February 19, 2010 3:22 pm

High stakes for Fiat’s Sergio Marchionne

 
Sergio Marchionne

Sergio Marchionne, 57, divides his time between Fiat and Chrysler, Italy and the US, and hopes each carmaker can save the other

Detroit’s auto show has a kabuki theatre aspect to it, or the stale ritual feel of a late-Soviet communist party plenum. There are the carmakers’ dinners for dealers, who fly in from the heartland with their finery-bedecked wives. There are the photo-ops with politicians, and the stagey but mostly dull media round tables. There’s the charity gala packed with corporate ticket-holders who haven’t paid a cent for the evening.

The desire to keep up appearances was keener than usual this January, after both General Motors’ and Chrysler’s near-collapse last year, averted only when Washington injected more than $60bn of emergency aid. Sergio Marchionne, the chief executive of Fiat – and now Chrysler, too – was there, talking up his companies. In Europe, Marchionne tends to give car-show interviews a pass, but this year in Detroit he dutifully submitted to several, though he later described the experience as “the Spanish Inquisition in three shifts”.

The questions were mostly predictable, and partly unanswerable: how did he hope to replicate the five-year turnaround he achieved at Fiat at Chrysler, a company with a damaged reputation, dwindling market share and a history of making poor-quality vehicles? In the interviews, Marchionne – an intense man with tousled hair and a round face – did not sugarcoat the task ahead. Still, he later told me: “I have no intention of failing.” His determination is practically constitutional: he works nights and weekends, calls staff at all hours and appears to subsist largely on cigarettes and strong coffee. He outpaces relaxed, midwestern Detroit by bounds.

Marchionne spent the weekend before the show leading Chrysler’s performance review, which involves examining about 700 staffers in fine detail. The previous week, he had done the same for 1,100 people at Fiat. On Monday, he was back at the show for a visit from a representative of Chrysler’s biggest new creditor: the US government. When Nancy Pelosi, speaker of the House, arrived at Chrysler’s exhibit, Marchionne pulled her aside and spoke at length while Pelosi nodded along, unable to get a word in.

When I asked Marchionne later what they had discussed, he mentioned the smaller engines and cars that Fiat was providing to Chrysler. The Italian group currently has a 20 per cent stake in the American company, and could raise that to as much as 35 per cent once it supplies this new technology. He had also, he said, talked about Chrysler’s new and “vibrant” product plan. And he had thanked Pelosi for her support. “We wouldn’t have been here unless she and Congress had decided to back the proposal [to approve Fiat’s stake],” he said. “It’s a pretty gutsy thing on their part to do.”

Gutsy is one word for it. When the US and Canada bailed out Chrysler, they were saving a mess of a company. The group’s domestic sales last year slipped below one million vehicles for the first time in nearly 50 years. Its international business was so small that “niche” was too generous a word. It derived much of its revenues from sales to car-rental companies, a low-margin business that has a corrosive effect on prices. And while GM and Ford have been producing measurably better cars in recent years, Chrysler’s portfolio – which also includes the Dodge and Jeep brands – had just one vehicle, the Ram truck, recommended on Consumer Reports’ closely watched league tables.

Marchionne is promising to transform all this by pooling Chrysler’s resources with Fiat’s. Fiat-derived small cars will begin appearing in the US, mostly under Chrysler group nameplates, and Chrysler will fill the large-vehicle gaps in Fiat’s line-up. Marchionne has also launched a revamp of the company’s entire product portfolio, amounting to what he calls “the most substantial overhaul that any car company has ever done in [this] period of time.” And he plans to test a bold management strategy that’s worked at other businesses and in other countries, but which will get the ultimate test when applied to recession-era American carmaking.

Here be dragons: Chrysler has been a graveyard of dreams for business visionaries past. Its merger with Daimler in 1998 was touted as “a marriage made in heaven” and the dawn of a new era for carmaking, only to be dissolved three years ago after nearly a decade of acrimony. When the private equity group Cerberus bought Chrysler from the Germans, its chief described the new deal as a patriotic opportunity to rebuild an American icon. Then the US car market collapsed, nearly sinking the group and prompting a hasty exit by Cerberus.

