Fiat will push its rivals. The CEO says his successor as boss of automaking division must be fearless: Sergio Marchionne expects Fiat Auto to win more than 570,000 sales from its European competitors between now and 2010. In the past, a bold statement like that from a Fiat Auto CEO would have caused the industry to collectively roll its eyes. Not anymore. The automaker has been on a roll since February 2005, which is when Marchionne added responsibility for Fiat Auto to his job as Fiat Group CEO. 

The 54-year-old chief executive recently told Automotive News Europe Chief Correspondent Luca Ciferri that Fiat Auto wants to be chased by its competitors rather than the other way around. The two spoke at Marchionne’s office at Fiat group’s Turin headquarters.

You predict western European sales will be flat until 2010, but you expect Fiat Auto to increase its sales from 1,329,000 units this year to 1,900,000 by 2010. Which competitors will give up the largest portion of those sales to you?

We are not targeting someone specific, we are only looking for space in the market. How it gets surrendered, I really do not care. The competition will pay the price for success, which is what happened to Fiat Auto. We were pummelled between 1997 and 2005. I think we need to get it back.

Even if you reach your 2010 targets, Fiat Auto will remain one of the group’s weakest performers in terms of operating margin. Is this because of the structural weakness of Fiat Auto or because of the sector’s overall low profitability?

It is undoubtedly true that (Fiat Auto) has historically had a very poor track record of earning a decent return on capital. It has been a destroyer of value for a long period of time. We are playing in a box, which is structurally not used to generating adequate returns. It is not just my issue, but one that affects everybody in the industry.

Is it nearly impossible to generate big profits making cars today? 

I look at the other carmakers and I say to myself, okay, it may be true that eight other guys look like me, but there is one guy who does not, and he looks phenomenally different. This guy is Toyota. Toyota can play this game differently. I think we have to learn from what Toyota has done and to close the competitive gap. Over the next four years, I think we are going to make a significant dent in that gap. What we have that Toyota does not have – and I say this with all modesty – is the great historical heritage of the brands. If we play this the right way, there is probably a competitive advantage over their product line. However, I still think that, from a manufacturing and engineering standpoint, Toyota is miles ahead. I call them a flawless-execution machine and they are – it is scary to watch them. They have not missed a beat.

If Toyota remains miles ahead, where will Fiat Auto and other European automakers be in the future?

If Fiat (Auto) can get to the point where it can start earning returns that are commensurable with the capital commitment that it is making, you will have a tendency to push the other guys to do the same. If we are successful, we will also drag the others along. This is all going to become a level playing field sooner or later. This industry cannot continue destroying capital at this level.

A year ago, you said the best investment Fiat could make would be to buy its own shares. Since then, the company’s shares have more than doubled in value to about €15. Would you give the same advice again?

I would still do it. I think Fiat group is on its way to making the 2010 numbers. The market will eventually recognise what we are doing. When you look at the (projected) earnings for 2010, we are going to make €3.5 billion net  (But) I never worry about valuation. I worry about what drives that valuation. What drives it fundamentally is the delivery of what we commit to.

You say that next year you will name one of your ‘kids’ to succeed you as Fiat Auto CEO. What are the main characteristics you want in the future CEO?

Fiat Auto is still an underdog, and underdogs need special care, since the leadership team that runs that business cannot know fear. If it knows fear, it will do nothing. The kind of leader who can ensure this mass of leaders continues to function properly has a unique set of qualities. These are people who are very good at running what I call ‘creative collaborations’. They are, at least visually, rather messy collections of relationships that make the organisation thrive and that need to be looked after constantly. It is a continuous maintenance process – and it will take a while for Fiat Auto to institutionalise that kind of management style as part of its DNA. It is not there yet. In regard to the question of whether I will leave in 2007, I will try to find a successor. I will only do so if I can find someone who ensures that what we started is finished.

How is Fiat Auto’s relationship with suppliers evolving?

Fiat and its suppliers have had a very strange relationship for a long time. We over-promised and under-delivered. The over-promise was not just to the press and the markets, but also to suppliers, which got used to thinking: If you say 100, you really mean 50. From now on, when we say 100, we mean 100. If you deliver 50, you are out. It will, therefore, take them a while to get rid of their bad habits. 

