Herbert Demel has been the CEO of troubled Fiat Auto for 11 months. The automaker's first non-Italian boss has reorganized the Fiat Auto structure and assembled his own management team since arriving from Austrian coachbuilder Magna Steyr. Demel still must halt massive losses, control costs, deal with excess capacity and launch attractive new products to restore Fiat to profitability. Automotive News Europe reporter Luca Ciferri interviewed Demel at Fiat Auto headquarters in Turin.
In March, you said Fiat Auto's target in 2004 was to at least halve its previous-year operating losses of 979 million. You set a 2004 goal of less than 450 million in losses. In the first half, Fiat Auto had already lost 474 million. What went wrong?
In the first quarter, we performed quite well. In the second quarter, we had to face a major strike at our Italian plant in Melfi, which had a severe impact. The third quarter has been better again. Therefore, during 2004 we will report a further reduction in losses vis-a-vis 2003, although most likely it will not be possible to halve them.
Achieving operating breakeven for Fiat Auto is now set for 2006, while in 2005 you will still report "a small operating loss." Can you be more specific?
We have said "small," and we continue to say "small."
Fiat group CEO Sergio Marchionne has said that by 2007 all operating sectors of the Fiat group should match best-in-class performance. For Fiat Auto, he set a target of 2.4 percent profit margin at the peak of the cycle. Isn't that lower than other mass-market carmakers?
Our goal is to keep us in the average range of the automotive industry. In 2003, Fiat Auto recorded an operating loss of almost 5 percent of revenues, so to reach a 2.4 percent profit margin by 2007 means an improvement of over 7 percentage points, which is an ambitious target.
Except for the Melfi and Pomigliano plants, your other three Italian car factories -- Cassino, Mirafiori and Termini -- on average operate every other week. How can you claim to use 78 percent of your 1.6-million unit Italy-based installed capacity?
Capacity is calculated on 230 days a year on two shifts. At Melfi, we work on three shifts six days a week and the Mirafiori plant is partially running on three shifts for the Fiat Punto, Fiat Idea and Lancia Musa lines. Consequently, on average we use 78 percent of our Italian capacity.
Will Fiat Auto reduce capacity in Italy or will it keep five plants?
There is no need to reduce it. We are often told that we have a big capacity problem. We don't see it as a problem. I would say that what we have to do is to review the layout of some production areas to better utilize our existing plants. We have about 44,000 employees, which is a good number in relation to our volume.
In China, is your slow growth due to lack of products, lack of commitment or lack of financial resources to invest there?
In China, we have a good industrial base and a good dealer network. What we had been missing was an increase in the product range. We have therefore decided to launch the Fiat Doblo there, which will probably take place within the next six months. And, we are developing a more attractive product range for China.
You now have 28 direct reports. How can you manage all of them?
Fiat Auto needed a leaner, more efficient and more competitive structure. At the end of July, we announced the new organizational structure that is "flat" and is based upon teamwork. Therefore, the 28 managers will not work with me on a one-to-one basis, but as a team. Furthermore, they are called upon to make rapid decisions and counted on to execute them. This was, most likely, one of the major disadvantages we previously had.
Let's make one point very clear: no structure works by itself, or by simply announcing it. What matters most is the guiding process. May I ask you something? Have you ever heard anyone ask Riccardo Muti whether he has problems conducting the more than 100 members of the La Scala Orchestra? I invite you to think about us as an orchestra -- a good and determined one, of course.
Is the sector committee still meeting every Monday morning?
In early September we had the last one, because we will work in many smaller groups. Of course, we will continue to bring together all 28 of the top 28 managers, but not every week.
So do you foresee having more small meetings rather than a huge sector meeting?
Clearly. When I came here, there were 18 direct reports, but sector meetings were much bigger. We had already reduced the number of participants at these meetings by half.
What responsibilities have you given the heads of the Fiat, Lancia and Alfa Romeo brands and the boss of Fiat's light commercial vehicle division?
