Page last updated at 14:30 GMT, Tuesday, 5 May 2009 15:30 UK

Fiat's ambition and opportunism

By Will Smale
Business reporter, BBC News

Sergio Marchionne
Opel can never make money in its current size, and if you don't make money you won't survive
Sergio Marchionne, Fiat

For a carmaker that used to be preoccupied with simply returning to profit, Italy's Fiat has suddenly developed audacious ambition.

Following an agreement last week to take an initial 20% stake in US group Chrysler, rising to 35%, Fiat has confirmed it also wants to take over General Motors' (GM) European business, which includes Opel and Vauxhall.

Saab is also part of GM Europe, but may not be part of any discussions as it is being reorganised under Swedish law. "There have been discussions in Germany, but not specifically on Saab," says Saab spokesman Eric Geers.

If the GM Europe deal is completed, Fiat estimates it would make it the world's second-largest carmaker, after Toyota, up from its current 10th position.

Fiat's group chief executive Sergio Marchionne said a coming together of Fiat, GM Europe and Chrysler would be a "marriage made in heaven".

Mr Marchionne says the figures speak for themselves: He estimates that a combined Fiat-GM Europe-Chrysler could sell more than six million cars a year. By contrast, Fiat sold 2.15 million in 2008.

Map of GM Europe's key operations

Yet some analysts have questioned the merit of combining Fiat and Opel's range of cars.

"Opel and Fiat almost exactly mirror each other in terms of model and segment offerings in the European market," according to IHS Global Insight automotive analyst Tim Urquhart.

"There is an argument that Fiat's small car portfolio could be somehow grafted on to Opel's medium and large car product offerings to present a much more attractive combined model range, but it is not particularly compelling."

Consequently, Mr Urquhart says, "it is difficult to see the logic of an alliance between Fiat and Opel, other than to create a company of such critical mass that government support for the project is almost guaranteed".

'Yard sale'

But with global car sales now continuing to fall as the worldwide recession shows little sign of slowing, why is Fiat suddenly showing such ambitious growth plans?

Ellesmere Port
The Ellesmere Port facility is one of GM Europe's most efficient, and the Astra remains a strong seller
Car industry analyst Robin Roberts

There are two main reasons - necessity and opportunism.

Mr Marchionne, who successfully returned Fiat to profit in 2006 after six years of losses, has long maintained that in the future carmakers will need to sell more than six million vehicles a year to survive.

He says this is the minimum level required to secure the economies of scale to maintain profits.

The opportunism comes from the fact that such is the extent of the financial woes facing Chrysler and GM in the US, Fiat will likely be able to pick up Chrysler and GM Europe very cheaply indeed.

So much so, that Fiat's initial 20% stake in Chrysler has been given to it for free, as Chrysler begins to restructure itself in bankruptcy protection.

And with GM also at risk of going into bankruptcy protection, it will likely sell its European subsidiary at a rock bottom price so it can continue to concentrate on sorting out its main US business.

FIAT
Fiat 500
Europe's sixth-largest carmaker by unit sales
Group sales of 59.4bn euros (£53.9bn; $78.8bn) in 2008
Based in Turin, north-west Italy
Employs about 200,000 people
Fiat Auto's brands include Fiat, Lancia and Alfa Romeo
Fiat Group also owns Maserati, 85% of Ferrari and the truck and commercial vehicles maker Iveco

"We're in the middle of an automotive yard sale," says car industry analyst Michael Robinet of CSM Worlwide. Marchionne has "gone to a yard sale and picked up some really good stuff".

While no financial details have yet been released, reports suggest Fiat may be able to buy GM Europe for as little as 1bn euros ($1.3bn; £886m).

And Fiat appears to be hoping it will not have to take much financial risk at all.

Germany's Economy Minister Karl-Theodor zu Guttenberg has confirmed that Fiat is seeking up to 7bn euros of loan guarantees from various European governments, both to cover the purchase price and GM Europe's debt and pension obligations.

