Can Chrysler Save Fiat as 2013 Profits approach $2 Billion?

Chrysler Group CEO Sergio Marchionne (right) escorts U.S. Treasury Secretary Tim Geithner (left) on a tour of Jefferson North Assembly Plant (JNAP) during Geithner‘s Detroit visit today. Marchionne

Chrysler CEO Sergio Marchionne (right) escorts then U.S. Treasury Secretary Tim Geithner on a tour of  the Jefferson North Assembly Plant in Detroit after U.S. taxpayers bailed out the company in 2009. The question now is whether the combined Fiat Chrysler Automobiles can survive in a global business against much bigger, more profitable competitors. Lack of Chinese sales is a big problem.

Chrysler Group posted net revenue of $72 billion in 2013, an increase of 10% from $66 billion during 2012. This was the direct result of an increase in vehicle sales, primarily the Jeep Grand Cherokee, Cherokee and Ram pickup trucks in the U.S., as well as the Town & Country and Caravan minivans. (Jeep set an all-time global sales record for the second consecutive year of 732,000 vehicles.) Full-year net income was $2.8 billion, up from $1.7 billion a year earlier.

The weakest Detroit Three company – with a limited product line and slim global sales – is clearly doing well as the American economy continues to recover slowly in spite of the inaction by politicians in Washington. Chrysler Group has $1 billion cash on hand and to quote an auto mogul of an earlier time is holding ‘one white chip’ at the table in the global automotive poker game. Its success in this high stakes game is by no means assured.

On scrutiny these results are not as good as they may seem to sound. Special items for 2013 included a tax break of $962 million for the release of deferred tax assets during Q4, and a $24 million loss on two debt re-pricing transactions during the year. Adjusted net income for the year was $1.8 billion, an increase of 9% from $1.7 billion a year earlier. Yes, good, but in the automotive big leagues this is not enough to ensure survival in a business that requires at least $6 billion or more of capital expenditures each year, every year just to stay competitive and refresh the products.

Net revenue totaled $21 billion for the fourth quarter at Chrysler Group. Net income for Q4 was $1.6 billion, including special items of $961 million that boosted the bottom line. Nonetheless, this was Chrysler Group’s tenth consecutive quarter of positive net income. Adjusted Net Income for the fourth quarter of 2013 totaled $659 million, up 74% compared with the same period a year ago. Combined with some deft maneuvering between the Fiat-controlled company and the United Auto Workers Union, which wanted out of its more than 40% stake, Chrysler enters 2014 in decent shape, arguably better shape than Fiat with its $9 billion in debt, and that’s the issue.

The question remains whether a regional company that thrives on sales of trucks and minivans in North America can survive in the global automotive business as part of Fiat, which has its own severe problems starting in its home market and the rest of the moribund EU. Without Chrysler’s contribution, Fiat  lost $321 million during Q4.

As Chrysler was reporting earnings, the Board of Directors of Fiat S.p.A. approved a corporate reorganization and a new company called Fiat Chrysler Automobiles, aka FCA. Following Fiat’s acquisition of the equity interest in Chrysler Group previously held by the United Autoworker’s VEBA Trust, Fiat Chrysler Automobiles will be registered registered in the Netherlands, as the parent company of the Group.

FCA’s common shares will be listed in New York and Milan. It will be interesting to see how the market values them. And thus far it is unknown where the new company will be headquartered – Fiat is the largest private employer in Italy  and Chrysler is the largest private employer in Detroit.

Sergio Marchionne, CEO of Fiat and Chairman/CEO of Chrysler Group says, “Five years ago we began to cultivate a vision that went beyond industrial cooperation to include full cultural integration at all levels. We have worked tenaciously and single-mindedly to transform differences into strengths and break down barriers of nationalistic or cultural resistance. Today we can say that we have succeeded in creating solid foundations for a global automaker with a mix of experience and know-how on a level with the best of our competitors. An international governance structure and listings will complete this vision and improve the Group’s access to global markets bringing obvious financial benefits.”

If only it were that simple.

Fiat shareholders will receive one share of FCA common for each Fiat share they now hold. The transaction is expected to be completed by the end of this year. The Group will present a long-term business plan to the financial community at the beginning of May 2014.

Chrysler Group also announced that it plans to offer $2.7 billion in secured senior debt, as well as plans to sell additional loans to raise up to another $2 billion. The net proceeds, together with borrowings under term loans will be used to repay all amounts outstanding under the unsecured note issued on 10 June 2009 to the UAW VEBA Trust.

Bottom line here is the UAW is out of its Chrysler investment. Fiat is all in with uncertain prospects going forward.