They are responsible for their respective brands' marketing and sales activities and their profit and loss. That means they focus on the strategic positioning of the products -- including content, style, prices, distribution channels -- and on product initiatives including things connected to the life cycle of the models. On the commercial side, they are responsible for sales -- that includes managing the dealer network.
You said this new organization "is designed to create and nurture accountability." But we see a potentially endless conflict between brand and product initiatives since both are profit-and-loss centers. Are we wrong?
You are not wrong! This organization is designed to create an early conflict between the brands. [It pits the brand managers], as soon as they start to outline new models, against the product initiative managers, who has to push for a much higher level of components and systems standardization to reduce investments and variable costs. In the past to increase their product differentiation, Fiat Auto brands adopted an unsatisfactory level of commonization and an excess of industrial complexity. This was due both to a lack of discipline in carryovers and to a too-liberal interpretation of what is really brand relevant.
How much has Fiat Auto saved by developing the 199 project (the 2005 Punto replacement) with GM? How much would Fiat Auto have had to spend if it went solo?
It is not so easy to say. You never know what you would have really spent if you went solo, so it is like discussing virtual numbers. To keep it simple, the cooperation with GM on this platform worked really well and both sides saved money.
The Stilo successor will be built on the current Stilo platform. When will Fiat's and GM's lower-medium, or C segment, platforms converge?
We are talking about 2012, so obviously nothing has been decided yet. Right now, at Fiat Auto, we are planning to internally converge to a single platform for our various future C-segment models. Anyway, to converge with a partner, you need to align product cycles. Right now, that is not the case with GM in the C segment.
Fiat offered two platforms to GM: the Panda's A platform and the Doblo's commercial vehicle platform. What is the status?
I do not know of any activity (from GM) on the A platform. For the Doblo replacement we are currently making some common project studies for the next generations. But it is too soon to say if we could end up making something together.
Are there other GM platforms Fiat Auto is considering?
We are still looking to see if there is something else we could make together with mutual benefits.
Let's talk about Fiat. What is the future of your main brand?
The Fiat brand covers and will cover the A, B, C [minicar, small and lower-medium] segments for sure. Within the framework of the brand positioning, we are quite confident there also is room to play a role in the D [upper-medium] segment.
The so-called New Large is a project you inherited from past management. Can it be successful?
Fiat needs to cover the D segment in its brand mission. We are confident we can find ways to position our new car in the right way. It offers a hybrid bodystyle marrying the roominess and driving position of a minivan with the elegance and drivability of a sedan.
You told analysts that if all new models are like the Panda, "Our 2007 targets will be easily reached." What's so great about that car?
The Panda is an excellent product, which won the European Car of the Year award. That was the first of a number of prestigious prizes it has won. The Panda is highly accepted and is exceeding our forecasts. It has a much higher positioning than its predecessor in terms of content and market perception. For example, air-conditioning is chosen by more than 60 percent of buyers. If we could extrapolate all the positives of the Panda to our future products, then what I said would be right: our 2007 targets could be easily reached.
What is the Lancia brand's potential for Fiat Auto?
Lancia has the youngest product range in Fiat Auto and is our fastest growing brand. We have just launched the Musa in Italy and we are starting to introduce it in other markets. Lancia has a very defined mission: to focus on design, comfort and luxury and not on sportiness, which is Alfa Romeo's mission.
Alfa Romeo has a great image globally, but volume and profitability continue to disappoint. Volume is likely to be down to 170,000 units this year. What is Alfa's medium-term target: 500,000? 300,000?
At Fiat Auto, we are much more continuity-oriented. Let Alfa first start to grow again and then grow with continuity. Three hundred thousand units is a nice number, and if it could be feasible in four years, it would be OK.
What is the latest on Alfa Romeo returning to North America?
It's on the third page of the agenda, and I don't really think that we will open that page in the next few years.
In planning to return to the US, Alfa first considered re-entering in 2004 with a new Spider only. Then it was delayed to 2007 to have a complete range of models. These plans were scrapped last year. So what is the right approach?
