General Motors insiders say GM has worked out a detailed strategy for integrating Fiat Auto, the deeply-troubled carmaker that Fiat SpA seems ready to sell.
A team of GM executives in America and Europe is making plans to blend Fiat Auto with Adam Opel, according to company sources. The team is preparing for joint product development, coordination of the various brands and models, and acceleration of purchasing, powertrain and back-office synergies.
GM is trying to make the best of a bad situation, possibly even a disastrous one. After acquiring 20 percent of Fiat Auto two years ago for $2.4 billion (E2.56 billion), GM is committed to buying the remainder of the distressed carmaker if parent Fiat SpA chooses to sell it.
Meanwhile, Opel's own operations are struggling and GM must also plan how to integrate the Daewoo brand in Europe. Adding Fiat Auto to the mix would be another distraction for top management.
Fiat SpA could force GM to buy the rest of Fiat Auto by exercising a put option that takes effect in January 2004. But GM sources say they want to do the deal now - before the crisis at Fiat Auto gets worse.
The thinking inside GM is 'the sooner the better,' said a GM executive who asked not to be named.
'We wanted to take over Fiat as a whole two years ago, but [Fiat patriarch] Giovanni Agnelli refused this plan,' he said. 'All we could get was 20 percent and this put option. But our aim hasn't changed. We want the whole thing.'
GM has hired US investment banks to advise on the takeover. Sources say Chief Financial Officer John Devine is spending most of his time in New York, working out a strategy with bankers for getting Fiat as quickly as possible - and on the most favorable terms.
Two scenarios are being discussed internally:
* Taking over Fiat Auto, but not its debt - paying a fair market price for the shares.
* Getting the shares for free and assuming all liabilities.
Sources say GM favors the first route, resembling its recent acquisition of key assets of Daewoo Motor.
'Our Daewoo agreement is an example,' said a company official. 'We were able to acquire control without taking over the debt. And the deal excluded those parts of the business we weren't interested in.'
The combination of GM's European operations and Fiat 'looks good on paper,' said John Casesa, analyst for Merrill Lynch in New York. But Casesa added that GM would face a long, difficult job in integrating Fiat into its manufacturing, product development and brand positioning: 'It's a high-risk, high-reward proposition, even more so than the other [GM] alliance partnerships.'
General Motors CEO Rick Wagoner said last week that GM is not in talks with Fiat.
But company sources say GM executives in the USA and Europe are working out the details of bringing the two companies together.
'These aren't theoretical games,' a GM source said. 'We are in the middle of an analysis phase and the result is a very detailed integration plan that involves all business areas. We are prepared for Day One. We can start immediately with full integration of Fiat into GM Europe.
He added: 'We want to make sure that we don't lose years and money, as happened to Daimler when it took over Chrysler. We won't have digestion problems integrating Fiat.'
Still, few think the integration would be easy.
'There would be huge integration problems,' said a Fiat executive who asked not to be named. 'There would be tremendous cultural problems in terms of platform sharing. GM would need visionary leadership.'
The Fiat insider said GM would find value only in the Alfa Romeo brand and the Punto supermini, which the executive claimed was the only profitable Fiat-badged model.
Umberto Agnelli, 67, brother of Giovanni Agnelli, is understood to be ready to sell the car division that Giovanni has vowed to keep. Giovanni, 81, is currently undergoing treatment for a prostate condition in New York.
'It is our duty to permit [Fiat Auto management] to work in optimal conditions, even if this doesn't happen with Fiat Auto as part of the Fiat group,' said Umberto Agnelli last week. The younger Agnelli is chairman of IFI and IFIL, the two family-controlled financial holdings that own 30 percent of Fiat group shares.
It was the first time an Agnelli family member has said publicly that Fiat Auto could be sold.
Besides Umberto Agnelli's impatience, GM may not want to wait for Fiat's deteriorating results to get worse, according to a note to analysts issued last week by Merrill Lynch.
'The deal offers the long-term promise of making GM a powerhouse in Europe, but it will require investment, in capital and management attention, sooner rather than later,' according to Merrill Lynch.
Together, GM Europe, Fiat and Daewoo would be Europe's No. 1 in unit sales volume. Their combined 2001 western European sales were 3,141,280, equal to a 21.2 percent market share. Volkswagen group was No. 1 last year with sales of 2,700,042, an 18.9 percent share.
