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Marchionne will unveil 4th relaunch plan for struggling Alfa

The 4C coupe (shown) comes at a critical time for Alfa, whose global sales this year are set to fall below 100,000 units for the first time since the late 1960s.
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Fiat CEO Sergio Marchionne hopes that betting billions of euros on Alfa Romeo will reverse a decade of losses and six years of collapsing sales at the sporty brand. This year, Alfa's sales are likely to fall below 100,000 units for the first time since 1969. Marchionne's new plan for Alfa – his fourth since he joined Fiat in June 2004 – has the same goal as the one he introduced for its sister company, Fiat's premium subsidiary, Maserati. Under the plan, Alfa will focus on developing premium vehicles to be exported worldwide from Italy.

An effective Alfa relaunch is a crucial element in Marchionne's broader strategy to return Fiat's automotive division to profitability in Europe by 2016. Fiat lost 700 million euros ($928 million) last year in Europe and so far Alfa has yet to make a profit under Marchionne's nine-year watch.

"We continue to work in a pretty determined fashion trying to reshape the Alfa Romeo platform and I think we will be in a position to outline more at the end of the first quarter of 2014," Marchionne said during a conference call with analysts on Oct. 30. He said he would reveal a new five-year strategy for Fiat Group and Chrysler next year, most likely in late April in conjunction with the company's first-quarter earnings report. "We will give an opportunity to look to the five-year plan based on the thorough assessment" of Alfa Romeo and the company's other automotive brands, he said.

'Great brand, no plan'

"Alfa is great brand with no industrial plan," said Arndt Ellinghorst, senior managing director of London consultancy International Strategy & Investment.

Ian Fletcher, a senior analyst at IHS Automotive, said: "In the past, Fiat has tried to address so many projects at once that it appears to have been unable to give Alfa the attention it really needs." Fletcher said a new Alfa strategy could fall short in terms of execution because Chrysler and the rest of Fiat's European operations also need a lot of attention.

Plan execution is also the main risk foreseen by Massimo Vecchio, a financial analyst at Mediobanca Securities in Milan. "Marchionne could still relaunch Alfa, it is just a matter of money and execution," he said. Vecchio also said that in the future Alfa's products would have to be genuinely premium and not merely pretend to be and he questioned whether the company still has the skills needed to achieve this.

New underpinnings

The revised Alfa plan will focus on a new rear-wheel- and all-wheel-drive architecture being developed by a small team of engineers based at Maserati's headquarters in Modena, Italy. The team is headed by Philippe Krieff, who reports directly to Harald Wester, Fiat-Chrysler chief technical officer and CEO of Alfa and Maserati.

Krieff, a French-born engineer, joined tire maker Michelin in 1987 and became responsible for Fiat's chassis and vehicle dynamics 11 years later. He moved to Ferrari in January 2012 as head of vehicle development. Krieff's team is working on a new vehicle architecture needed to help Alfa compete more effectively against German rivals BMW and Mercedes-Benz, both of which already offer the rwd and awd cars favored by many driving enthusiasts.

Alfa, however, will be unable to generate sufficient volume in its own right to achieve any worthwhile economies of scale. So Krieff's architecture must be flexible enough to be used by Chrysler and Dodge brands as well. With a global volume of 101,000 units last year, Alfa sold less than one-tenth as many cars as BMW and Mercedes. There are two key reasons for this: Alfa is product starved – its current models are the MiTo subcompact, Giulietta compact and 4C coupe. The automaker is also almost entirely dependent on a slumping European market. In the first 10 months of this year Alfa's European sales fell 30 percent to 53,604 units, according to data from the industry association ACEA.

The new architecture is expected to help reverse this trend. It will underpin at least four new Alfa models: the Giulia mid-sized sedan and wagon, a large flagship sedan and a mid-sized SUV. The first of these vehicles is due to debut in Europe in late 2015 or early 2016. All Alfa models built on the new architecture will also be sold in the United States, the world's second-largest market after China, where Alfa has long wanted to regain a foothold. Sources say the architecture could also underpin the replacements for the Chrysler 300 and Dodge Charger large sedans, as well as the future Dodge Challenger coupe.

Marchionne's previous plan for Alfa, unveiled in April 2010, sought to achieve annual sales of 500,000 units by 2014. Due to delays in new product launches, however, that target was lowered, first in September 2011 to 400,000 units and then in October last year to "more than 300,000 units."