The stakes are enormous not just for Chrysler but for Marchionne, and Fiat. Barack Obama mentioned the Italian company – not widely known in the US, where it doesn’t sell cars – when he tied Chrysler’s fate to the alliance last March, speaking of Marchionne’s “impressive turnaround” there and the group’s “cutting-edge technology”. And while few Americans outside business circles have heard of Marchionne, most people remember Lee Iacocca, the man who rescued Chrysler from an earlier crisis three decades ago. Whether Marchionne repeats Iacocca’s success or follows in the footsteps of failure, he is headed for US household-name status. “It’s reputation – credibility,” he told me in Detroit. “I mean, we put the whole damn thing on the line here, including my life.”

. . .

In an industry that regularly hoists national flags to demand special treatment or excuse bad decisions, Marchionne cuts an appealingly cosmopolitan figure. Marrying a European small-car specialist to a maker of minivans and trucks favoured in the US heartland does not require you to be “ethnically confused”, as he jokingly put it in Detroit – but it seems to have helped. The son of an Austrian mother and an Italian father who worked as a carabiniere, Marchionne was born in Italy but moved with his parents to Toronto when he was 14. He completed an MBA in Windsor, the depressed Canadian town just across the river from Detroit, and began his career in Toronto as an accountant and tax specialist. A decade into working life, he moved to the Swiss industrial group Alusuisse Lonza. There, he managed Alusuisse’s spin-off and merger with Canada’s Alcan. By the time he was drafted to Fiat in 2004, aged 52, he’d spent nearly three-quarters of his life outside Italy.

In decorous northern Italy, his pullovers, jokey style and no-bull approach to problems make him seem American. In the US, his manner is more familiar and his English native-level, but his accent unplaceable. His family home is in Switzerland.

Marchionne was not appointed at Fiat because he had a track record in carmaking. Rather, after years of management drift at the company and a crippling succession crisis, the Agnelli family were drawn to his skills as a manager. At SGS, a Swiss goods-inspection company they control, he had cut out layers of bureaucracy, slashed other costs and returned the company to profit. Fiat needed similar treatment. Despite a name synonymous with its core carmaking unit, Italy’s largest industrial group is a farrago of disparate businesses including the Iveco trucks brand and Case New Holland, which makes farm and construction equipment. Marchionne’s achievement in his six years there has rested less on building better cars – though he has also done that – than on streamlining management, benchmarking best-in-class competitors to match or exceed their performance, and making the parts of the company work together. Better cars, he believes, follow naturally from running a tighter ship.

Long before the credit crisis and collapse of the US car market, which brought Chrysler into the picture, Marchionne – with Agnelli support – was mulling a spin-off of Fiat’s car division from the rest of the group. He was also scouting for alliance partners. Carmaking devours vast amounts of capital to cover its costs, which are most easily amortised when spread over the largest possible volumes. Fiat sells just over two million vehicles, more than half in just two markets – Italy and South America. Marchionne felt it needed to be about three times bigger to justify shareholders’ investments. When the age of carmaker bankruptcies and bailouts dawned, that goal began to seem achievable.

Marchionne had been talking to Chrysler about an alliance since at least early 2008, but discussions intensified when its business hit the wall late in the year and the US government entered the equation. Last year, Washington’s autos task force, deciding a crippled Chrysler’s fate, was weighing whether to bail it out, merge parts of it with GM or push it into liquidation. Marchionne caught the group’s attention on the strength of his record and hard-driving style. According to Steve Rattner, one of the taskforce’s leaders, Obama threw his support behind a Fiat alliance after being told that letting Chrysler fail would cost 300,000 jobs, including at dealers and suppliers. Rattner wrote in Fortune magazine that Obama instructed the task force: “I want you to be tough, and I want you to be commercial.”