About Kenneth Zino

Ken Zino is an auto industry veteran with global experience in print, broadcast and electronic media. He has auto testing, marketing, public relations and communications expertise garnered while working in Asia, Europe and the U.S.
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5 Responses to Can Chrysler Save Fiat as 2013 Profits approach $2 Billion?

  1. Greg Grajew says:

    The “moribund” European market? (Yes Greg please see: EU Sales Recover in December. Six Year Trend Still Down @ this where we recently learned that VW surpassed GM as number 2 just behind Toyota? Where MB, Audi and VW are technologically light years ahead of anything coming out of Detroit?

    What is right, is that selling trucks and minivans is great, but as with the Challenger there is little technological innovation that will spur sales BEYOND its traditional market which was always marginal compared to GM, Ford, Toyota etc.

    There may be cash in hand, though as the article says a couple of “billions” isn’t that much in this industry.

    FIAT may in the long term save (if that’s at all possible) Chrysler and not the other way round. FIAT has an installed base in Europe selling everything from trucks to passenger vehicles . As to whether this will be successful in saving Chrysler and increase their sales in the US (I hope they have something else than the 500 in mind) is a big question. MB tried several years ago also stressing that they had worked “diligently” to work beyond “culture” and geography onto a common platform. Little of any interest materialized and MB threw in the towel after taking a huge financial bath. MB could afford it, not sure FIAT can.

    Conclusion? Should FIAT not succeed, I’m taking a collection as of right now to buy their stake in Ferrari. And if they do succeed, I’m also taking a collection as I sure don’t want any “imported from Detroit” technology to get put into a Ferrari. Please contact me if interested! 🙂

  2. Mike Wattam says:

    Your question could just have easily been framed in the opposite direction. Despite the pessimistic industry obervers surprise when the coming-together was announced, there do seem to be synergies there which we couldn’t at the time see to be important. It transpires Marchionne is one of the shrewdest cookies on the planet and if it is to work in the long term, success will be down to him and those he inspires..

    Conversely, a billion is not a lot of pocket money in the Fiat/Chrysler grand scheme of things and while it may reduce stock market jitters and pay operating bills in the short term, a wise man would otherwise discount any major benefit and concentrate on making the whole complex Fiat-Chrysler machine work much more productively, while doing surgery on gaping wounds and limbs which aren’t useful (those which make no directly measurable contribution to the machine).to enable an early return to full health. The primary measure will be the generation of free cash for re-investment.

  3. Iain Peter W. Robertson says:

    Greg, you are right. £2bn is enough to fund a new engine programme for most carmakers…it is not enough to warrant brand survival. Flagging it up as such is a feckless exercise. Bear in mind that DB’s ownership of Chrysler, not partnership, was doomed to failure, not least once you took Chrysler Corp’s exceptionally shifty history into account. There is no way that East Euro-built Fiat 500s can earn enough, even with the potential of volume US sales, as the unit profitability is way too low…and the production capacity unviable. Chrysler will drag down Fiat Group, just as it has done every other ‘partner’ with which it has been involved. Fiat is already on a downwards slope. Chrysler simply helps the inevitable. Mark my words.

  4. Miguel Angel De Miguel Velasco says:

    I just hope Chrysler can save itself, otherwise no one will be able to save it. Salvation comes from inside and not from outside…. If Chrysler is continuously waiting for someone else to pay the bill when they do not perform well… then I wish all the best to Fiat.

  5. Greg Grajew says:

    I guess the only glimmer of hope is that Chrysler benefits from some of the smaller engine technology from FIAT and some small amount of innovation as Ferrari would allow to escape into FIAT/Chrysler to make it come into the 21st century. As for FIAT the US market could represent a short term life line whilst they look at China and other markets to expand. Alas, Chrysler can’t help them in that as their sales or market penetration in Asia is pretty non existent.

    Several vehicles are built in the East European countries – the VW Touareg comes to mind still being built in Bratislava (though the engine comes from Wolfsburg) and is not in itself a kiss of death. However as you rightly pointed out Iain, the margins of the 500 vs the now awesome V8 turbo diesel Touareg (not sold in the US) at over 100k Euros is of course self evident.

    The search for partnerships of Toyota, Renault, Citroen… makes struggling makers like FIAT and Chrysler naturally gravitate to survive – heck look at the airlines. But finding that “fit” is as elusive as finding the right wife 🙂

    I wish them luck, just not holding out much hope unless there is a fundamental change in innovation, design, manufacturing and quality control in both companies.

    So I’m still looking for some capital to have ready in case Ferrari comes up for sale as I really wouldn’t want it to be sold to VW, Toyota, MB or other 🙂

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