Marchionne’s mantra for Fiat-Chrysler

He is the turnaround man for Fiat Auto. Within industry circles across the world, he is perceived as the master strategist who has done wonders for the troubled Italian carmaker.

It is now a decade since Sergio Marchionne took charge as CEO of Fiat Auto and he would have had every reason to feel pleased at the annual general meeting in Turin early this week. In January, the company completed its formal acquisition of Chrysler and the new entity, Fiat Chrysler Automobiles, is now the seventh largest player in the world with sales of nearly 4.5 million vehicles.

There are no two ways about the fact that had it not been for Marchionne, Fiat would have well been in troubled waters like its European counterpart, PSA Peugeot Citroen which just got a lifeline through equity infusion from China’s Dongfeng Motor. The opportunity came for Fiat when Detroit had its back to the wall in 2009 and Marchionne wasted little time in bailing out Chrysler. It has just been a remarkable fusion of strengths since then which has led to the creation of a far stronger company.

As Marchionne said at the AGM, Fiat and Chrysler were relatively similar way back in 2003. “Both were medium-sized automakers each with about 100,000 employees and satisfactory revenues, but poor earnings performance,” he pointed out.

Their product portfolios were also complementary, with Chrysler focusing more on SUVs and large sedans while Fiat was naturally more inclined towards the smaller car segments. In 2003, Chrysler sold 2.6 million vehicles and Fiat 1.8 million and the total of 4.4 million units was “exactly the same” as sales in 2013.

Yet, there was a significant difference between now and a decade ago. Despite volumes, both Fiat and Chrysler were deeply in the red. Ten years later, with the same volumes and even an increase in the number of employees, the combined entity has recorded profits of €3.4 billion.

“I believe this clearly demonstrates that volumes, of and by themselves, are not everything. It also demonstrates that in our industry independence should no longer be viewed as a virtue,” Marchionne cautioned.

Achieving economies of scale, generating cost efficiencies, developing global platforms, sharing costs and investment were “all part of the strategy we adopted in 2009 which is now paying off”. He admitted that there was no way out but to work “tenaciously and single-mindedly on this project” since it was the only solution for Fiat to survive in the long run.

Quoting a McKinsey study, Marchionne said automakers would no longer be able to succeed by “copying and pasting old strategies into new situations”. On the other hand, it was no imperative for companies to come to grips with the evolving nature of their businesses combined with a conviction to act and change.

From the auto sector’s point of view, this involves “understanding two essential truths”. The first, as Marchionne explained, is that the industry is capital-intensive where developing a new vehicle platform translates into an investment of €1 billion. “With an ante that high, you can’t afford to fail,” he said.

The second truth is that the business is “highly sensitive to operating leverage”. Simply put, this means that it is simple to make lots of money when operating leverage is high. Yet, it is equally easy to lose “large amounts of money when your break-even point is at the wrong end of the curve”.

It is keeping this in mind that economies of scale have to be large enough to justify investments in new architectures and products. “Volumes are important, but volumes alone are not enough.

In order to achieve an adequate return on investment, we need to develop platforms that can be used for multiple models with production of at least one million vehicles per platform,” Marchionne said.

It is here that the Fiat-Chrysler alliance has made this a pragmatic strategy. The duo has already completed convergence of three main architectures that will take up a large chunk of volumes in the near future.

For instance, as Marchionne elaborated, the Fiat Panda and 500 are built on the mini platform. The small platform, now being used for the Fiat 500L, will also be used for the Jeep Renegade and Fiat 500X.

As for the compact platform, which is the most widely used, the first model produced was the Alfa Romeo Giulietta. Marchionne said this is now being used for the Dodge Dart, the new Jeep Cherokee and Chrysler 200, as well as the Fiat Viaggio and Fiat Ottimo in China.

While wrapping up his speech, the Fiat CEO reminded shareholders that the world today has become extremely flat. “In a flat world, you can’t be secure in your home market if you are not able to compete in other markets. On the other hand, the alternatives and opportunities are multiplied,” he said.

There was a certain “responsibility and the privilege of seeking out those opportunities” and being ready to take advantage of them, wherever they present themselves. This, concluded Marchionne, was how a global entity like Fiat Chrysler Automobiles was formed “that is unique in terms of know-how, perspectives and capabilities”.

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