On June 10 2009, the company exited bankruptcy with a restructured balance sheet, radically downsized operations and the United Auto Workers as majority owners through their healthcare trust – a relatively clean canvas on a new continent to test Marchionne’s theories on how to make money from making cars.

. . .

 
Inside Chrysler's plant at Detroit

Inside the prototype development area at the massive Chrysler plant

Chrysler’s headquarters take up a behemoth building in Auburn Hills, north of Detroit – the second-biggest office in the US after the Pentagon. Some staff navigate its corridors on tricycles or electric carts. During the waning days of Cerberus ownership – a period Marchionne calls the “Twilight Zone” – the place emptied out, giving parts of it the feel of a mausoleum. Since Fiat took over, many Chrysler staffers who were working elsewhere have moved in, but the building still seems unnecessarily, laughably, even poignantly gargantuan.

 
Tricycles used for transport in the Chrysler plant

Employees use trikes to get around

When Chrysler was still in bankruptcy court and Cerberus in control, Marchionne toured the group’s operations, interviewing hundreds of employees. He felt that Chrysler in 2009 had many things in common with Fiat in 2004. Both were engineering-driven operations that had taken their eyes off developing their brands and producing good cars. Both had lost a culture of innovation and sense of purpose. Fiat had been run more like a government ministry than a company; many Chrysler employees, too, were working nine to five, even as it slid into bankruptcy.

At Fiat, Marchionne had begun his turnaround by spotting promising young executives from peripheral functions such as marketing or locations such as Latin America. He then promoted several of these “high potentials” – sometimes over their superiors’ heads – with orders to match or beat the best brands in each of the group’s businesses: Toyota for Fiat; Scania for Iveco; John Deere for CNH. Marchionne also looked outside heavy industry for inspiration, drawing lessons from Apple’s reliability and speed to market, for example, when launching the 500 minicar, helping make it a strong seller.

In Detroit, within hours of the bankruptcy judge’s decision to let Chrysler exit Chapter 11, Marchionne announced a flat organisational plan that stripped out layers of managers and gave new autonomy to the group’s brands. It was SGS and Fiat all over again. He moved his office from the 15th floor to a wing where Chrysler’s engineers sit. Brand managers were moved to the same floor as the people working for them.

 
Mike Manley

Mike Manley, division head for Jeep

The changes appear to have released latent energy at a demoralised company. Today, there is a near-pep rally atmosphere at headquarters. Ram trucks is run out of the fifth floor, where the walls are wrapped in red brand regalia. Dodge has been set loose to pursue its identity as a male-oriented marque. And while several of Marchionne’s new deputies and their staff looked baggy-eyed from lack of sleep when I met them, generally they appeared energised. Ralph Gilles, who leads the group’s design division and Chrysler’s Dodge brand, said the atmosphere was “amazing”. “People are staying late hours, they’re so motivated. When I move around, people are working at nine or 10 – the place feels like a major airport.”

“There’s a huge desire to make this work,” says Mike Manley, the Briton who heads Chrysler’s Jeep brand. “These Fiat people have done it before, and they know how fast they have to move.”

. . .

Fiat, as Marchionne admits, needs the alliance as much as Chrysler. Back in Turin, he and his team have a full plate. Like most big carmakers, Fiat lost money in 2009 – €848m after tax – and is heading into a trying year. Last year, its core cars unit had the fourth-best sales year in its history, thanks to generous scrapping incentives in several European countries that fuelled demand for its small cars. But these are now ending, and an abrupt landing could trim as much as €500m off operating profit, according to Marchionne. This will come as he contends with longer-term problems such as Alfa Romeo, which persistently loses money.