Will your B-compact architecture underpin your family of low-cost cars?

It is the lowest cost to make. That does not mean we will not do any other (low-cost models). This is the least expensive of our platforms.

Are the B-compact models Fiat’s answer to the Dacia Logan by Renault?

In broad strategic lines, the answer is, Yes. But I do not want to comment on whether they are the anti-Logan or not. The Logan was designed to be a spartan, limited-choice vehicle by definition. I think ours have greater potential than that, but I do not want to be derogatory about the Logan. It was a gutsy call to introduce it.

Part of your plan to boost Fiat Auto’s sales from 2.12 million this year to 3.5 million by 2010 calls for a nearly three-fold volume increase to 332,000 units in ‘the rest of the world’. What markets are in this group?

Eastern Europe, Japan, South Africa and the markets where we are represented by private importers we have neglected historically. We have just launched Fiat Auto brands in Mexico and Australia. Our competitors have done a very good job of positioning their brands outside of the traditional ‘grazing’ zone. We have done nothing, so we need to go play in those markets.

You want Alfa Romeo, Lancia and China each to reach 300,000 sales by 2010. Which is the toughest challenge?

China, by far. The market is there, but I am not sure we are. That is why I spent so much time building resources in China. The remedial work we are doing in China is significant. That market was neglected for a long period of time.

Between 2006 and 2010 you plan to spend €1 billion to fix your dealer network in Europe. How much will you need to spend on network development starting in 2011?

About €120-€150 million a year, probably closer to €150 million. 

Fiat Auto will reduce its number of vehicle architectures from 19 today to 11 by 2010 to 6 by 2012. That means you will go from building 1.7 models and 150,000 units a year per architecture to 3.7 models and 450,000 units by 2012. How much will this save the company?

About 25 percent to 30 percent both in R&D and capital investment. It is much more difficult to give a realistic and reasonable range for the cost of components, because that also has to do with manufacturing and the commonality of the components coming off the architecture. My suspicion is that, engines and transmissions excluded, (the saving) would be about 10 percent to 15 percent in production costs.

Fiat Auto will base seven models on its small architecture and produce more than 900,000 units a year off the platform once all the models are launched. Are you looking for a partner for this architecture?

We have discussions going on, not just in connection with this. To the extent that I own the platform and want to allow people to come onto the platform and do things with us, I am also willing to go onto theirs. We have already seen the benefits of this sharing with the mini architecture. It was born for the Panda and planned in 200,000 units a year. With the new 500 and the other model (the Ford Ka successor), we will reach 400,000 units a year.

Your B-compact architecture will underpin six models. What is the anticipated volume for that platform?

About 500,000 units a year. That is enough to be profitable using it just for Fiat Auto but, as said before, we will be more than happy to share it with others.

Could you tell us more about the new B-compact architecture?

It is structurally a scaled-down (small architecture), so we are not starting with a clean sheet of paper. It is designed to replace the Palio (world car family) and the Uno in the long term, being built and sold in western Europe and in emerging markets. Initially, I rejected the idea of creating our own architecture. Before we go spend a buck, let us find out whether we can join forces with somebody else. I told my guys to talk to other people and they did. We ran the numbers and the volumes; we looked at what the architecture had. But it did not have enough for us to go ahead and provide us with the solidity of a platform that would have allowed us to do what we wanted. Economically, therefore, it was not worthwhile. So we will build it alone, but there is enough volume in that to be profitable.

A year ago, you said you were 20 percent complete with your work to fix the Fiat group. Where do you stand now?

Not much further. The problem is that the objectives a year ago were different compared with today. We set 2010 targets, so the amount of work and the way in which we measure what has been spent in terms of resources is all in relation to the ultimate objective of the endgame. A year ago, the 2010 targets were inconceivable. If I stood up and told you that we would make a €5 billion trading profit in 2010, many of you people would have laughed out loud. We certainly lacked the credibility in 2005 to talk about 2010. 

In the past, good times at Fiat Auto meant good times for Turin-based design houses and engineering centers.  Why is this not happening anymore?

