Sergio's survival guide

Analysts are convinced FCA has a strategy for staying alive in the next downturn

June 04, 2018 01:00 AM

Reuters

Sergio Marchionne wore a tie Friday to celebrate FCA's net cash position. He later ditched it, but Agnelli family scion John Elkann held it like a trophy.

As fragile as Fiat Chrysler Automobiles has appeared to be in recent years, on Friday the company laid out a determined and doable strategy for the post-Sergio Marchionne era — one that should position it to be a highly profitable, stand-alone automaker for the foreseeable future.

That's a far cry from where FCA stood in May 2014, when it last presented a five-year business plan. Then, analysts scoffed at financial projections for 2018 — projections the company is now on track to hit.

And it's a world away from where the company was in November 2009, shortly after Fiat assumed control of a bankrupt Chrysler and presented a plan that would resurrect a company left for dead.

Analysts are no longer scoffing.

"What they presented today really does feel like it builds on what they've accomplished in the last five years," said Stephanie Brinley, principal automotive analyst with IHS Markit who attended the Friday, June 1, presentation in Balocco, Italy. "They are aggressive, but there's logic behind the targets. The difference between today and 2014 is that FCA is done now needing to set up for an IPO, and done with proving that they can do the things they need to do" to survive independently.

Last week, FCA said it could achieve adjusted earnings before interest and taxes of between 9 and 11 percent by 2022, compared with 6.3 percent adjusted EBIT in 2017. And it said that it would end this month with more cash on hand than debt on its books for the first time since what ultimately became FCA was jammed together almost a decade ago.

Unlike previous five-year plan presentations, CEO Sergio Marchionne and top lieutenants provided few specifics on product timelines, powertrain offerings and volumes. And they had to address persistent criticisms of their previous plans for neglecting how the company would compete in fledgling technologies such as electrification and autonomous driving, and in other industry experiments such as subscription models.

CFO Richard Palmer — seen as a potential CEO when the 65-year-old Marchionne retires in early 2019 — painted a detailed picture of how FCA would remain profitable even if auto sales in North America or globally plunge 20 percent, marking a sharp departure from Chrysler's historical susceptibility to U.S. market downturns.

Aiming high

Financial performance goals in FCA's business plan
	2017	2022*
Adjusted EBIT	$7.7 billion	$15.2 billion-$18.7 billion
Free cash flow	$1.8 billion	$8.8 billion-$11.7 billion
Margin	6.30%	9-11%
*Estimated
Notes: EBIT is earnings before interest and taxes; all figures exclude planned Magneti Marelli spinoff
Source: FCA

Palmer and Marchionne also promised that FCA, often criticized for not investing in its products, would spend at least €9 billion ($10.5 billion) to electrify most of its global lineup, and another $52.5 billion to develop products. All this while projecting a further reduction of FCA's gross debt from the $15.3 billion it owed at the end of March to about $11.7 billion by the end of 2022.

While it will be expensive, FCA's electrification push will be broad and varied, including mild hybridization to full-electric vehicles. It will cost more money than it generates, but it won't be as bad as the $14,000 it lost on every copy it sold of the first full-electric vehicle it produced, the 2013 Fiat 500e.

"They gave themselves a lot of flexibility," said Michelle Krebs, executive analyst with Autotrader. "It will be challenging times for dealers as they change directions and change products."

But while Marchionne and his team tried to lay out as bright a future as possible for the automaker, some seats at FCA's table were notably absent.

Mike Manley laid out plans for Jeep and Ram, which he oversees, and Tim Kuniskis presented plans for Maserati and Alfa Romeo, which he took over in February. But there was no such detailed discussion of a future for Chrysler, Fiat and Dodge.

Marchionne later said the differences weren't a slight, but a recognition that Jeep, Ram, Maserati and Alfa Romeo "represent 80 percent" of the company's expected profits during the coming years, while the other brands represented just a small piece of FCA's financial planning.

"I think their strategy is well thought out," said Rebecca Lindland, executive analyst with Kelley Blue Book.

"They're maximizing where they can and should, and are focused on their core competencies in recognizing that not every brand is right for every market and every situation. They've had to make some hard decisions when it comes to legacy brands — it's ironic that the two brands [in FCA's name] are the two brands that are most marginalized."

Dealers excited

For FCA dealers, the presentation paved a path forward that showed new products will be flowing to their showrooms with new technologies that they've been unable to offer before.

It also gave them hope that FCA would soon get its own captive finance arm, a possibility that Palmer suggested FCA would pursue, either through creation or acquisition.

Doug Wilson, CEO of Wilson Auto Group in Jackson, Miss., which sells Chrysler, Dodge, Jeep and Ram, along with Hyundai and Kia, said he is excited about the product and financing plans.

"The possibility of getting a Ram midsize pickup and also a seven-seat Grand Cherokee — I think both of those would be excellent. I'm pleased," Wilson said. "I think it's a natural evolution. Consumers are demanding pickups and SUVs and crossovers, and that naturally leads to more product development in the Jeep and Ram brands. I think it only makes sense."

Randy Bierlein, dealer principal of Schaefer and Bierlein Chrysler-Dodge-Jeep-Ram-Fiat in Frankenmuth, Mich., said, "The fact that Dodge and Chrysler weren't mentioned is a bit concerning, but the thing is that I don't see them abandoning the Chrysler name.

"Unfortunately, as dealers, we're just pawns in this whole thing," Bierlein said. "It's not like we have any say in it. I think they have a firm feeling on Jeep and Ram right now. SUVs and large trucks are good right now, but that's because of the economy."

Last time

While analysts, investors and dealers pored through the details of FCA's long-term plans, its iconoclastic CEO — the man who long ago became the sweater-clad personification of the company he helped to create, save and eventually thrive — repeatedly declined to say which of his top lieutenants would succeed him.

One of them, he said, would be tasked with implementing FCA's 2018-22 business plan when he is named the next CEO, but all of them would be responsible for carrying it out.

Amid all the other achievements, Marchionne said putting together a capable leadership team was among his best.

He said, "I've become irrelevant in all of this."