FIAT-CHRYSLER FIVE-YEAR PLAN

2018 Group Goals
Sales: 7 million vehicles
Revenue: €132 billion, CAGR 9%
EBIT: €9 billion
Net Profit: €5 billion (4.7-5.5)
Capital expenditures: €55 billion (~€9.5 billion/year)

Q1 2014 Results
Sales: 1.1 million +9%
Revenue: €22.1 billion
EBIT: €47 million (versus €607 million, Q1 2013)
NAFTA EBIT: €-117 million
Net Profit: €-319 million

The five main points:
1. FCA wants to grow sales of its premium brands. It will use excess capacity in Italy to grow worldwide Maserati sales to 75,000 cars, and Alfa Romeo sales to 400,000 cars by 2018. Alfa will get 8 new models, and has a sales target of 150,000 units in the US market, where it and Maserati will be sold in “the best Fiat dealers.”

2. Move mass market brands in the EU to more upscale products (CUV and SUV). FCA will not invest in the Fiat brand to grow market share in the EU. All Fiat brand growth will have to come from outside the EU.

3. The Jeep brand has huge upside potential, especially in Asia and Latin America and will account for the biggest sales gains for the group. Sales goal: 1.9 million vehicles by 2018, up from less than 1 million today. The Patriot and Compass get axed in 2016. A new C-segment SUV gets added then, and a Grand Wagoneer comes in 2018.

4. The group will sell 7 million vehicles by 2018 including joint venture partners in China. “If I can get to 6 million cars, it’s D-Day,” says Marchionne. FCA will not need another OEM partner to get the economy of scale it needs. That squelches rumors that FCA may have wanted to tie up with a Japanese OEM.

5. Despite analyst skepticism, FCA says it will generate the money to pull this all off. It will spend 3% to 4% of sales on R&D. By 2018 the group will be debt free.

RANDOM NOTES

FCA sees the US market growing to 17 million units in 2017. It predicts it will have 15.8% market share of the US market by 2018. But that means it would have to outsell both Ford and Toyota!

Chrysler will become the lead brand for the group in North America. It will get a plug-in version of the Town & Country minivan and a plug-in three row SUV. It will also get the Chrysler 100, slotted in under the Chrysler 200.

Dodge will concentrate on muscle and performance. SRT will no longer be a standalone brand and will get wrapped back into Dodge. No more SRT Jeeps or SRT Chryslers. The Dodge Grand Caravan and Avenger will get axed. Ralph Gilles, who had been running the SRT brand, will no longer do that but will continue to run the Chrysler Group design and racing activities.

Sergio Marchionne says he has reservations about doing an aluminum pickup, like the Ford F-150. He claims that the 3.0 L TDI in the Ram pickup delivers better fuel economy than the aluminum F-150 will.

Strangely, Sergio goes out of his way to criticize Nissan. “The Nissan GTR will never sell,” says Marchionne, “it’s just a weird thing.” Trying to make Nissan a premium brand will never work, he adds.

Marchionne says the two-tier wage system they have at the UAW is not sustainable. But he says they need to freeze the number of tier ones and retire them. Marchionne wants something different than a tier 1 and tier 2 wage system. He says they need something new that reflects the economic health of the company, so when times are good the tier twos make more than the tier ones ever did, but only when economic conditions warrant it. When times are bad he says the company can’t be hurt by uncompetitive labor costs. To us it sure sounds like he’s talking about some new formula for profit sharing.

Pricing in the US market will remain steady going forward because of all the capacity that was taken out during the Great Recession. No one has to chase market share to fill plants, so they don’t have to discount their prices.

Chrysler’s EBIT margins trail GM and Ford because it‘s still fixing up its plants in North America, and it sells proportionately fewer trucks than they do.

In Latin America Fiat’s plant in Betim, Brazil is making 730,000 cars a year, and has a capacity of 800,000. Fiat is still profitable in Brazil while General Motors and Volkswagen are losing money there and cutting production. But to maintain its profitability Fiat needs to add global platforms to that plant. It’s also going to open a new plant in Pernambuco to build Jeep Renegades. FCA’s margins will not recover in Latin America until the Pernambuco plant comes up to line speed.

FCA has a midsize pickup coming for the Latin American market. Reid Bigland, head of the Ram brand, says if they were ever to do a midsize pickup for the American market it would have to be unit body, priced around $20,000, and have a highway fuel economy number in the low 30s. And it cannot cannibalize sales of the full-size Ram pickup. So far he says they have not figured out how to do this.

Richard Palmer, the CFO, says it makes sense to export the Jeep Renegade from Italy to the US market, because it’s going into an unused assembly plant and so they do not have to add capacity. He says the manufacturing costs of the Renegade would be about the same in the US as in Italy, but admits they’ll have added transportation costs and the US 2.5% import duty. But he says using existing capacity drove the decision to export it from Italy. He says Fiat is not at a breakeven point in the EU because of its unused capacity. All Alfa Romeo’s and Maseratis will be built in Italy for the same reason.

Marchionne says he will not raise capital through the stock market right now with Fiat trading at its current prices. But he admits they’re looking at “mandatory convertibles” once they list FCA on the NYSE, set for October, 2014. “Mandatory convertibles” are bonds that get paid off in stock.

He suggests that he’ll break Ferrari out of FCA when the five-year plan works. He says he wants to let the market decide the value of Ferrari, pointing out that it makes half a billion a year in profits and generates $1 billion year in cash. He thinks Ferrari could be valued as high as $15 billion.

Marchionne criticizes other OEMs who he says are holding onto too much cash. “They’re planning for a doomsday scenario. That’s not necessary.”

He says that Chrysler’s recall costs have been excessive in the first quarter of 2014 in the US. And the same goes for all the other OEMs. He says this recall rate is not sustainable for anyone. And of course this is in reference to the hypersensitivity of all OEMs to recalls due to all the public scrutiny with GM’s botched ignition switch defect recall.

Marchionne says FCA is different from other OEMs because its strength is based on its executive leadership. He talks about the need to do what’s right for society, not just for the spreadsheet. “Spreadsheet capitalism does not work,” he says. He also voices concern about income inequality and how it’s not good for the world.

AUTOLINE INSIGHT

This is a very ambitious plan, and some aspects seem overly optimistic. However, that was true of the last 5-year plan. And while it did not hit all its targets, the company is far stronger now than it was five years ago. That is the likely outcome of this new 5-year plan. They won’t hit all their targets, but the company should emerge far stronger than it is today.