I would say you are not obliged to enter a new market with a full range. You can also start with a niche position, and then grow.
Former Fiat CEO Giuseppe Morchio said Fiat Auto was going to close a plant outside Italy, assumed to be the one in India. What is the current situation?
There is no decision to close the Indian plant and we are working to continue our activity in India.
What are the responsibilities of Johann Wohlfarter at the newly created network development & coordination department?
When you have four brands -- Fiat, Lancia, Alfa Romeo, and light commercial vehicles -- there is not only a lot of coordination to be pursued, but there are also conflicts amongst the brands. It may happen in specific areas, and therefore you need somebody who's behind them, who solves the problems at an early stage and who certainly doesn't wait until the brands solve them by themselves.
Is Wohlfarter a sort of referee for the dealers' relations among the various brands?
Absolutely. Especially as the entire network planning has to be coordinated. But Wohlfarter doesn't only have this responsibility. Early this year, we changed the market organization in major European markets, such as Germany and France. We named two figures: the market general manager and the brand country manager. The integration of the two roles is of paramount importance to guarantee a better focus on brand and product, together with better synergies at the company level. I've been responsible for those two markets, playing a neutral role in the organization. We intend to expand such organization to other main markets. Wohlfarter will also be responsible for all the Fiat Auto directly owned dealers. This gives him a function to be a neutral partner for the countries involved, and in a more operative way.
In the medium term, will Europe's other three main markets -- Italy, UK and Spain -- have their own market general manager who reports to Wohlfarter?
No. It's quite common practice with most multibrand carmakers to organize the home market separately from the other major ones.
If a brand appoints a new dealer in a certain country, how does it work?
It depends on the city or area or country. Let's take Germany and France as an example. We have frequently said that we need a network development in those two countries. Wohlfarter's team must identify the opportunities for the development of our network.
Once the styling centers reported directly to the respective brands. Now they all stand under the engineering and design function. Won't this dilute their brand characterization?
No, there is not this risk. In addition, it could create an advantage for Fiat Auto. No one can say anymore "this designer is mine." There will be still Fiat, Alfa, Lancia and LCV people, but they not always remain with the same brand.
Are you going to concentrate all the design people in a single structure?
I didn't say that. But I want to add the various styling centers now can more easily compete on the same project.
Fiat was planning 200,000 units a year of the Panda. What is its production volume?
In the first 12 months of sales, which began in September 2003, we collected 260,000 orders. We plan to build 250,000 units this year, using a number of Saturday extra shifts.
On a scale from 1 to 10, how important is the 199, successor to the Fiat Punto?
I would say it's an 8, but in reality we have to try to make every new launch a 10.
At the Paris auto show the 3+1 was again on display. We know that this concept car, shown first in March in Geneva, is not going to be built as we saw it. Fiat is currently working on a new "mini-car," with two options. The first is to invest about 50 million and build just 50,000 units in total, basing the car on a shortened version of the current Fiat Punto platform, most likely built at Mirafiori or Termini Imerese. The second option is to use the Panda platform, building the new small car in Poland with a target of 200,000 units a year, but also a more substantial investment. What can we expect?
Let's assume that the new car will be launched in 2008. One doesn't have to announce that volume in the autumn of 2004. At the moment, there are evaluations and discussions under way, and then we have to decide which proposal and the volume we want to achieve.
Why wait until 2008? Does Fiat Auto not have the cash to launch it sooner?
No, I would say we have cash and investment for everything, provided we are convinced that it pays off.
Does this mean that you are not personally convinced of the idea of making such a small car?
No, I said it is there. We need our time because we are evaluating several different solutions, at this moment in their very early stage. Then you take a decision. This is the normal behavior in the industry.
Are you going to introduce a three-box sedan version of the second-generation Stilo for China and Latin America?
No decision has been made yet.
While the sedan variant to the next Punto/project 199 was already approved...
