Marchionne, the Italian who took Fiat from the nearly fatal embrace of the Agnelli family and miraculously revived it, is trying to do the same for America’s bankrupt Chrysler. The grand plan is based on delivering must-buy vehicles to the showrooms at attractive prices that will end up by expanding production and market share. English-born Reilly however has the unenviable job of saving Opel, the European brand of an also bankrupt General Motors, by cutting back production, closing plants and laying off workers.
Both are well aware of the maths. The market for new cars in Europe and USA is in decline and both Fiat and Opel are competing for fewer buyers. The market was boosted last year – more accurately, saved – by the cash-for-clunkers scheme that gave owners of older cars discounts for trading them in for new ones, but that’s due to run out unless governments change their minds and extend it. Needless to say, the car industry has mounted a diplomatic offensive across Europe to persuade them to do so.
The scheme boosted Fiat’s car sales alone by nearly six percent as customers piled into low-cost Pandas and Puntos, helping deliver a trading profit of €1.1bn [$1.5bn] in 2009. But the Fiat chief warns that the abolition of the scheme will dump his brand’s car sales by a disastrous 20 percent in Italy alone. Marchionne believes Fiat needs to sell six million cars a year, roughly three times what it does now, to achieve the essential economies of scale. If he can pull that off, clearly Fiat’s gains would come at the expense of other brands including Opel, Peugeot, Renault and other middle-priced producers.
Nobody’s disagreeing with the cold hard facts. According to automotive analysts, European car sales will be down by 1.5 million this year as the “cash for clunkers” scheme runs out in those countries that adopted it. That’s 4.5 million fewer cars than in the peak year of 2007. Sales are not expected to return to the levels of that pre-crisis golden year for a long time, if ever.
Elsewhere in Europe, General Motors has cast off Saab, the Swedish brand that has been draining it of cash. Saab was only saved from extinction by a €400m [$555m] loan from a Swedish government desperate to preserve jobs. That loan, arranged through the European Investment Bank, persuaded Spyker, the boutique manufacturer of high-performance cars, to take the brand over. The parent company was also in talks to sell Opel to Magna, Ontario, Canada-based supplier of automotive parts, but the deal fell through.
For his part Marchionne doesn’t hold out much hope for Saab’s future. “It is very difficult to be a niche player and be profitable,” he says.
As for Ford-owned Volvo, the other Swedish marque, it’s being sold after several disappointing years to China in a $2bn deal [€1.44bn] with Zhejiang Geely Holding Group. If nothing else, this reinforces the view of Marchionne and other titans of the industry that China will be the next automotive powerhouse. That would further threaten those European brands without global scale.
In this embattled automotive world, nobody disputes that both Chrysler and Opel are fighting for survival. When the dust settles, says Marchionne, only six global automotive manufacturers will survive. And nobody’s predicting the immediate demise of Toyota, Honda, BMW, Volkswagen or Mercedez-Benz.
The current period of breakneck consolidation means whole factories will have to go – indeed, they already are – over the protests of governments and unions. For instance, the Fiat boss has identified the Ypsilon-producing plant in Sicily as hopelessly uneconomic – “a cathedral in the desert” – that last year cost the company €1,000 [$1,400] for every vehicle it produced. Although the Sicilian staff » » immediately downed tools, Marchionne has famously got his way with Fiat’s once-intransigeant unions. He plans to move production to Poland.
Meantime at Opel, it’s costs rather than cars. The German auto-maker is acknowledged to have quality models already sitting in the showrooms such as the Insignia and Astra, with the Meriva imminent, but is weak on alternatively-fuelled vehicles. On his first visit to Opel headquarters at Russelsheim, in the Rhein-Main region, in January, Reilly took immediate action to combat chronic over-capacity. A large facility in Antwerp will be closed with the loss of 2,600 jobs. Half of the German workforce was already on short-time work anyway. Including the wind-down of the plant in Belgium, he confirmed Opel will in the near future shed some 8,500 Opel jobs – approximately eight percent of GM’s 50,000 employees across Europe.
Predictably, the hard man from Britain has run into trouble in Germany. “I didn’t know Britain produced managers as mad as this,” grumbled a letter-writer to the Suddeutsche Zeitung, the main newspaper in the region.
He is at least a car guy. One of Reilly’s top priorities was to give Opel’s latest models a thorough-going test drive in all conditions, even over ice and snow. He pronounced the Insignia as a breakthrough.
At 61, Shanghai-based Reilly has seen more than his fair share of automotive upheavals, albeit not as grim as this one. A stalwart of GM who joined the firm 35 years ago, he started in the boondocks in the truck division and has held down increasingly tough jobs in South America, Europe, Asia and the US. From China, as the director of GM’s international operations he wields responsibility for the Daewoo, Opel and its sister Vauxhall brands among others. It was a job he was given in mid-2009 after the parent company had been rescued under President Obama’s TARP programme originally designed to save the financial sector. Effectively, he’s now the grand panjandrum of Opel/Vauxhall worldwide.
