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Once-Struggling Fiat Could Become No. 3 World Automaker With GM, Chrysler Deals

By Craig Whitlock and Steven Mufson
Washington Post Foreign Service
Sunday, May 17, 2009; A01

TURIN, Italy -- Almost overnight, Fiat Group has transformed itself from a bit player into a global titan in the auto industry, effectively taking over Chrysler and possibly a big chunk of General Motors. And nobody is more surprised than the Italians.

"If you had asked me four years ago whether I could imagine that Fiat would be able to restore itself and become a hunter, instead of the hunted, I would have said you were crazy," said Sergio Chiamparino, the mayor of Turin, the northern Italian city that Fiat has called home for more than a century. "Practically speaking, it was a badly run company."

In 2005, Fiat was struggling to overcome chronic losses and recover from the death of its legendary chairman, Gianni Agnelli, who had ruled for decades with a feudal lord's touch. The company's future was so dim that it couldn't give itself away. General Motors, afraid it might get stuck with an Italian basket case, paid Fiat $2 billion to abandon a partnership.

Today, the tables have turned. Under a chief executive with no prior experience in the car business, Fiat has stabilized its finances and is pursuing an ambition that most Italians would have laughed at only a few months ago: to become the third-largest manufacturer of automobiles in the world, behind only Toyota and Volkswagen and ahead of a fading GM.

Without spending a dime of its own money, Fiat has cut a deal to take over management of Chrysler, the bankrupt U.S. automaker. It is expected to acquire a 20 percent equity stake that could lead to majority ownership in a few years.

Fiat is also negotiating with ailing General Motors to absorb GM's European and Latin American operations. If successful, Fiat will oversee a new company with the capacity to build almost 6 million cars a year -- triple what Fiat produced last year.

That prospect has led to a surge in national pride in Italy, where many people remain awestruck that the White House has pinned its hopes on little Fiat to save Chrysler. Italians are also dazzled by the idea that Turin, a city with a population of 1 million and the Alps as a backdrop, could reverse Italy's steady economic decline and host a global industrial power.

At the same time, anxieties are growing over the potential downside. If Fiat takes over GM's European operations, it could cut up to 18,000 assembly-line jobs in an effort to restore profitability. Worse, Fiat's basic strategy could fail, given the inherent difficulty of combining three money-losing companies in a star-crossed industry.

"We're worried that Fiat will internationalize itself and leave Italy in the dust," said Giorgio Airaudo, the regional general secretary of the Italian metalworkers union, which represents thousands of Fiat workers in Turin. "The big questions we ask are: What role will Italy play? What role will our factories play? What will we produce?"

Doubts also linger over one of Fiat's main assumptions: that a quarter-century after abandoning the North American market, it will succeed at selling its small, fuel-efficient cars to U.S. consumers.

"I hope that Americans will want to drive around in Alfas and Cinquecentos," Airaudo said, referring to Fiat's stylish, if tiny, sedans. "But I'm not so sure."

Miracle Worker

Fiat's workers and shareholders, as well as U.S. and Italian government officials, are pinning their hopes on Sergio Marchionne, 56, an accountant who was named Fiat's chief executive five years ago.

Marchionne is credited with engineering Fiat's comeback by modernizing its fossilized management ranks, revitalizing its product line and cutting costs -- all while keeping the peace with organized labor. He returned the company to profitability in 2006, although it sank back into the red during the first quarter of this year, posting a $550 million loss.

Since the onset of the recession last year, Marchionne has predicted that the auto industry is ripe for consolidation and that a handful of global manufacturers will dominate the market. An Italian by birth who was raised in Canada and lives in Switzerland, he has become a favorite of the Obama administration, which has agreed to let him run Fiat and Chrysler simultaneously.

"I guess what the question hangs on is how much of a miracle worker is Mr. Marchionne," said Marina Whitman, a former economist at General Motors and a professor at the University of Michigan. "In his ambition to become one of the big players in an increasingly consolidated marketplace . . . he's trying to bite off an awfully big chunk."

The past offers some painful lessons. Daimler AG, the German automaker, paid $37 billion for Chrysler in 1998 but virtually gave it away nine years later to Cerberus Capital Management, a private equity firm. Fiat's partnership with GM between 2000 and 2005 was also a disaster, culminating in GM's decision to pay $2 billion just to get out of the deal.

Martin Leach, a longtime auto executive who served as president of Ford's European operations and managing director of Mazda in Japan, said Marchionne's plan to pull off a three-way merger is "extremely ambitious."

In addition to ironing out differences in corporate cultures, he said, Marchionne will have to overcome logistical challenges and, quite literally, standardize nuts and bolts.

"It is a massive undertaking," said Leach, now chairman of Magma Group, an automotive technology and consulting firm based in London. "Most people would put it on the too-hard-to-handle list."

But he said Fiat's key conviction -- that it needs to grow to survive -- is sound. "Most people might be skeptical of whether Marchionne can pull it off, but if anybody can, he can," Leach said.

Matteo Colaninno, a member of the Italian Parliament, said Fiat has little choice but to accept Chrysler and GM Europe as partners.

"It's very risky, but it's the only path for them to follow," said Colaninno, a member of the opposition Democratic Party. "It's much better to ensure that Fiat is in a strategic position to determine its own fate. It's probably not the perfect situation. But a perfect situation doesn't exist in the automotive industry today."

