Global Insight Perspective | |
Significance | Fiat is aiming to grow outside of its domestic Italian market, looking to its new arrangement in China and building on its success in Latin America to boost its global presence. |
Implications | With a new deal signed with China's largest carmaker and a plan to boost production in Latin American to 1 million units, Fiat is looking to develop a truly global manufacturing footprint to ensure its future stability. |
Outlook | China is key to Fiat's growth and future success, and although the new deal with Chery is late in the day, it means that the Italian carmaker is now involved with a company with the scale to succeed in the fast-growing market. Latin America is a complex conundrum for Fiat, as it must decide how to grow rapidly in the heated environment without sacrificing efficiency or ending up with an expensive over-capacity legacy should the market turn. |
Fiat Chief Executive Officer (CEO) Sergio Marchionne has detailed the company’s global growth strategy, which involves planned investments of 17 billion euro (US$23 billion) worldwide on increasing production capacity and launching new models. The investments will be made in the period from 2008 to 2010 and will entail the launch of 16 to 20 new models on the European market during the period, including some facelifts and updates of its current line-up, according to an Autodata Brazil release.
A significant portion of the investment will go towards Fiat's Latin American operations, one of the key driving forces behind the recent good financial results of the Italian group, and a major factor in its overall recovery process during the past few years (see Latin America: 13 August 2007: Fiat to Invest 2 bil. Euro in Latin America, Raise Production to 1 mil. Units by 2010). Latin America will receive investments valued at 5 billion Brazilian reais (2 billion euro) between 2008 and 2010, expanding production to 1 million units. “We will expand our production capacity in the region to 1 million units, new models will arrive in the market, and our market share in Latin America, which is currently between 13% and 15%, will increase”, Marchionne announced last week in the Argentine capital, Buenos Aires, during the launch of the lBrazilian-made Fiat Grande Punto.
Fiat will also invest a significant amount in China to establish its recently announced joint venture (JV) with Chery, the company’s second in the country. “The market in China is difficult to understand. Despite knowing that the results for Fiat will only come after 2010, those who do not enter [that market] will regret it”, said Marchionne. Fiat's deal with Chery is still in its formative stages, but it has ambitious plans for the new alliance, with an initial production target of up to 175,000 units per annum (upa). The partnership will include a contract that will see Chery supply Fiat with its 1.6- and 1.8-litre gasoline (petrol) engines (see China: 7 August 2007: Fiat Confirms Contract for China's Chery to Supply Engines) and the tie-up is highly significant as Chery has long held a position as China's largest independent carmaker with no JV alliance with a foreign carmaker, although it has signed an agreement to supply Chrysler Group with B-segment vehicles for export.
Chery's domestic sales growth has been impressive in recent years and the company has a ready-made dealership, service and distribution structure that Fiat may tap into with the models resulting from the JV. It is also a highly significant development for Fiat, which has been hamstrung in the Chinese market by its underperforming JV with Nanjing Automotive, which manufactures a number of variants of the 187 “world car”, including the Palio, the Siena, and the Perla (see China: 25 July 2006: Nanjing Fiat Unveils Perla Model in China). In 2006, the JV sold a total of 31,300 units, giving Fiat around 0.7% of the Chinese passenger car market. Fiat has a publicly stated target of selling 300,000 passenger cars in China by 2010, and the deal with Chery now makes this a potentially realistic target. Fiat's existing partnership with Nanjing Automobile Co. has been failing and its long-term future is still uncertain, although the JV recently acquired a new managing director (see China: 17 August, 2007: Nanjing Fiat Announces New Managing Director).
Marchionne also stated that in other emerging markets Fiat will follow the partnership strategy pursued in China, and similar arrangements are planned or in progress with Tata in India, and with Russian companies. Marchionne also touched upon Fiat’s strategy to re-enter the U.S. market with Alfa Romeo: “We know that it is the market that represents the maximum efficiency and, as such, the intensity of the punishment is the same as the intensity with which it allows growth. They do not forgive mistakes. We are looking at this large market through Ferrari, Maserati, and, in 2009, we will enter with Alfa Romeo, but we know that, during the first three years, we will not have any profits. It is similar to China, in the sense that it is as fascinating a market, as it is dangerous.”
Outlook and Implications
Fiat's investment plans on the model development front will centre on maximising its expertise in the smaller segments, bringing out derivatives of its existing model range, including the resurrection of its aspirational, sporting Arbarth brand. Further expansion of Alfa Romeo is essential and Fiat will attack new segments with its premium brand and look to resurrect the iconic brand in the key U.S. market, although somewhat cautiously. Fiat's model offensive will largely concentrate on defending its share in its main market of Europe. As with many European companies, Fiat is looking to grow outside of Europe in emerging markets, and this is essential for the future stability of the company. For Fiat to establish itself as a true global player with a manufacturing footprint to match, it needs to establish a recognisable presence in China and look to move its winning small-car line-up into the country as quickly as possible.
Although Fiat plans to enter the Chinese market with the Chery JV with both its Fiat and Alfa Romeo brands, it will be the former that is the main sales driver for the group in the market. Fiat has criticised Nanjing Automotive for a lack of commitment to their JV project, but the fact remains that the model line-up is unloved and uncompetitive and Fiat must acknowledge its role in this failure. However, the positive news is that Fiat is currently undergoing a resurgence as a result of an impressive model renewal programme that has resulted in the company returning to its core values of making excellent small cars. This has resulted in the launch of the A-segment Panda, B-segment Grand Punto, and the new Mini-rivalling 500, which have all made their debuts in the last four years. The company has also launched the new C-segment Bravo in 2007, as well as unveiling the Linea model in 2006, which is aimed at developing markets such as Eastern Europe and Turkey. This model could also be built in China and is likely to be the beneficiary of the earlier deal for Chery to supply Fiat with 1.6- and 1.8-litre gasoline passenger car engines. There are signs that Chinese consumers are ready to accept smaller, more fuel-efficient passenger cars, and Fiat is extremely well placed to meet rising demand in the market. However, it has missed the mark in this respect with the Nanjing-Fiat range of vehicles, and this JV's days may be numbered as a result, despite both parties having pledged additional investment earlier this year.
In South America, Fiat's prospects are limited only by the constraints on capacity. Today, the production limit is 860,000 units per year, composed of 700,000 in Brazil and160,000 in Cordoba (Argentina). Although it has committed to producing 1 million units in the region by 2010, where the extra capacity will be installed has not been detailed. In line with our previous assumption that the company would have to either expand existing facilities or build new ones, Fiat could potentially purchase Daimler's Mercedes-Benz Brazilian facility in Juiz de Fora, in its home state of Minas Gerais. The recently built, but severely under-utilised plant could well be the answer to a few of Fiat's problems, and some of Mercedes’ as well. Another possibility is expansion of its Iveco commercial vehicle plant in Sete Lagoas, also in the same state of Brazil. Fiat's cautious approach to expanding in the region is the result of experience after rapid expansion programmes in the 1990s left it with expensive, under-utilised plants following the financial crash in the region around 2000.