better?

It’s all about economies of scale. Marchionne is desperate to establish Fiat as a proper volume car maker; he’s on record as saying anyone producing fewer than 5.5 million vehicles a year will struggle. His vision is of a world where giants will prosper and the mid-market will fade away.

Is Fiat interested in buying Saab as well?

Yes, perhaps surprisingly. Saab is included in the talks taking place in Turin and Berlin (and Brussels and London and Detroit and Stockholm and many other capital cities you care to mention). GM had washed its hands of Saab, forcing the brand to seek bankruptcy protection in the Swedish law courts as it sought new owners as an independent concern. But that process is effectively on hold, while they work out if Fiat could be the knight in shining armour.

What are the chances of this new European super-group succeeding?

All of the European businesses concerned have form. Fiat was part owned by GM until it exercised its ‘put option’ in 2005 and went independent. But the two companies continue to operate closely; the Vauxhall Corsa and Grande Punto use the same architecture underneath the skin, for instance. Two decades ago there was the four-way ‘Type 4’ cooperation between Fiat (Croma), Alfa Romeo (164), Saab (9000) and Lancia (Thema). Mind you, that partnership didn’t exactly set the world alight, so what’s going to be different this time?

>> Click ‘Next to read more of our Fiat-Chrysler-Opel-Vauxhall-Saab analysis

Will there be much more platform sharing?

Over to Marchionne himself. He recently told The Economist: ‘We can achieve convergence on all the big platforms by 2012. Ultimately I need to do this with Chrysler, but Opel gets me there much faster and with more immediate returns. I’m offering the German government a car business that will be effectively debt-free and I will take on Opel’s liabilities, including pensions. I told them: “if you have a better offer, take it”.’

How big does Fiat want to go?

Marchionne says you need to sell at least 1 million cars a year on each major platform to be genuinely efficient. The Golf, for example, works because Volkswagen builds around 1.5m a year with its legion VW, Skoda, Audi and Seat derivatives. Marchionne claims around 75% of a car’s cost lies in its architectural underpinnings. Today, Fiat produces just 2.15m cars in total – and its biggest scale platform, its city car package on the Panda/500/Ka, makes up just 600,000 units. That’s why Fiat must expand to survive.

How much money is changing hands?

This is the clever bit. Marchionne has taken a 20% equity stake in Chrysler (rising to 35% when key conditions are met) without handing over a single dollar. He is taking on some of the risk in return for management expertise and the small-car technology that Chrysler so desperately craves. Current talks in Europe revolve around Fiat doing the same for GM’s cash-strapped subsidiaries. It’s no wonder that Marchionne sees this as a once-in-a-century opportunity. Fiat isn’t cash-rich, but is able to transform itself at very little cost.

So how will Chrysler, Opel/Vauxhall and Saab survive with no new money being pumped in?

Because governments around the globe are injecting billions of dollars, euros and pounds to keep these businesses afloat. In the case of Opel/Vauxhall, Fiat is pitching for bridging loans of €5-7 billion. They are mostly loans, to be repaid when the good times return. Under the terms of the Chrysler rescue deal, Fiat cannot extend its stake in the Auburn Hills maker beyond the initially sanctioned 35% maximum until it’s paid off its state loan. Expect similar conditions in Europe. In return for state aid, Marchionne is promising to keep the biggest factories open. But that still leaves room for closures which will be inevitable in a streamlined business. Plants in Belgium and the UK have already been put at risk, since Marchionne believes he will have to cut capacity by 22%.

What’s Fiat’s game plan in America?

Don’t expect Fiat Pandas to be sold in the US. Turin is planning to sell small numbers of the 500 in certain metropolitan areas on the east and west coasts, but it’s not really about sales volumes for its Fiat brand. The Chrysler deal will accelerate the return of Alfa Romeo Stateside – and there are factories to help build cars there in the long term. Fiat chiefs are baffled by Chrysler’s poor representation in certain key markets; it doesn’t sell in many South American countries, despite its truck portfolio marrying with local demand. Marchionne plans to take swift advantage of such opportunities on its doorstep.

Isn’t Marchionne stretching himself pretty thin?

That’s the risk. He’s now effectively the boss of stricken Chrylser and is trying to steer it out of Chapter 11 bankruptcy in record time. Obama had planned a 30-60 day stint in court, but Marchionne believes it will be much quicker. Privately, they hope the new business to be up and running by the end of May or early June. It could even be in time for the 1 June deadline for GM to convince the US government it can survive. Marchionne plans to rip out much of the existing management at Chrysler (and, presumably, Opel-Vauxhall-Saab if it wins approval) and transform the company into a nimbler, smaller, faster-moving business. In essence, a repeat of the turnaround that made Fiat into a successful business within a few short years; it had been the basketcase of Europe just five years ago.

What’s the end game?

Fiat is already a giant business, don’t forget. It is involved in everything from tractors (its Case New Holland business is one of the world’s largest agricultural specialists) to supercars (though Ferrari and Maserati will not be included in the anticipated new, global Fiat company). The new company will be jointly owned by Fiat and the Agnelli family, the unions and GM. If successful, Marchionne will preside over the world’s second biggest car maker after Toyota – a combination that would create $100 billion revenues with sales of 6 million a year. Funnily enough, that’s just above Marhcionne’s idealised threshold of making 5.5 million units to be profitable.

>> Can Fiat pull off this masterplan? Click ‘Add your comment’ and rate Marchionne’s chances of success

By Tim Pollard

Editorial director of CAR's digital publishing arm. Motoring news magnet