I won't talk so specifically about our future products. But this idea is more likely than a sedan from the Stilo successor.
So we will never see a Delta Integrale again?
I would say that a Delta Integrale in its traditional form should not be a Lancia.
The traditional form was a very high-performing 4WD car.
Eventually, it should be more an Alfa than a Lancia.
The Lancia Ypsilon is a success, but it's sold predominately in Italy. How can Lancia reverse that?
First, Lancia is growing faster outside Italy than in Italy -- 15 percent versus 10 percent -- although abroad it is starting from a modest basis. We have had quite a good experience in Spain, where we grow faster. We are still weak in Germany and we are working on it. You don't explode a brand in a country overnight. Nevertheless, the results so far make me confident that we are on the right track because we are growing, on average, faster than any comparable brand in Europe. We are improving both our powertrain mix and our distribution channel mix, and also our margins are improving. Consider that more than 90 percent of the Ypsilon sold are upper versions. Everybody has a development, and up to now the indicators of the development are running in the right direction.
Does that also include the return of a right-hand-drive version for Lancia?
There is no such plan.
Will the Fulvia coupe become a production car or just remain the best concept shown at last year's Frankfurt auto show?
For the time being, it remains the best concept of that Frankfurt show.
The Lancia Musa is part of the old strategy of Lancia that has been around for about 20 years. Fiat added a limited investment -- in this case about 60 million -- to the cost of the new Fiat Idea to derive a nice Lancia variant. Can we expect a C segment Lancia to ideally replace the Delta, derived from the second-generation Stilo?
It's quite feasible that a Lancia future project would address the C segment.
Last year Alfa increased sales in Italy by 2,000 units, but had 10,000 fewer sales abroad. Lancia's big problems began when it became too focused on Italy. What is Alfa doing to avoid this?
This is a general mission that we have. Inside and outside our organization, we must create a much more international orientation. I would say we are progressing well. If you ask the markets and the dealers how we interface with them, also outside Italy, it is getting much more consistent and much closer.
You develop that by working with them and not by telling them what they have to do. This is an orientation to export, an understanding of the local behaviors and necessities and adjustment to that, not to proliferate everything, but to have some vehicle versions that are not only Italy, but also export-oriented.
The 939 project, the replacement for the Alfa 156, the GTV coupe and the Spider, was born as a joint project with Saab, but is now a standalone project. Apart from engines and transmissions, how much is carryover?
The carryover from Saab is 0.
Is the 939 project target 150,000 sales a year at full capacity?
I don't like to speculate in advance with forecasts of volumes.
Alfa said it planned to make 20,000 GTs in 2004, but the Pomigliano plant is very flexible and could make more if needed. In six months, the GT had 17,800 dealer orders, but Alfa said it is raising output to just 24,000 to 25,000 units this year. The numbers don't match -- or isn't Pomigliano that flexible?
Demand is much more than we expected. Therefore, we have increased the capacity in conjunction with our suppliers to increase the output. But we didn't increase it by [making] many additional investments, which is good.
Can the GT keep the same volume next year?
I would be more conservative. These are products that have a very peak cycle, but let's wait and see.
Alfa invested 50 million for a 4wd system for 15,000 units a year on the 156 Sportwagon and Alfa 147 4wd due next spring. Is this an investment that will pay or will it just be an image booster?
For sure, it is an image booster. As far as the bottom line is concerned, as we are talking about a lifecycle investment. We will, in due course, see whether it has paid off.
Premium carmakers have moved downmarket. But Alfa always avoids making a sporty small car, even with project 199. Why is Alfa dropping down into small segments?
This is an option, but it isn't the preferred one.
Are there other options to enlarge Alfa's product line?
Let's talk about it in our next interview.
In Italy, Alfa sales are 90 percent diesel. What is the diesel weight on Alfa's total production?
Around 77 percent.
Is this the peak level in Europe, or could Alfa's diesel mix grow further?
I would say the current level is very high. There should still be room for some Alfas with very high-performing gasoline engines.