Interesting question, but I was not here when this parallel development was going on. First, our in-house design capabilities have been strengthened significantly. Thus the reliance on external designers for our brands today is important, but not crucial. Second, when you look at our engineering capabilities, they are much stronger than they have been since I have been here and are getting progressively better. Our need to rely on others, therefore, is decreasing.

Fiat Auto used to outsource much of its engineering work. Can you now do everything in-house?

With 23 new products and face-lifts coming in the next four years, we will be able to handle roughly two-thirds internally in terms of engineering and development. When I say internally I mean Fiat Auto in Italy, our engineering resources at Fiat Brazil and Comau Engineering (part of Fiat group’s production systems subsidiary). We are taking a large chunk of Comau Engineering’s resources, which in the past had been available to third parties, and redirecting them toward the needs of the group. It is also a much better utilisation of internal resources.

Where will Fiat Auto look to get the remaining third of its engineering work done?

We will look at the Italian engineering houses, as well as others. We have just gone through a total restructuring of our Chinese operation from a management standpoint. We are now investing in the resources required to run an infrastructure out of China, which is designed to serve not only Asia but also Europe. Tata will be helping us in India.

Supplier strikes forced Fiat Auto plants to work on Saturdays recoup the loss of 25,000 units this year.  What is being done to prevent future supplier-caused shutdowns?

Actually you never recover them completely! There is a physical recovery of units that are lost. But economically I lost two days because I ran overheads while these people were just unable to produce cars. We are hopefully getting to the tail end of this unfortunate distribution of suppliers. We have worked our way through a whole pile of them in the first three years here. We have a couple left that we need to fix. We still have a few of what we call ‘critical’ suppliers that are impacting us negatively, but (problems with them) will be totally worked out by mid-2007.

The Bravo is the first car fully conceived under your leadership. Did you get what you wanted?

What I wanted is what I got: The car will be on the market in 18 months.

Is it true the Bravo’s production start was delayed a month?

No, we will begin production for customers on December 1 and have the first units at Italian dealerships for the January 29 launch.

Everyone is saying 120,000 units of the new 500 minicar will not be enough. If demand peaks, how many units can you produce?

To 160,000 units easily, to 180,000 units with minimal investment, to 200,000 units taking some decisions on the Seicento.

Isn’t the Seicento planned to exit production next summer?

We need an entry-level car and the Seicento’s current transaction price is about €6,000. The model has a good following, so we are going to maintain it in production until 2009.
 

This causes some (adjustments) on the plant production lines but we are working our way through the issues right now.

When will the Fiat brand be profitable in western Europe?

The official answer is: We do not elaborate on margins by brand. I will repeat this every time I am asked for any brand.

Will the market accept a Fiat with a Chinese engine?

One of the great things about the collaboration with Chery is that it will allow us to work with them technically on that engine, effectively making it as Fiat as it needs to be.

Which will be the first models to use the Chery-sourced engines?

We will begin with the Linea made in Turkey. But what triggered all this is (that) we needed an engine for the introduction of the Linea in China. The 1.8-litre we build in Italy is incompatible in the Chinese market purely on a cost basis. We needed an engine that matched that car and its reach in the marketplace. In the future, these engines will be available for our global architectures.

You say it was “no miracle” to take Fiat group from a €50 million trading loss in 2004 to a €1 billion trading profit in 2005, a result you plan to increase to €1.85 billion this year and to €5 billion in 2010. How did you do it?

Our revival and our plans for the future are based on five core principles: 1) We are a meritocracy; 2) Leadership is a function of leading change and leading people; 3) We embrace and cherish competition; 4) We aim to achieve best-in-class performance; and 5) We deliver what we promise. The first is the clear acknowledgement that we are a meritocracy. The right to lead is a privilege that is granted only to those who have demonstrated the ability or a clear potential to lead and who have delivered in terms of business performance. Speed, simplicity and self-confidence are key. The selection of these individuals – their right to lead – has been determined by a rather thorough assessment of their leadership skills. This represents the second key element of the new Fiat context. Leadership combines the abilities to lead change and to lead people. Survival, and even more so superior performance, is earned by those who have the courage and the stamina to constantly change their position to stay one step ahead.  The objective in order to ensure survival is to match or exceed the speed of the market. 