Trouble in Germany

Fiat is banking on substantial help from the U.S. and German governments to fuel its expansion. The Obama administration has already approved a total of $12 billion in public financing for Chrysler. It has also forced private creditors to write off more than $4.5 billion in debt as the Detroit automaker goes through bankruptcy proceedings.

Fiat will pay nothing for its 20 percent stake in Chrysler, but it will have to ensure that some of the U.S. government loans are repaid and meet other benchmarks before it can take majority ownership.

Similarly, Fiat is seeking up to $9 billion in loan guarantees from European governments, primarily Germany's, to help it run GM's European operations. GM Europe's crown jewel, Opel, is based in Ruesselsheim, Germany, and employs about 25,000 people in that country. GM is trying to shed Opel and its other money-losing European divisions as part of its restructuring. Although negotiations are ongoing, analysts said it is unlikely that the Italian firm would have to invest money up front.

"The idea is that for two or three years Fiat can keep on relying on public funding," said Francesco Zirpoli, a management professor at the University of Salerno. "Which, if you put yourself in the shoes of Fiat shareholders, is very appealing and very smart. It's really managing to build up an empire with no cash."

Fiat, however, has run into hurdles in Germany. The proposed deal has become a hot campaign issue as Germans gear up for elections in September. Organized labor, a powerful political constituency, is seeking assurances that Fiat will not close any of GM's auto-assembly or engine plants in Germany.

Some German politicians have openly questioned whether Fiat is the right choice to take over Opel, noting that the Italian firm has $9 billion in outstanding debts.

"Fiat is not the European automaker that is doing the best at the moment," Guenther Verheugen, a German who serves as the European Union's industry commissioner, said last month. "I ask myself where this indebted company will get the means to support two such operations at the same time."

Verheugen's comments struck a nerve in Italy; Fiat executives and politicians in Rome accused him of trying to scuttle a deal. "I understand that for a German politician it could be annoying to have to accept the aid of an Italian business like Fiat to save a German-American one like Opel," said Italian Industry Minister Claudio Scajola.

But the German government, which is eager to preserve jobs at Opel, has few options. The only other confirmed bidder for GM's European divisions is Magna International, a Canadian auto-parts supplier. Analysts said Magna lacks resources to invest in Opel and would also need public aid to make the deal work.

A decision on Opel's fate is expected by the end of the month.

Corporate Royalty

Fiat is an acronym for Fabbrica Italiana Automobili Torino, or the Italian Automobile Factory of Turin. The company was founded in 1899 and led by Giovanni Agnelli, a former cavalry officer.

Fiat grew quickly and made the Agnellis one of the wealthiest families in Europe, akin to Italian royalty. "When the Italians voted out the monarchy, Agnelli understood that deep down they were monarchists, and so he crowned himself king of Italy," said a senior executive at a major Italian company who asked for anonymity to protect his business relationships.

Agnelli's grandson, Gianni, took over the company in the 1960s and continued to manage the firm in regal style. Named by Esquire magazine as one of the five best-dressed men in the history of the world, he would arrive fashionably late to work, and if the weather was good, he might take the company helicopter to a nearby ski resort.

By the time Gianni Agnelli died in 2003, however, Fiat's management had grown staid and ill-equipped to compete in a globalized marketplace, said Giuseppe Berta, a professor of industrial history at the University of Bocconi in Milan.

"The real fecklessness of the history of Fiat is its absence of corporate governorship," he said. "It acted as a court. It had a king, a very magnificent king, in Gianni Agnelli. The relationship with the king was more important for corporate managers than getting economic results."

Fiat burned through a succession of chief executives until 2004, when Marchionne was appointed. He quickly overhauled Fiat's leadership ranks, hiring scores of foreign-born executives in an effort to change the insular culture at headquarters in Turin. "He admitted there was bad management and that if Fiat had to be rebuilt, it should start from top management," said Zirpoli, the University of Salerno professor.

Although Fiat has already received a financial boost from Washington and is hopeful of receiving one from Berlin, it may be harder to get help at home.

The Agnelli family, which still holds a 30 percent stake in Fiat, has traditionally maintained good relationships with the Italian government, no matter which party has held power.

But it has a complicated relationship with Prime Minister Silvio Berlusconi, a billionaire businessman who, in the minds of many Italians, succeeded Gianni Agnelli as Italy's unofficial king. Although Berlusconi has paid homage to the Agnellis in public, he has never been enthusiastic about giving state support to Fiat or the auto industry, analysts said.

"There was really no great love between Berlusconi and Gianni Agnelli when he was alive," said Sergio Romano, a former Italian diplomat and columnist for Corriere della Sera, a leading newspaper. When Fiat faced a cash squeeze in 2002 and looked to Berlusconi for a bailout, "there was no indication whatsoever of his desire to help," Romano said.

Like Germany and other European countries, the Italian government approved a cash-for-clunkers subsidy this year to encourage car buyers to trade in old models for new ones, a program that has benefited Fiat. But officials in Rome have said the automaker should not expect any direct handouts.

"At the moment, I think we can say no to that," said Benedetto Della Vedova, a member of Parliament from Berlusconi's party.

Mufson reported from Washington.

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