The Re-Making of Fiat: Remodelling the Last Chance Saloon Sergio Marchionne Chief Executive Officer Fiat Group 1
Choosing between carmakers is often like trying to pick the least flearidden dog. FT Lex Column, May 4, 2005 2
When you sleep with dogs 1 High Cost 2 3 4 Low Cost 5 The financial performance of the industry has been dismal, with a few exceptions. The capital markets an increasingly jaundiced view of it, as a destroyer of value. There is clearly something wrong with its economic model. 80,000 Average Revenue per unit, 2001, $ Long Term ROIC*=WACC** Porsche Value Destruction BMW Mercedes Chrysler Ford VW GM Mazda MMC Fiat Nissan Value Creation Honda Renault PSA Hyundai KIA Toyota *Return on Invested Capital **Weighted Average Cost of Capital 60,000 40,000 20,000 0 Source: G. Maxton & J. Wormald, Time for a model change: re-engineering the global automotive industry, Cambridge University Press, 2004 3
The automotive industry Value destruction at work 300 Source: JPMorgan, Datastream 250 Europe Autos ( ) rebased to market US ($) autos relative Japan (Y) relative 200 150 100 50 - Jan-73 Jan-75 Jan-77 Jan-79 Jan-81 Jan-83 Jan-85 Jan-87 Jan-89 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 The financial performance of the industry has been dismal, with a few exceptions. The capital markets take an increasingly jaundiced view of it, as a destroyer of value. There is clearly something wrong with its economic model. Source: G. Maxton & J. Wormald, Time for a model change: re-engineering the global automotive industry, Cambridge University Press, 2004 4
The 2002-3 Prognosis Fortune January 13, 2003 Business Week, May 13, 2002 5
Historical Returns on Sales - Selected Automotive Groups 15 10 5 % 0 94 95 96 97 98 99 '00 '01 '02 '03 '04 '05-5 -10 Year Ford Nissan Toyota Renault Peugeot GM Fiat Auto Data of European companies under IAS since 2004 6
Automotive News Europe, June 14, 2004 7
I feel like Zsa Zsa Gabor's fifth husband. I know what I'm supposed to do but I don't know if I can make it interesting.. Al Gore, Jr. 8
What We ve Accomplished in 2005 Posted 1.4bn net income in 05 after 4 consecutive years of net losses, a 3.0bn swing from 04 Regained strategic flexibility after resolving GM relationship Collected $2 billion from GM to unwind relationship Targeted, no-equity alliance strategy across automobile value chain 8 (7 auto-related) cooperation/licensing industrial agreements in less than 12 months Resolved all major outstanding financial issues (ItalenergiaBis & Convertible loan) Secured sound financial structure Net industrial debt slashed by 2/3 to 3.2bn Re-shaped & strengthened management Streamlined/right-sized governance structure at Auto; work in progress at all other sectors, Achieved first quarterly trading profit at Auto after 17 consecutive quarterly losses 9
Q1 2006 Financial highlights - Operating Performance Improvements Across the Board Group revenues up 16.7% to 12.6bn Autos: +23.2% on success of new models Group trading profit up 276mn to 323mn Fiat Auto at 57mn trading profit main contributor to swing (+ 186mn) Net income at 151mn, up 363mn (excluding non-recurring gains in 05) Positive net industrial cash flow of 0.3bn; 1.9bn swing from 05 (net of GM settlement) Sharp reduction in working capital needs, chiefly at Auto Net industrial debt at 2.9bn, down 0.3bn from 05 year end Debt to equity at 0.31:1 8.8bn in cash at March end (up 1.8bn) following bond issues for 1.4bn All targets confirmed, with Fiat Auto trading profit guidance raised to 200 million 10
McKinsey Corporate Performance Database 1962-1998 Source: McKinsey & Company Formed a pool comprising the top 80% of US companies (249) measured by market capitalization. They allowed companies to enter and exit the pool to ensure that it always contained the top 80% of US companies. 64% of the 1962 pool was still there in 1998 80% condition required tracking 1008 companies 759 new companies came into the pool, and only 70% survived 20% of the 1998 pool was not there 5 years prior. 11
The Gales of Creative Destruction the process of industrial mutation incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has to got to live in. Source: McKinsey & Company Joseph A. Schumpeter Business Cycles: A Theoretical, Historical and Statistical Analysis of the Capital Process 12
Fiat then Fiat, almost alone among major European auto manufacturers, is racing along with profits and sales at all-time highs. Fiat achieves production efficiency by making 35% of its auto parts interchangeable, brings out a full line of models, and can respond quickly to new market opportunities by producing a new model in a mere 18 months. Life Atlantic October 28, 1968 13
The Telecoms Bubble Glorious Hopes on a trillion-dollar scrapheap Financial Times, September 5th, 2001 $4 trillion spent on telecoms in US and Europe during 1997-2001 Result is a glut of bandwidth 1or 2% of installed fibre optic was lit on installation Technology has increased yield per fibre 100 fold Market value of all telecoms operators and manufacturers down by $3.8 trillion since peak Estimated waste of $1 trillion 14
The Red Queen Well in our country, said Alice, still panting a little, you d generally get to somewhere else - if you ran very fast for a long time as we ve been doing. A slow sort of country! said the Queen. Now here you see it takes all the running you can do to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that! L. Carroll Through the Looking Glass 15
Analysts fixation 16
What s wrong with this picture? We think Fiat has a strategy to improve shareholder returns by exiting the auto industry...in our opinion, Fiat s main attraction is a possible re-rating of the Group as a capital good stock in the event of a disposal of Fiat Auto... (JPM, Nov 04) Life beyond Autos?...the issue is not whether Fiat Auto s earnings improvements are sustainable (in general, it is fair to assume that auto earnings are not) but how Fiat Group will use its improved group balance sheet to reduce its exposure to the auto industry (JPM, Mar 06) Fiat Group is currently valued like a mass auto maker we believe a massive re-rating could be triggered by a spin-off or disposal of Fiat Auto (SocGen, Mar 06) 17
Assume that what you just discovered the competition already knows 18
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