 
An atrium with mutliple escalators at Chrysler's headquarters

The complex has many separate atriums

Fiat paid no cash for its Chrysler stake, and for now will not be required to consolidate any losses into its own earnings. But Marchionne is devoting copious amounts of Fiat’s knowhow and time to its US partner. In the golden vision of the future he presented when unveiling Chrysler’s five-year business plan in December, the effort will benefit both companies. But in a gloomier scenario, Marchionne’s effort to transplant his management model to Michigan will founder – and detract from efforts to keep Italy’s biggest industrial group on track through the downturn.

Early indications are that Fiat and Chrysler are indeed working in tandem. Marchionne has ordered executives at both companies to co-operate in purchasing, engineering, manufacturing and other functions. Chrysler veterans say that, unlike Daimler, which balked at sharing swathes of Mercedes-Benz’s technology, Fiat has been an active partner. While under Daimler it took Chrysler several years to earn a stand opposite Mercedes-Benz’s at the Detroit auto show, Fiat showed a Ferrari and its 500 model right alongside the Jeeps and Ram trucks in January.

 
Pietro Gorlier

Pietro Gorlier, division head for Mopar

Pietro Gorlier, whom Marchionne drafted from Turin to head Mopar, Chrysler’s parts and service division, described the relationship between the two companies as “a pipeline without a clog”. The unit recently launched a customer-service number and began competing with rivals like Jiffy Lube on everything from working hours down to their outlets’ weekend opening times. “Now my team know they can’t present a project without knowing what the competition is doing,” Gorlier said.

Chrysler is also following Fiat in adopting world-class manufacturing practices modelled broadly on Toyota’s – still considered an industry gold standard for efficiency, despite its two big product recalls this year. In a business that reaps thin profit margins in the best of times, carmakers need to get everything right in the manufacturing, from avoiding machinery breakdowns to having parts in the right order and location. Problems that were solved by management under Daimler are now being solved on the shop floor. “The people that are fixing the machine are doing a lot of the reports, the repairs and the tracking process,” said Michael Licht, maintenance supervisor at Chrysler’s on-site pilot assembly plant.

 
Fred Diaz

Fred Diaz, division head for Ram

In an October redrawing of his organisational chart, Marchionne partnered Chrysler with Lancia, Fiat’s slow-selling premium brand. Olivier Francois, a Frenchman brought to Detroit from Turin, is now heading both. He rises at 4.30am to keep abreast of work in Turin and told me: “In this house, there is nobody who has any doubt about this plan working out – we are all working like hell.”

By all accounts, Marchionne gives his white-collar staff enough latitude to make decisions. But he also sacks people who do not work out. If a problem appears on the agenda and is unresolved for three meetings running, it is usually a sign that someone is on their way out. In Marchionne’s October shake-up, Peter Fong – whom he had plucked from a lower-level job to run the Chrysler brand – stepped down. Mike Accaviti, head of Dodge, also departed. Fred Diaz, who benefited from that revamp, which placed him at the head of a newly independent Ram, says: “We all have different talents, and we all have a co-operative experience of teamwork. The hidden agendas, the backstabbing that are typical of other organisations don’t exist.”

For that, Marchionne says, they can thank a new matrix structure, where Chrysler’s brand heads have cross-company functions, worrying about other brands and divisions on top of their own. Francois, in addition to leading a fused Chrysler and Lancia, also heads group marketing. Manley, in addition to heading Jeep, is also leading efforts to build the group’s still-modest international business.

 
Engineers moving car parts inside Chrysler's headquarters

Engineers in the prototype area of Chrysler’s huge Auburn Hills headquarters

With the house in order, better cars should follow, according to Marchionne’s world view. Chrysler’s designers and engineers are pushing to improve quality, which bears crucially not just on sales, but the prices it can command. Gilles told me his team was focusing heavily on interiors, an area where Chrysler has long trailed competitors. These efforts, says Marchionne, will be visible in a “completely different” Chrysler display at next year’s Detroit car show. The team is promising to launch heavily revamped or all-new versions of 16 cars over the coming year.

. . .