Analysts are much more pessimistic. IHS, for example, expects Alfa only will sell about 77,000 units globally next year. The market forecaster envisages Alfa annual sales recovering to a peak of about 239,000 units in 2017 and 2018, then decreasing to 223,000 in 2020. To put this dismal performance into context, Audi expects to achieve global sales of 1.5 million units this year and to be selling 2 million units a year by 2020.

Chrysler or Alfa?

Analysts are also skeptical about Marchionne's new plan for Alfa because it could conflict with his other mission, which is to take full control of Chrysler Group. Mediobanca's Vecchio says that with its current capital structure Fiat simply does not have enough cash to buy the remaining 41.5 stake in Chrysler and also to spend billions reviving Alfa Romeo. ISI's Ellinghorst agrees, saying that Marchionne could do "neither ... unless he fixes the issue of combining Chrysler and Fiat cash."

However, Richard Hilgert, an automotive analyst at Morningstar in Chicago, thinks that prior to acquiring the remaining stake in Chrysler Marchionne could prepare an entirely new capital structure for the enlarged group. This would let the CEO: fund the relaunch of Alfa; support new product development for Fiat in Europe; and fund the Chrysler purchase. "I think the company could negotiate a financing package prior to closing on a Chrysler deal with the VEBA [the trade union pension trust that is Chrysler's minority owner]," Hilgert said.

To date Fiat has kept secret its plans for new Alfa models and the investments required for the company's relaunch. Mediobanca's Vecchio expects Fiat to put 5 billion euros into Alfa over the next five years. This includes 800 million euros each for five new products and the balance for marketing and distribution.

Marchionne hopes that revamping Alfa, in much the same way that Maserati has been, will help ignite a production boom. The ultimate aim is to turn the company's currently underutilized Italian plants into export champions. It is hoped they will end up working around the clock to meet unprecedented global demand for such stylish models as the Maserati Ghibli and Quattroporte large sedans.

Alfa’s last successful model, the 156, debuted in 1997 and achieved peak global sales of 120,000 in 2000.

Aiming at the 'higher end'

"We will focus on Alfa Romeo and Maserati to access the higher end of what we consider to be a permanently polarized market," Marchionne said in October, when he reiterated that Fiat would not close any Italian vehicle plants. The Cassino, Melfi, Mirafiori and Pomigliano plants have the capacity to make more than 1 million units but last year their combined output declined by 18 percent to 394,620 units, according to the Italian automaker association ANFIA.

Industry observers say that as a rule of thumb automakers need to be working at around 75 percent to 80 percent of capacity just to achieve break-even. Last year, Fiat's Italian plants worked at 40 percent of capacity.

"The Maserati [third-quarter] numbers are an initial indication of the route to success of the strategy that we've outlined," Marchionne said. Between January and September this year Maserati's sales rose by 63 percent to 7,458 units – more than the 6,288 cars sold in the whole of 2012 and well on course to beat its 2008 record of 9,000 units. Revenues grew consistently in each quarter this year, reflecting increases in shipments. There was a corresponding improvement in profitability, with a first-quarter trading loss of 4 million euros followed by trading profits of 9 million euros in the second quarter and 43 million euros in the third.

Maserati received about 22,700 orders in the first nine months this year and in November its main plant in Grugliasco, near Turin, finished the 10,000th car built since January. The company said it built 8,200 Quattroporte and 1,800 Ghiblis in the period.

Fiat plans to invest 1.5 billion euros in Maserati between 2011 and 2014 and to sell 50,000 cars a year by 2015. "Our investment [in new models] is starting to pay off," Wester said adding that he aims to deliver a strong profit. "We plan a two-figure operating margin by 2015," he said. For 2012, Maserati had a 6.6 percent operating margin on sales of 634 million euros. This improved to 9.7 percent in the third quarter on sales of 444 million euros. Wester expects revenue to grow nearly tenfold to about 4 billion euros by 2015.

Based on what has been achieved so far at Maserati, Morningstar's Hilgert believes a relaunch of Alfa could work. "Maserati has global brand recognition as a premium automotive company. Alfa has similar global recognition, but as a brand that represents a premium, small, sporty, fun-to-drive carmaker," he said.

Other analysts doubt Alfa can match Maserati's success. "Maserati is super niche," Ellinghorst said, "while Alfa competes with other mass makers and needs global distribution." Said Vecchio: "Maserati is simply a stronger brand."

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You can reach Luca Ciferri at lciferri@crain.com.


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