The reason behind Fiat Chrysler's wholesale pricing action is simple: profits -- or the lack thereof.
FCA US' revenues and market shares are booming. It has picked up 3.3 percentage points of market share in the United States from 2010 through 2014.
Yet at profit margins of 4 percent, parent Fiat Chrysler Automobiles' margins are half those of General Motors and one-third those of Ford Motor Co., says auto analyst Max Warburton of Bernstein Research. Margins are earnings before interest and taxes expressed as a percentage of total revenues.
The situation is a growing problem for the now publicly traded FCA, especially as it talks about merging with or acquiring another automaker. Higher profits and stock price give the company more negotiating clout.
In a detailed report to investors last week, Warburton found numerous reasons why FCA's profits have been substantially lower than those of GM and Ford.
Among his findings:
- High industrial costs: FCA has spent heavily to retool factories that were starved of investment by Chrysler's previous owners.
- Growing head count: The automaker has added about 30,000 jobs in the United States since 2009 and its head count has returned to its prerecession levels, though productivity also has climbed.
- "Below the line" stimulus: FCA has been "uniquely aggressive with incentives ... but has organized them in a way that does not appear in the incentive data" that are compared with incentives of other automakers. Warburton finds that FCA has been dropping gross profits to dealers, and then using items such as its Volume Growth Program payments to make the dealers whole.
Under the program, dealerships that reach monthly sales targets receive substantial payments.
Speaking to reporters at FCA's annual shareholders meeting on April 16 in Amsterdam, CEO Sergio Marchionne reacted strongly to Warburton's assertions on FCA's pricing in the United States. But he also recognized that FCA's margins are an ongoing problem.
"I fundamentally disagree with the report thesis that we have depressed our pricing conditions to increase our sales or market share," Marchionne said. He said in some cases, FCA vehicle prices are low because the vehicles are waiting for redesigns, such as the company's minivans.
Marchionne said the automaker has been researching ways to increase its margins for two months. It has settled on twin solutions that will affect dealers and suppliers. Last August, Marchionne said he envied the profit margins of some FCA suppliers and would like to share in their success.
He said: "Our extraordinary volume growth [in North America] stretched the supplier base and therefore created the conditions for us to be forced to accept from suppliers extraordinary increases in [their] prices."