'We are No. 1 globally, but with Fiat and Daewoo sales we would be No. 1 in Europe, too,' said a GM executive. 'This would dramatically strengthen our position as a force in supply and procurement, distribution and logistics in Europe. This is the charm of a Fiat takeover.'
The source said the partners' current areas of cooperation don't go far enough. Fiat and GM two years ago formed purchasing and powertrain joint ventures and have since begun codeveloping platforms for the next Fiat Punto and Opel Corsa and the replacements of the Alfa Romeo 166, Saab 9-5 and Opel Omega.
'What we need is a common development process and a component matrix,' the source said. 'So far we don't truly have joint development at Fiat and Opel. All we have are a few joint projects. There is enormous potential for synergies when we have a common component matrix. Each brand can then use whatever component it wants, while concentrating on developing brand identity and brand differentiation.'
Fiat Auto lost E429 million in the first quarter of 2002. It is slashing spending on new products, marketing and manufacturing in hopes of holding full-year losses to no more than the E549 million it lost last year. Opel lost E674 million in 2001.
GM executives say the integration would accelerate Opel and Fiat's turnaround plans because cost-saving measures could be applied on a broader scale.
'There are maybe five nuts and bolts you can save when developing a new electric window at Opel and about the same at Fiat,' the source said. 'But if you save the whole cost of developing that device at one company and add the combined purchasing power, then one plus one equals much more than two. This will help both return to profitability faster than if they are on their own.'
GM executives say they have already worked out plans. For example, Fiat, with its JTD common-rail diesel engines, would take the lead on diesels. Opel, with its highly economical Ecotech engines would lead in gasoline-engine competence.
Small-car development would be led by Fiat. Opel would head development of compact and midsize cars. Saab would take the lead in premium segment cars, which would likely feature rear- and all-wheel drive only.
GM says it has been making decisions based on the expected takeover.
'We would have never agreed to share the Corsa component matrix with the Punto if we weren't sure that all of Fiat will be part of the family soon,' the source said. 'And we are planning to integrate the next-generation Stilo into the GM Europe component matrix.'
Positioning brands would be a problem. Opel and Fiat already compete directly in every significant segment. And the brand strategy is further complicated by the need to position Daewoo in Europe.
But plans already exist for both the differentiation of brands and coverage of all market niches, according to the GM source.
'We will quickly ensure that overlaps in the product portfolios of the brands are avoided in order to eliminate cannibalization,' he said. 'And there will be niche models in all market segments, though not by each brand in each segment. We will make sure that the niche products will be absolutely in line with the respective brand message.'
GM expects dramatic savings not only in product development and purchasing costs, but in logistics and in the distribution network. Potential back-office synergies are huge, the source said.
Fiat's overcapacity problem is the only problem GM officials say they cannot address before taking control of the company. But executives in Detroit are watching closely and possible solutions are being discussed internally.
'We know that we can only grow with a refined multi-brand strategy,' the manager said. 'GM wants to grow, especially in Europe, and Fiat with its strong customer base, especially in the southern European markets, fits perfectly into our strategy.'
A GM spokesman said that the $2.4 billion GM paid in the initial deal does not suggest what GM might pay for the other 80 percent of Fiat Auto.
The valuation would be set in consultation with investment bankers. Also, the initial $2.4 billion included the cost of setting up the GM-Fiat joint ventures for purchasing and powertrain, the spokesman said.
Other analysts questioned the benefits GM would gain from buying the rest of Fiat.
'When they announced the deal two years ago, they said they would get 80 percent of the benefits from owning 20 percent of the company, which raises the question of why they need to buy the remaining 80 percent,' said Michael Bruynesteyn, automotive analyst for Prudential Securities in New York.
Management distraction could be a significant problem, said Scott Sprinzen, managing director for credit-rating agency Standard & Poor's in New York. He said GM already is occupied with restructuring Opel. And, like Bruynesteyn, Sprinzen said GM is already enjoying significant savings in its joint purchasing and powertrain operations with Fiat.
'It's hard to know what the additional benefits would be in a full merger,' he said.
Mark Oline, managing director for Fitch Ratings, a credit rating agency, in Chicago, said GM is likely to try to accelerate the timing of the deal. Though he said Fitch is watching the situation closely, Oline said GM probably could afford the deal.
Still, Oline said, GM probably is unhappy to be in its current position: 'Would they do it all over again? My guess is probably not.'