Fiat Turns to High-End Production

Sergio Marchionne, who is chief executive of both companies, outlined a recovery plan that was fundamentally different than Fiat’s rival, Ford, which last week said it would shutter three plants in Europe. Both Fiat and Ford reported Tuesday higher losses in Europe, though overall profit rose because of healthy sales in the United States and elsewhere.

Instead of closing Italian factories, which have been producing fewer than half as many cars as they could, workers there will focus on producing Alfa Romeos, Jeeps and Maseratis, Mr. Marchionne said. Those premium Fiat brands have higher profit margins, but they must significantly increase their sales for the plan to succeed. Production of lower-priced Fiats will be shifted to countries where costs are lower.

“Building things is a lot more exciting than retrenching,” Mr. Marchionne said during a conference call with analysts Tuesday. Referring to the revival of Chrysler, he said, “We have to do it one more time.”

It has become increasingly clear that the decline in European auto sales, which have fallen 20 percent in the past five years, is more than just a temporary slump. Ford said Tuesday that it “believes the changes in the European business environment to be structural, rather than cyclical, in nature.”

The crisis in the auto industry has emerged as another threat to European stability because of the number of jobs at risk. The car industry employs about two million people in Europe, plus millions more who depend indirectly on automakers.

Last week, Ford announced plans to close three factories in Europe and eliminate 5,700 jobs. Analysts have predicted that other European carmakers would be compelled to follow suit. But Mr. Marchionne said that it made more sense to keep Fiat plants open.

Closing factories “would have relegated us to being a minor player in Europe because of the social delocations,” he said. “I’ve run the numbers both ways. This is the best economic choice we can make.”

Fiat reported Tuesday that its net profit globally more than doubled to €286 million, or $370 million, in the three months through September. Revenue rose 16 percent to €20.4 billion as the company sold more than a million vehicles.

But the company, based in Turin, said it would have lost €281 million in the quarter without profit from its Chrysler unit, which on Monday reported an 80 percent increase in earnings.

Mr. Marchionne’s decision to keep open the Italian plants was a surprise. As recently as September, at the Paris Motor Show, he had been lamenting Europe’s failure to do something about factories that have been operating at a fraction of their potential. The underused factories are ruinous for carmakers because companies must continue to pay fixed costs like worker salaries and maintenance.

The decision is good news for Italy, which is in recession and struggling to maintain its credibility with international bond investors. When car plants close, the damage quickly spreads to suppliers and the regional economy, costing tens of thousands of jobs and undercutting tax revenue.

Even as he expressed optimism that Fiat brands can win a share of high-end markets now dominated by BMW, Mercedes and Audi, Mr. Marchionne painted a grim picture of the European auto market.

Sales in Italy, the company’s core market, will be the lowest since 1979, Fiat said. Although Fiat closed a factory in Sicily last year, the company’s Italian plants are producing less than half as many cars as they could if they were running three shifts a day. Fiat will not break even in Europe until 2015 or 2016, Mr. Marchionne said.

In characteristically colorful terms, he acknowledged that it would be difficult for Fiat to break out of its dependence on less expensive, small cars. “It is shark-infested waters and you’re bound to lose some parts of your anatomy,” Mr. Marchionne said.

At the same time, Mr. Marchionne said, Fiat and Chrysler plants outside Europe were operating at full capacity, opening a chance for Italian factories to produce for export. He outlined plans to introduce seven new Alfa Romeo and six new Maserati models by 2016 that would be made in Italy for sale outside Europe, including the United States. In addition, he said, a new Jeep model would be produced in Italy for export beginning in 2014.

Fiat’s control of Chrysler allowed the company to return to the American market and means “we are no longer a marginal player,” Mr. Marchionne said.

“We now face the future together as a four million-plus vehicle producer,” he said. “The opportunities that are available to both of us now are opportunities that neither of us would be able to extract on our own.”

Article source: http://www.nytimes.com/2012/10/31/business/global/fiat-turns-to-high-end-production.html?partner=rss&emc=rss