Marchionne's big gamble on Alfa and Maserati comes at a time when rivals such as PSA/Peugeot-Citroen, General Motors and Ford Motor are negotiating to close European car plants to adjust to shrinking demand and to end big financial loses in the region.
Marchionne has said for years that European volume automakers must make painful capacity reductions to become profitable in Europe again. Now the CEO has accepted that it is politically impossible for Fiat to close factories in Italy. To fully use the group's underperforming Italian plants, Marchionne aims to increase Maserati's annual sales to more than 50,000 by 2015 from about 6,000 last year, and he wants Alfa to triple sales to more over than 300,000 by 2016.
Boosting exports from Italy to global markets makes sense as the European new-car market has shrunk every year since peaking at 16 million units in 2007. New-car sales dipped 8 percent to 12.5 million in Europe last year and volume is forecast to slip below 12 million this year. Analysts don't see a return to the pre-crisis sales level until the end of the decade at the soonest.
Marchionne is also wise to concentrate on the Fiat Group's higher-end brands, especially considering the success of BMW, Audi and Mercedes-Benz. The three German premium automakers have avoided the European sales declines that have plagued most volume brands over the past few years. In addition, all three have added shifts or shortened vacation periods at their European plants in recent years to keep pace with strong demand for their models in countries such as China and the United States.
"We will focus on Alfa Romeo and Maserati to access the higher end of what we consider to be a permanently polarized market now," Marchionne said last month.
Can't do both?
Analysts are skeptical about Marchionne's new plan because it will likely conflict with his other mission, which is to take full control of Chrysler Group. Industry watchers say Fiat simply does not have enough cash to buy the stake it still needs to take over Chrysler and also to invest billions to revive Alfa Romeo and Maserati.
"While Fiat adapting its product to a polarizing market makes sense, we think the market could be disappointed that capacity actions do not feature in Fiat's plans, especially given Ford, GM and PSA have all made tough capacity decisions recently," Morgan Stanley analysts wrote in a note to investors. In early February, Marchionne reiterated that Fiat won't close any Italian vehicle assembly factories. The Cassino, Melfi, Mirafiori (Turin) and Pomigliano plants have an installed capacity of 1 million units, but last year their combined output declined by 18 percent to 394,620 units, according to the Italian automakers association ANFIA.
An automaker should use from 75 percent to 80 percent of installed capacity to reach break-even, industry observers say. Last year, Fiat's capacity use rate was about 40 percent in Italy and just above 50 percent in the rest of Europe, which includes plants in Poland, Serbia and a joint venture in Turkey.
Managing capacity might get even harder for Fiat as it adds production in Italy. In January the automaker reopened an abandoned Bertone plant outside of Turin, where it plans to build up to 50,000 Maseratis a year. If Marchionne's plan to build upscale vehicles in Italy works, high-margin Alfas, Maseratis and Jeeps will offset the country's high labor costs and low labor flexibility.
2 million vehicles
The CEO envisions Fiat's European plants building about 2 million cars, SUVs and light commercial vehicles annually by 2016, up from 1.25 million units last year. At that production volume, Marchionne says that the company would break even in Europe.
By 2016, about half of the additional 750,000 units built in the company's European plants will be sold in Europe and the other half -- dominated by Alfa Romeo, Maserati and Jeep models -- will be sold in global markets, according to Marchionne's planning.
Analysts believe Marchionne's mission might be too costly to achieve.
"Fiat's plan to move upmarket comes with a big price tag. With up to 18 billion in capital expenditures to fund over two years, net debt is unlikely to decline before 2015, meaning a full buyout for Chrysler may be off the table for some time," Morgan Stanley said.
Barclays Capital also signaled concern in a recent analyst note. The firm wonders how Fiat can succeed when most of its rivals "are pursuing the opposite strategy of trying to localize production to hedge against currency risk." The analysts also said: "Competitors have tried on numerous occasions but failed to push upscale, with the notable exception of Audi."