Most analysts agree that without these loan guarantees, Fiat simply couldn't afford to buy GM Europe. They point to Fiat's existing 5.9bn euros debts at the end of last year, a sign of the Italian carmaker's role as the weakest player in Europe's motor industry.

"The Fiat plan to form an alliance with Opel appears to be predicated, like its deal with Chrysler, on there being no capital risk to the Italian company, and on no additional debts being accrued," says Mr Urquhart.

Redundancy fears

With Fiat and GM Europe's main Opel business (called Vauxhall in the UK) making a number of competing small cars, such as Fiat's Punto and Opel's Corsa, at a time of falling sales, fears have already been raised that any takeover will lead to job cuts or even factory closures at GM Europe's main factories.

Vauxhall badge
Analysts predict the UK's Vauxhall brand to remain

Mr Marchionne has already warned that redundancies will be likely, as a combined Fiat and GM Europe would be able to cut annual costs by 1bn euros.

"Opel can never make money in its current size, and if you don't make money you won't survive," he says.

"Of course staff levels have to fall. No one will be able to change that. The plants have to become more efficient."

Mr Marchionne has given assurances that GM Europe's German factories would be safe from closure, but this has done little to mollify workers there.

"Statements like this are 10 a penny," according to Rainer Einenkel, head of the works council at Opel's Bochum plant in Germany, speaking on NDR public radio.

In the UK media, fears have been raised over possible job cuts at GM Europe's Vauxhall plant in Ellesmere Port in Cheshire, which makes the Astra model, and employs 2,500.

"Quite frankly, this move sends shivers down my spine," says Unite joint general secretary Tony Woodley. "These proposals are not so much a sale as a giveaway."

Independent motor industry analyst Robin Roberts says these concerns appear unfounded.

Fiat and Opel logos
Helping Fiat buy GM Europe would be the best solution for the German government
Stephen Pope, of Cantor Fitzgerald Europe

"If you look across Europe as a whole, there are far too many car production plants across the industry," he says.

"However, the Ellesmere Port facility is one of GM Europe's most efficient, and the Astra remains a strong seller. If there are any employment cuts surrounding the Astra, they would likely come at its sister production base in Belgium."

Mr Roberts also predicts that if Fiat does buy GM Europe, it will maintain the Vauxhall brand in the UK.

"Vauxhall means a lot in the UK, and it doesn't cost anything to use a different badge."

Political pressures

But why would European governments be willing to give Fiat loan guarantees to buy GM Europe if the firm plans to cut jobs? Especially the German government, which faces a general election in September, and where GM Europe employs most of its workforce?

GM EUROPE
Cars at Ellesmere Port
Sales of $34.4bn in 2008 (£23bn; 25.9bn euros)
Operates 10 plants in seven countries
Employs about 54,500 people
Brands include Vauxhall, Opel and Saab

"Helping Fiat buy GM Europe would be the best solution for the German government," says fellow industry analyst Stephen Pope, of Cantor Fitzgerald Europe.

"It can't directly step in and help GM Europe as that would greatly antagonise Volkswagen and BMW.

"Instead, this way it can be shown to be doing its bit, at the same time as handing over the responsibility to Fiat, which can then take the blame for any future job cuts.

"If there is state support to help Fiat buy GM Europe, then I'm sure the German government will put down some tough criteria [on keeping jobs], but that can only be for the short term.

"It is not as if there is a serious other bid to rival Fiat. There is no white knight about to ride in."

However, if Fiat does receive the state aid it needs to fund the takeover of GM Europe, Mr Urquhart says it would likely "enrage other German carmakers", sparking an anti-competition probe.

"It is likely that the biggest obstacle to the alliance could yet prove to be the European Union's competition commission," he says.

If Fiat does ultimately succeed in getting regulatory approval to buy GM Europe, it then has to make the new business work, something analysts say will be difficult.

"We remain unconvinced that Fiat has the management depth to pull off this very ambitious task," says Max Warburton of Sanford C. Bernstein.

"Although we acknowledge that the company clearly keeps its talent obscured."



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