TURIN -- Fiat Auto's weaker-than-expected performance in the first half means the company will almost certainly miss its full-year target.
The Italian automaker is expected to report a second-quarter operating loss of E212 million this Monday, narrowing slightly from a loss of E234 million a year earlier.
Combined with a E192 million first quarter loss, the shortfall for the first half will be more than E400 million.
Fiat Auto CEO Herbert Demel said in March that "to halve our [full-year 2004] operating loss is our minimum target, but we hope to achieve more,"
That goal now appears impossible to reach.
In 2003, Fiat Auto's operating losses narrowed to E979 million from E1.34 billion a year earlier. Having posted a E44 million profit in 2000, Fiat Auto had cumulative operating losses of E2.8 billion over the next three years.
"We have just updated our full-year operating loss prediction to E650 million," says Valeria Sgaramella, auto analyst at Banca Leonardo in Milan. She predicted a second-quarter loss close to E250 million.
Demel's forecast assumed a stable European car market and more pressure on automotive net pricing. Pricing is indeed under pressure, as carmakers continue to offer cut-throat incentives. Analysts predict net prices will fall 1 percent to 1.5 percent this year.
But western European sales rose 3.3 percent in the first six months, according to ACEA, the European automakers' association. Fiat sales increased 5 percent in the first six months, to 601,535 units from 572,838.
Fiat cited three weeks of strikes at its Melfi, Italy, plant as the main cause for the disappointing second-quarter results. Fiat lost 38,000 units of production, mainly Fiat Puntos and Lancia Ypsilons. Analysts said that slashed E80 million to E100 million from results.
At an Automotive News Europe roundtable in London last week, analysts said Fiat Auto's recovery will be long.
"It is very difficult to see how Fiat Auto will reach operating breakeven," said Max Warburton, executive director of global investment research at Goldman Sachs.
Warburton doubts Fiat Auto's long-term profitability because it is weak in spare parts sales and financial services, areas where other automakers make the bulk of their profits.
"Fiat has a very weak dealer network outside of Italy, so it is quite difficult to be really profitable with spare parts," he says.
And last year, Fiat sold 51 percent of consumer financial arm Fidis.
Fiat can't cost-cut its way to profitability, says Arndt Ellinghorst of Dresdner Kleinwort Wasserstein.
"Fiat Auto has the lowest cost base in the European automotive industry," he says. "There's almost nothing more to cut, so recovery can only come on the revenue side."
Sabine Blümel, an analyst at Banca IMI, says: "Fiat Auto could reach breakeven, but I do not think they could return to stable profitability."
Nigel Griffiths of Global Insight says Fiat has serious problems managing its three car brands.
"They have no idea what they are doing with Lancia," he says. "The Fiat brand is too weak in the Stilo segment. This year they will build about 130,000 Stilos out of a 400,000 unit-a-year target at launch."
Analysts don't expect Fiat to fail.
"Fiat is made of unknown but great people. Don't forget they invented the platform strategy, the module strategy, the common-rail diesel," says Warburton.
Adds Ellinghorst: "We saw turn-arounds at companies in worse shape than Fiat, like Nissan. I think Fiat could recover and return to be competitive, not against VW, but mainly competing with the cheap and cheerful Koreans brands."