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Marchionne’s Latest Five Year Plan Rightfully Addresses the Core Problems at FiatChrysler (Part 1)

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On May 6, CEO Sergio Marchionne presented his latest five-year strategic plan for the newly unified FIAT Chrysler Automobiles NV (FCA). Investors have most certainly not embraced the plan and remain sceptical at best, with the stock price of FIAT SpA falling more than 11% as a result. However, at €7.54 (US$10.38) at the time of writing, this is still higher than at any point during 2012 and 2013 and is arguably more of a knee-jerk reaction to the group’s weaker-than-expected Q1 results which were actually only dragged into the red because of the US$491 million cost of acquiring the remainder of Chrysler. Moreover, I see the logic behind the plan and fundamentally support it as Marchionne attempts to address two core issues that are plaguing FCA; Europe’s squeezed middle and the group’s under-representation in key emerging markets. In this first piece of two, I discuss the situation in Europe.

As part of Europe’s squeezed middle, FIAT sold just 552,000 passenger cars in West Europe in 2013, far short of the 900,000+ units sold in 2007 to 2009. Although European car sales are recovering (Euromonitor forecasts 5% growth in 2014 and that a new sales record will be set in the early 2020s), it is especially noteworthy that premium brands have consistently increased their market share and our income distribution data suggests that demand for premium cars will already ascend to a new peak in 2016 and reach 5 million units in 2030, based on a projected 28% market share.

It therefore makes perfect sense that Marchionne is focusing on expanding the upscale 500 range of vehicles and Alfa Romeo rather than the core FIAT brand. In fact, according to an article in Automotive News Europe on May 8, “The five-door Punto replacement will launch in 2016. It will be a longer and wider version of the 500 three-door minicar that is built in Tychy and could be named the 500 Plus, sources told Automotive News Europe.” In other words, even core FIAT product is being positioned higher but the real news surrounds the announcement that courtesy of a €5 billion investment, Alfa Romeo will gain 8 new models. This then leaves the group with a portfolio of premium products ranging from the growing 500 family through Alfa Romeo, Maserati and Ferrari. This is a major transformation for the group’s European operations and an incredible but sensible, almost necessary one.

Coincidentally, it has recently been reported that PSA is seeking to target VW by taking its Peugeot brand upmarket and has just appointed a new head for its offshoot DS premium brand and so their strategy is therefore not entirely different to Marchionne’s. Intriguingly, whereas investors are seemingly baulking at the investment in Alfa Romeo, it is the slow conversion of the FIAT brand to the 500 sub-brand that interests me and given the staggering growth in value brands in Europe, I do wonder if there is not scope for FIAT eventually to develop into a value brand to compete against Skoda and Dacia for example.

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