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Last Updated: Monday, 14 February 2005, 14:37 GMT
Fiat in need of rapid gear change
Analysis
By Ben Richardson
BBC News business reporter

Fiat deputy chairman John Elkann, chairman Luca Cordero di Montezemolo, and chief executive Sergio Marchionne
Management will be under pressure to turn the business around
The end of a relationship is never easy, but sometimes it can give the former partners a new lease of life.

Gone are the pressures of getting along, and instead there is the opportunity to take stock and revamp.

On Monday, Italian manufacturer Fiat said it was looking forward to life on its own after ending a partnership with US carmaker General Motors (GM).

Chief executive Sergio Marchionne exclaimed that Fiat now had "absolute freedom to design our own future", the pain of separation soothed by a 1.55bn euro ($2bn; 1.1bn) payment from GM.

By coughing up, GM got out of an agreement dating from 2000 that could have forced it to buy out Fiat's loss-making automotive division. The two firms will now unwind joint ventures, though Fiat will keep supplying diesel engines.

The end of a five-year affair with GM has removed a great deal of uncertainty surrounding Fiat, and its shares jumped by almost 5% to 6.22 euros in Milan on the news.

Two sides

The problems that we thought we solved five years ago are now once again exactly the same
Carlo Scarpa, professor at Brescia University

But analysts warn that while Fiat may be looking forward to a greater degree of control over its destiny, harsh economic realities may soon sour the taste of its new-found "freedom".

"Fiat's problems have two origins, financial and industrial," Carlo Scarpa, a professor of industrial economics at Brescia's university, told Italian state radio.

The agreement with GM is "excellent news from a financial point of view, he explained. "But from the industrial point of view the problems that we thought we solved five years ago are now once again exactly the same".

On the plus side, the money from GM will only provide Fiat with "breathing space", analysts say.

The company is saddled with debts, and the cash injection should allow it to pay part of them off as well as give it time to restructure payments before many of them come due in 2006.

But any respite will be short-lived unless management is able to breathe new life into Fiat's ailing auto business.

Driving force

Fiat is a leading player in Italy's automotive world, and gets about 40% of its revenue from the loss-making Fiat Auto.

It also holds a controlling stake in the super car maker Ferrari Maserati, which has failed to make a profit since it was bought in 1990.

Fiat Auto, which makes Fiat cars as well as Lancias and Alfa Romeos, is facing substantial challenges.

It has net debt of 8bn euros, and increased competition from abroad, especially Japan and Korea, has eaten into Fiat's domestic market share.

Fiat workers protest at planned job cuts
Many European car firms have clashed with workers over cost cuts

Last year, Fiat accounted for one out of every four cars that were sold in Italy. In its heyday the company accounted for six out of every 10 cars sold.

That decline had been exacerbated by weak sales elsewhere in Europe and the US. Total sales fell by almost 9% last year from the previous 12 months.

A lot will depend on new models such as the rejuvenated Punto set for a release in September, and Alfa Romeo's Croma estate car.

Support group

Another key factor in any recovery will be convincing consumers that Italian cars are as reliable and well made as those from Germany or Japan, analysts say.

Fiat's brand has taken a bashing for being poor quality, while a badly-run dealership and spare parts network has only compounded this problem.

Fiat is not alone in facing problems, and many of Europe's largest carmakers have had to look at ways of cutting costs.

Manufacturers like Volkswagen and DaimlerChrysler have talked tough with unions and pushed through measures that include longer working weeks and redundancies.

Getting cost saving measures agreed at Fiat, which employs 60,000 workers, is likely to prove difficult, analysts said.

Attractive deal

A cornerstone of the Italian economy and one of the country's biggest employers, Fiat is a politically as well as economically sensitive issue.

Earlier this year there were massed walkouts and protests by workers over plans to move production to Iran.

Analysts at Morgan Stanley forecast that investors will have a "rocky road" ahead, adding that the company may need to find another partner if it wants to develop new models in a cost effective manner.

For his part, Fiat's Mr Marchionne has long said he would like to forge new partnerships in specific business areas to cut costs.

But unless the company manages to makeover its image, Fiat may find itself firmly on the shelf.


SEE ALSO
GM pays $2bn to evade Fiat buyout
14 Feb 05 |  Business
GM cuts 10,000 jobs in Germany
09 Dec 04 |  Business
Fiat boss Umberto Agnelli dies
28 May 04 |  Business
Fiat Auto's delicate recovery
08 Mar 04 |  Business

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