That is why the third element of Fiat’s new context is a requirement: That we embrace and cherish competition. Because we understand that it is at the heart of our survival. The targets we have set for 2010 clearly show we aim to achieve best-in-class performance. Last but not least, we deliver what we promise. A similar process was put in place in July 2004 for the first phase of the permanent fix of (the) Fiat group. We have achieved the targets that were due and, in certain cases, even exceeded them. And we fully intend to achieve the coming ones.

By 2010, you want Alfa Romeo to sell 20,000 units a year in North America. Will you be profitable at that volume?

It is highly unlikely that 20,000 units by itself will be profitable because of the amount of money it will require to build this sales volume.

How much will it cost to let North American consumers know that Alfa is back?

Including all the elements of the re-entry, the re-positioning of the brand, the advertising and marketing support, it will cost between €70 million and €100 million.

How will you build up Alfa’s North American dealer network?

Because of its association with Maserati, our initial dealer base in North America is not big enough. Thus, from January 2007, we will start searching for additional dealers. Anyway, Alfa won’t return in North America before the end of 2008, but we will have all the dealers identified much earlier. Because of CNH’s (Case New Holland) activities in the U.S., this whole issue about parts supports and distribution is gone. We have enough warehouses in the U.S. to support any penetration of the car business. That will be done relatively easily.

What about the products?

We have already done studies in the U.S. with J.D. Power. We got the first findings, so we will be working on the facelifts for the 159, Brera and Spider to ensure that when they are ready for the U.S. launch, they incorporate all the requirements of the U.S. market.

Is it true that Alfa could also offer the Junior and the 149 in the U.S.?

We are looking at it, but no decision has been made.

You said that you expect Alfa to enter China within 2 to 3 years. Will the brand form a joint venture with Chery?

Maybe.

Alfa breaks even at 225,000 units a year. According to your plan, that means it will turn a profit by 2009, right?

We do not elaborate on margins by brand.

Alfa has received more than 1,000 orders for the 8C Competizione. You plan to build 500 units. What will you do?

We will build just 500 units, as planned. We have allocated volumes by region and it is first come, first served. It is that simple. There are some (units) that have been allocated to North America, but I will not tell how many. I can only say that I am on the list.

Are you the first one in the list?

I do not know whether I am the first one. I was talking to (Fiat head of purchasing) Gianni Coda and he said he wants to be number 25. I do not know why. Maybe it is (because of) Christmas!

To meet your 2010 target, Lancia has to increase annual sales 150 percent to 300,000 units. But its model range will shrink to just three after you stop building the Thesis. How can Lancia equal Alfa’s sales if it has fewer products and it available in fewer markets?

The Thesis ended up being a structural failure, so its volume contribution always has been negligible. We want to be more consistent with the Ypsilon replacement. Right now, it is by far the top-selling three-door model in Italy. But its successor will also have a five-door version. We have seen initial sketches of what the new Ypsilon could look like and there is enough room to reach 300,000 vehicles in Lancia. We need to give it some muscle. We can also fight a much better battle by entering some markets where we are not present, with a narrower range, rather than expanding the range and playing on one field.

Lancia said it has five proposals for its niche product. Which one do you favour?

The one that I prefer – and it does not mean we will make it because I never win these arguments anyway – is probably the Fulvia coupe. This model is my favourite Lancia niche entry, but the likelihood of that being made, from what I am being told, unfortunately is relatively small.

Outside Italy, Alfa dealers also are supposed to sell Lancias. But so far few dealers have agreed to add Lancia. How can you convince them to do so?

Initial reaction to the introduction of the dual dealership has been good. We have gotten positive feedback.

Fiat’s portfolio of car-derived vans will grow when the Scudo and Minicargo join the Doblo. Will these models hurt sales of your traditional minivans?

I don’t think there will be an overlap because they compete in different markets. In addition, for the next generation of our large minivans, the Fiat Ulysse and Lancia Phedra, we are working with PSA/Peugeot-Citroen on something quite different. It is too early to tell, but we rejected the first submissions from the design guys because we were not moving sufficiently ahead of the current versions.