His turnaround plan is a two-fold one based on promoting the product and cutting red tape. Russelsheim will be reduced to a mere branch of GM that is controlled by Reilly’s lieutenants – he has already installed a new chief financial officer – from his base in China. Simultaneously, the all-action Reilly has mounted an offensive on a surfeit of bureaucracy. In Germany, non-car staff will be reduced massively, by about half according to some reports. In Britain, Vauxhall’s people have been told to spend less time sitting in meetings and in writing reports. Daringly, decision-making powers will be pushed down the line, even those related to capital spending. Nothing is more likely to inspire middle management than this kind of trust.
Meantime his team is working to reduce manufacturing costs to a level that is considered the break-even point in this brutally competitive market, in exactly the same way as many oil and gas companies have a strategy of achieving profits at a certain price per barrel.
And in a six-page, mainly up-beat letter that praised German engineering and fully endorsed Opel’s motto of “We live cars”, he warned against laying the blame for the auto-maker’s woes on the bankrupt parent. “That’s creating a victim mentality”, said the new boss.
Among Europe’s big brands, Opel is considered particularly vulnerable because it has an excess capacity of 20 percent. According to a GM spokesman, “Opel won’t make a cent in 2010”. That’s partly why Reilly’s new team is negotiating a €3.3bn package from European governments to help keep the business on the road.
At Chrysler, Marchionne has different though related goals. He emerged as the effective boss of Chrysler in July last year when Fiat took a controlling 20 percent stake in exchange for agreeing to provide the technology to build more fuel-efficient cars in a deal brokered by the Obama administration. (Marchionne also tried to acquire Opel on the cheap, which would have turned Fiat overnight into a global automotive powerhouse, but the German government thwarted him.)
A former accountant and tax specialist with Deloitte whose last job was running Switzerland-based SGS Group, an industrial verification and certification company, Marchionne is acknowledged to have achieved miracles in sorting out Fiat since taking over in 2004. He did so through much-improved quality control and must-have models. But the stakes are even higher with Chrysler, which Fiat acquired through an unusual three-step recovery plan. Basically, Fiat ends up with 35 percent of Chrysler if, as agreed with the government, it can create those fuel-efficient engines in the US (actually, at Michigan), launch a car capable of doing 40mpg – a project dear to President Obama’s heart, and extend the brand’s international reach.
Thus neither recovery programme is just about cutting costs. Both chief executives pin their hopes of a revival on a roll-out of new machinery. The details are under wraps but, as the first cars to emerge under Fiat’s control, the 2010 Chryslers will attract an unusual amount of attention for a variety of reasons quite apart from the fact that their success will be crucial to the automaker’s recovery. Not only will they be the first to appear in showrooms under Fiat’s wing, they will reflect the Marchionne management method in all its glory.
After locking in control of Chrysler, the English-speaking Fiat chief spent a good part of 2009 unpicking the brand with the marque’s top brass. “We started last year a piece at a time rebuilding the component elements of the brand equity,” Marchionne told reporters at the Detroit Motor Show. “These things take time, but I think 2010 is the crucial year. We need to do most of that work (of restoring consumer confidence in Chrysler) in 2010. When the new product offerings come into the market place starting in the second quarter, this year we will see a rebuilding of that equity in terms of actual sales.”
That equity-building exercise has a long way to go. In a year of collapsing sales, Chrysler’s collapsed faster than its rivals, in part because of a tired offering. Last year the brand’s sales were down 35.9 percent compared with 30.1 percent at GM and 15.4 percent at Ford. But, as the Fiat boss said at the Detroit Motor Show in January, the Chrysler phoenix won’t arise in one day or even one year: “By the end of 2011 and in early 2012, you should be able to tell how our plan is working.”
For his part, Reilly is gung-ho about an Opel revival. “We need to take bold decisions and be held accountable for those decisions,” he told staff in his letter. “By taking the right decisions, we will reverse the downward trend in market share, we will return to profitability, we will have a brand that people want to buy and be associated with and we will lay the foundations of sustainable success”
The car guy in him clearly loves the slogan “We live cars”, which has the ring of Nike’s “Just do it” and has more heart-felt appeal than Audi’s “Progress through technology.” And he’s selling the turnaround under the headline of a “conqueror mentality”.
In their respective countries, Chrysler and Opel are much-cherished brands that have produced many iconic cars over the years from Chrysler’s first SUV and the Prowler to Opel’s much-praised Insignia. Thus the automotive world is closely watching their fight-back. It’s just that, until mid-2009, nobody expected Fiat to hold Chrysler’s future in its hands while everybody expected GM would wash its hands entirely of Opel.