Fiat's UK-style revival plan faces Italian hurdles

Marchionne says Fiat plants have a bright future making "premium segment, high-quality products."

MILAN (Reuters) -- Idle plants, surly unions and a weak, aging model lineup -- the challenges facing Fiat-Chrysler's Italian revival sound a lot like the British car industry's low point in 1982.

CEO Sergio Marchionne will be hoping the similarities don't end there as he orders up sporty new Alfa Romeos and sleek Maseratis in a bid to repeat in Italy what British brands like Mini and Jaguar have since achieved under foreign ownership.

After cementing its marriage to Chrysler in January, which will move the group's domicile and main share listing abroad, Fiat is turning back to long-delayed plans to relaunch its Alfa and Maserati marques, with which it has pledged to revive Italian production.

This week's Geneva auto show may offer early clues as the company wheels out a cabriolet version of the recently launched Alfa Romeo 4C coupe, along with the first Italian-made Jeep.

Marchionne said last month that Fiat plants have a bright future making "premium segment, high-quality products with reduced competition, more attentive customers and higher margins."

Like the British auto industry, which now exports 80 percent of its car production, Fiat aims to tap overseas demand. That could soften the fallout from a six-year meltdown in Fiat's core southern European markets, where a nascent recovery promises to be slow.

But Marchionne faces hurdles including a big investment outlay, a difficult Italian business climate and heavy unionization among the workforce of 62,000.

"For a premium brand you need a broad offering of cars, but that's very expensive and takes time," said Commerzbank analyst Sascha Gommel. "I'm not sure Fiat can deliver that."

BMW's Mini and Tata Motors-owned Jaguar Land Rover have become cash machines for their parents, helping to propel British car production to a six-year high in 2013, including half a million Nissans made in Sunderland, northeast England.

Automakers announced 2.5 billion pounds ($4.2 billion) of U.K. investment last year as national output rose to 1.59 million light vehicles, narrowing the gap with France, Europe's No. 3 manufacturer after Germany and Spain. Italian output was below 630,000 vehicles, less than half its total a decade earlier.

To halt European losses by 2016, Marchionne is counting on 104-year-old Alfa to combine higher pricing than the mass-market Fiat brand with heavier sales volumes than Maserati.

Little gem

Marchionne has pledged to unveil a new strategy in May -- expected to include tough goals for an array of new Maseratis and Alfas built at plants like Cassino, south of Rome.

The 4C coupe is off to a decent start; 1,200 European orders since sales opened in December, with the U.S. launch yet to come. The BBC's Top Gear show called it a "fantastic little gem."

Maserati's vital statistics are also encouraging: trading profit tripled last year as deliveries more than doubled to 15,400 cars -- though still far short of a 50,000 target for 2015.

Neither brand needs the restoration job that brought Mini and Jaguar back from nationalization and near-death after U.K. auto production bottomed out below 900,000 vehicles in 1982.

But Fiat will still have to invest many more billions to revive Alfa, turn Maserati into a higher-volume marque and boost the global renown of both brands.

"I just wonder if it has the money to really drive a strong interior build-out of Maserati and Alfa," said Arndt Ellinghorst, a London-based analyst at ISI Group.

The group has almost 20 billion euros of cash, but 30 billion in debt. While the tie-up deepened Fiat's pockets, Chrysler needs a costly makeover of its own to keep up with General Motors and Ford Motor Co., Ellinghorst said.

Underlining the strain, Moody's last week cut Fiat's debt rating to four notches below investment grade.

Several promised revivals have stalled since Fiat bought Alfa in 1986, leaving behind a weak reputation for quality and just three models, including the 4C. With about 100,000 annual sales, the brand is dwarfed by Audi's 1.57 million deliveries last year, a gap many doubt it can narrow significantly.

No government help

Italy's business environment is another challenge -- ranked by a World Bank survey as 65th out of 189 economies for ease of doing business, compared with Britain's 10th place -- and its cash-strapped public coffers are unlikely to help.

"The government has nothing to put on the table," said Fabiano Schivardi, an economist at Rome's LUISS University.

Marchionne's plan is seen as "the only chance" for an Italian auto renaissance, he added.

Senior Nissan executive Andy Palmer credits consistent U.K. government support, financial aid and 1980s labor reforms for its repeated decisions to build new vehicles in the country.

"Grant aid tips the balance," he said. "It registers a clear government interest in having a particular car there."

Palmer, who sits on Nissan's executive committee as chief planning officer, believes Japanese management and competitive plant benchmarking were also essential to the U.K. revival.

While Fiat Chrysler has some lower-cost production experience in China, he added, "I'd question whether they have access to what we would call lean manufacturing."

Even if Alfa and Maserati exports take off as hoped, they will fill just a fraction of spare capacity at Italian plants, which last year built less than one-third of their 1.87 million vehicle maximum output, according to IHS Automotive data.

Marchionne has promised to save all Italian sites and re-instate thousands of workers on state-backed temporary lay off, but union officials don't believe he can.

"There's no way the premium strategy can fill all the manufacturing capacity in Italy," said Federico Bellono, general secretary of the Fiom union's Turin branch.

What happens next may depend on whether new Prime Minister Matteo Renzi makes good on reform pledges, cutting labour costs and red tape to emulate recent French and Spanish moves towards greater flexibility.

And if Marchionne can convince politicians and workers that his plan leads to eventual recovery and job creation, it may help win acceptance for short-term sacrifices. Gianluca Spina, dean of Milan Polytechnic's MIP business school, believes the new Alfas and Maseratis can find a place in the market with the right balance of glamor, design and performance.

"Being successful in the premium segment doesn't mean having to beat the Germans on volume," Spina said. "If they make beautiful cars that sell, then they have a shot."

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