Is human activity a significant cause of global warming? Does the auto industry have a responsibility to do something about global warming?

The European automobile industry has in the last few years made a relevant contribution to the reduction of CO2 emissions – and is going to continue to do so. New technologies recently introduced, regarding both engines and vehicles, have allowed an average reduction of 13 percent in the new registration emissions in 2004 compared with 1995, notwithstanding the new regulation and quasi-regulation requirements on safety and emissions push toward weight increases. Moreover, consumers have expressed a preference for larger, more powerful and therefore less efficient vehicles. The automobile industry considers that CO2 emissions reduction has to be dealt with by all interested stakeholders – manufacturers, oil producers, governments and customers – to find solutions with a better effectiveness related to costs. This is what is effectively contained in CARS 21 (Competitive Automotive Regulatory System for the 21st Century). CARS 21, launched in December 2005, to be perfectly honest, has not had the most brilliant of starts that I have seen. However, I think it remains a very strong commitment on behalf of both the European Commission and us to ensure that it becomes operational. That is the only way to get it done.

ACEA members do not comment on the average CO2 emissions of their brands. But a recent independent report shows that the Fiat brand was already at 139 grams per kilometre of CO2 in 2005. Does that mean the 140g/km target for 2008 is more than attainable for Fiat Auto?

The voluntary agreement is a collective commitment of the manufacturers and has to be evaluated as such. Having said that, I think we have a fuel-efficient fleet.

Can you provide more on the topic since you are both Fiat Auto CEO and ACEA chairman?

The efforts of Fiat and other European manufacturers to reduce CO2 will intensify in the coming years. Nevertheless, realistically, only an integrated and consistent approach, which takes into consideration the contributions coming from all actors, will lead to tangible results and prevent the advantages associated with the new technologies from being negated by other factors. The risk is that whatever we do on one side, we lose on the other. We support biofuels blended with traditional fuels as well as compressed natural gas. Fiat does have a viable technical solution for CNG and I think that we need to push for it.

Is it fair to discuss mandatory CO2 legislation before the 2008 emissions results are calculated?

I think the industry collectively knows more or less where we are going to end up on CO2. I think we need to go back and look at this in terms of the CARS 21 process. CARS 21 really provided the framework with which to deal with regulation of the automotive industry and we really need to continue to push that. There are no viable alternatives. Any discussions that go outside CARS 21 are by definition flawed. They do not recognise the impact of other contributors to this process, including people who provide infrastructure. You can do all the safety things you like on a vehicle, but if you do not control speed and put systems in place, it will do nothing.

Do you think cars will be taxed based on their CO2 emissions?

I think there will be a progressive taxation based on CO2 emissions. There will be a threshold established and anything above that (threshold) will be linear.

How would you rate the first year of your two-year term as ACEA chairman?

It has been a good year. We have been able to manage a number of issues as the year went on. I only regret that most of the people I started with at ACEA will not be here by the end of this year. I lost (PSA CEO) Jean-Martin Folz; I will lose (Volkswagen group Chairman) Bernd Pischetsrieder; (BMW Chairman) Helmut Panke has gone from BMW; (Renault CEO) Louis Schweitzer has gone; (Renault-Nissan CEO) Carlos Ghosn has come in. We are going to have a completely different crew at ACEA, so my second year is going to be different from the first.

Were ACEA wrong to deny Toyota’s bid to become a member?

The decision to accept Toyota required the support of the board of directors and the vote by the assembly, but the board did not provide that support and thus (the matter) was not even taken to the assembly. I will not comment on who was supportive and who was not as a matter of general principle. I do think that any time you try to artificially limit access it is not worth the end game. Toyota, anyway, now sits on a number of ACEA working groups. They have been working very closely with our colleagues and they made significant contributions.

Toyota’s position is that its request for entry remains on the table because it was not discussed. Do you agree?

Technically, I think it could be reintroduced, as it was never voted on.

How many auto industry and non-auto industry job offers did you receive this year?

I will not tell how many job offers I received, neither from this industry, nor from other sectors. I think this will be unnecessary speculation, as it does not achieve anything.  I am still here. I like it here. It is that simple.