Of course, shaking a reputation in the marketplace for shoddy quality takes time, and it is not clear how much of that Chrysler has. To make it on to the Consumer Reports ranking, for example, a car must prove its “predicted reliability” for three years. And Chrysler’s efforts to make significantly better cars come as its competitors also strive to raise their games.

These facts underpin much of the scepticism that greeted Marchionne’s forecast in December that Chrysler would be selling 2.8 million cars by 2014. Marchionne bristles at the pessimism. “We laid out objectives that I don’t think any other car company in the United States has,” he said. “We’ve laid out a plan till 2014. And the funny thing about all this is that we keep on defending ourselves against these objectives. Everybody else is quiet, so nobody knows where they’re going, or how much money they’ll make this year.”

For now, though, Chrysler’s sales are still shrinking: down 8 per cent last month from the year before – and that was an exceptionally grim January, when Chrysler was heading toward bankruptcy. And while Marchionne has many admirers, one cynical view sometimes voiced in industry circles is that Fiat is profiting from US taxpayer money simply to save engineering costs on its own products. “He doesn’t understand the US market, and is doing this 100 per cent for Fiat,” one senior industry executive told me recently. These doubts, in turn, have raised questions over whether Chrysler can stay afloat financially while it awaits the cavalcade of Fiat-derived cars.

Chrysler does seem to be conserving cash. Marchionne said in Detroit that the company had on hand less than $6bn – but that’s still more than the $5.7bn it reported in November, and significantly more than the taxpayer-funded dowry of $4bn it had when it exited Chapter 11. Richard Palmer, chief financial officer, said Chrysler would burn through about $1bn of operating cash this year, but expects to make up for this with a Department of Energy loan of the same size now being processed.

Marchionne likens Chrysler’s current situation to that of a Canadian bear in hibernation, nearing the end of a long winter. “You have to be able to conserve energy as you go through this horrible period of time,” he said.

Chrysler will probably achieve the short-term goals Marchionne has set: to sell 1.1 million cars in the US this year and 1.6 million globally. This coincides with a rebounding car market – after hitting a 27-year nadir in 2009. Chrysler can certainly win a slice of that growing pie. It’s the longer-term goals that will be harder. For Fiat, the concern is that Marchionne and his top echelon may be stretched too thin. In a December report, Standard & Poor’s cited the Chrysler alliance as a factor behind its “negative outlook” for the company. “We don’t see it as a potential upside,” Barbara Castellano, the S&P associate director who wrote the report, told me. “It’s something that could drain managerial resources.”

It could become a worry at Chrysler, too – for all that Marchionne rejects the “Great Man” school of management (in Detroit he brought a full team of executives to interviews to underscore the extent to which he sees Chrysler’s rejuvenation as a team effort). But, perhaps in a nod to those concerns, he has indicated that he might give up one of the two CEO jobs within the next two years. He roundly rejects the notion that his name is now synonymous with Chrysler’s. “I think it’s unfair to the management team,” he said. “I think it’s deeper than me.”

Marchionne does seem to have lined up Chrysler’s cadre behind him and pointed them in the same direction – more than could be said for the company under previous owners. But some of the spirit I sensed there may come down to the feeling that the new boss is playing the last card in the company’s deck. “We’ve been given another lease on life, and we plan to keep on living,” Jeep’s manager Manley told me.

Marchionne makes clear he is playing a long game. He predicts that the shake-out in carmaking, far from over, is just beginning – and will see the industry’s dozen or so big players winnowed down to six. And Fiat, he clearly believes, will be among them – joined to a rejuvenated Chrysler. “Look, I’m confident that we will make it,” he said. “The proof is in the pudding. I don’t know whether clarity and ambition needs to be punished. You should give it the benefit of the doubt.”

John Reed is the FT’s motor industry correspondent. His last piece for the magazine was about Elon Musk, entrepreneur and chief executive of electric carmaker Tesla Motors. Read it at www.ft.com/tesla

Fiat has been nominated for an FT ArcelorMittal Boldness in Business award. The winners will be announced in the FT on Friday. www.ft.com/boldness

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