This is an edited transcript of the Financial Times’ interview in Turin with Sergio Marchionne, Fiat chief executive on March 19, 2008.

John Reed, FT:

Is Fiat misunderstood by the market for having business units that its competitors don’t?

Sergio Marchionne, Fiat:

There’s no doubt that we are, by traditional automotive manufacturing standards, an automotive conglomerate. And so that causes confusion by definition. [Volvo] went through this divorce process, when it lost the car business to Ford, and … unleashed a lot of value by doing this.

Adrian Michaels, FT:

And [a possible separation of Fiat’s businesses] seems to come up any time any journalist talks to you?

SM: People don’t like the car business. They like going to car sales, but they don’t like the stock of the car companies.

AM: Why?

SM: Exactly because they have been incredibly disappointed over the years. It’s an industry which has promised often and delivered little.

AM: You’re talking about the car industry in general, rather than you?

SM: Rather than us. [But] to be perfectly honest, we for a long time overpromised and underdelivered. It’s a fatal mistake. I have a chart that I show around that shows the level of capital restructuring that’s gone on in this business since the 1970s, it’s huge …

The issue is that, when you’re one of the guys in the [car industry] pack, you get up in the morning and you immediately start to defend 30 plus years’ worth of crap history. And it’s like being short – when you’re short you always get told you’re short, even if you’ve grown. It’s almost a stigma that attaches to the industry. I think in a lot of ways the Japanese have done a great job of restoring credibility to the sector…But I don’t think it’s filtered across to the Europeans and certainly it’s not filtered across to the USA.

AM: Do you feel that not having to defend 30 years of crap is something that has been of great benefit to you, since you came from outside?

SM: There’s no doubt. I mean, not being part of that history, not having been one of the people that built it.

JR: You do have all these other more profitable business units, how do you feel about cars? Do you feel like you really need to be in them?

SM: Well, to begin with, this business started 109 years ago. So to sit back and say we should not be in cars as a business is [difficult].

The more fundamental question is whether all these businesses should be together, and whether we shouldn’t be trying to emulate Volvo. And that’s a big question because you’ll only contemplate a separation of the businesses if you have continued misalignment of value with the market. But looking at valuations in today’s market is nonsense. You might as well read the horse racing column in The Sunday Times, it’s as good as any. I have no confidence in any of the market valuations today, because the market is being driven by other things, so I just sit back and watch. But in a steady state environment, where there’s a level of normalcy in the movement of the markets, if there’s a continued undervaluation of the Fiat group because of the association of the car side with the capital group businesses [trucks and agricultural equipment], then I think we would be forced to look at this [separation].

AM: Forced because you would not be serving your shareholders as well as you could?

SM: Absolutely. The aggregation argument goes deeper than this. It’s not just a question of unleashing shareholder value. I think it’s a question of aligning the businesses with the market realities that say, if I’m able to trade at this [higher] value, I, financially, am capable of doing many more things than I could just sitting inside the conglomerate. If my ability to raise debt, equity, or anything which is required for growth depends on my having proper market recognition of what I am, then you need to do it.

AM: That explains your recent railing against the lack of restoration of your investment grade credit rating?

SM: Yes. There’s not a single doubt that if Iveco [trucks] and CNH [agricultural and construction equipment] were independent of the carousel, then those two businesses, with a proper capital structure, whatever that is, which are comparable to their peers – that they would never have had a junk rating.

AM: And what’s that costing you, in terms of finance?

SM: In all likelihood, it has cost us between 150 and 250 basis points, just in terms of borrowing costs. It’s been much higher in the past.

AM: And those two units [Iveco, CNH] would have much cheaper finance?

SM: They would have had cheaper financing, and I would assume even in today’s market, they would have been able to hang on to investment grade. They’ve performed well. I mean, when you look at CNH and you look at last year, they made almost a billion [euros], a billion and a quarter operating profit. And that’s a big number, it’s not yet best-in-class [but it] sort of ranks in the industry. But they’re significant and significant cash flow generators. They don’t have this sink problem that the car business has, where you invest huge amounts of money with the hope of placing these products in the marketplace, and then after you do this, the margins are associated with that business are less that stellar, I think. Dollar for dollar, sterling, you know, pound to pound, euro to euro, one year invested in the capital goods business is going to have a completely different risk profile than the car side, completely. And that’s really what’s driving this.

AM: By capital goods you mean, the non-car?

SM: Yes, the non-car.

AM: Right, which is part of your explanation of why people hate the car business, the margins are too small.

SM: Yes. They’re too small, too risky. The problem with that industry is, it’s had phenomenal years and it’s had phenomenally bad years. I think those days are gone. If you want my opinion, I think this notion of boom-to-bust cycles has pretty well gone out of the marketplace. I don’t think we’re going to see them. The question is whether you’re going to see continued mediocre performance, which is even worse in a sense. I mean, because you get up in the morning and you keep on telling yourself you’re going to be average until you die – it’s not a great thing.

I’m a lot more hopeful for the industry overall. I think that this industry, certainly with the leadership that it has today, particularly the Europeans, is probably one of the healthiest industries I’ve seen. The leadership is quite good. People are very focused on value and preservation of capital. They’re a lot less risk-prone than they used to be. They’re much less baron-minded than the car guys used to be.

We’ve gone through this. We’ve had the metal barons and the car barons and the truck barons, where people dominated an industry physically. I mean, there was a guy, the guy who ran X, and he didn’t care about shareholder returns, he just owned the business. And this led to a variety of pretty ridiculous decisions that shareholders were paying for long after they left. Those days are gone. When you look at the German leadership, the French leadership, they’re much, much better.

AM: What could have changed the cyclical nature of the industry?

SM: They’re being a lot more careful, I think, in the way in which they roll out their plans. I think they’re all more careful about how they invest. They’re willing to make some decisions about not chasing every piece of business in town. They’re being a lot more careful, I think, on their portfolio choices. I think it’s visible. There are things that some of the guys will not do now.

AM: Examples?

SM: For example, the more popular carmakers are a lot less trigger-happy to expand in the upper end of the range of the products … because the brand doesn’t have the credibility. There is notion of the value of the brand … you don’t make a big car because you’re a car guy.

AM: At what point will you make a judgment on separation of Fiat businesses? At what point will the markets be normal?

SM: I think the trigger is going to be, for us, in steady state markets. It can’t be a market where the Fed drops [the interest rate several] basis points on one day because of a crisis. Those are not totally rational capital markets. We need to see stable, rational capital markets that function without a huge amount of stress. And if, at that point in time, the sum of the parts of the value of Fiat is substantially higher than the market value of Fiat as a whole, the issue is unavoidable.

AM: So that could be relatively soon?

SM: Well, the difference between the question being asked in 2004 and the question being asked in 2008 is that in 2004 it would have been structurally impossible to consider it, because the car business was bleeding as much as it was bleeding.

AM: Well, wouldn’t that have made a sale a more attractive option?

SM: No, because you can’t separate a bleeder from a healthy body…unless I found the umbilical cord back to mother goose in some fashion. I needed to find some way to keep the organism alive.

JR: So you’ve been basically saying the [group] is undervalued.

SM: Today? Absolutely.

JR: OK, so the condition is being met, in a way?

SM: The condition is being met, but it’s being done by an assessor that has no credibility. The market has no credibility.

AM: OK, but let’s assume that the markets do come back to some sense of normality next year. How many quarters of undervalue would you tolerate?

SM: I don’t know, I think if we saw it over two or three quarters, and the market has a way of giving the signals ... Some of the analysts are looking at this, they’re looking at the sum of the parts calculations … so a lot of the speculation in the stock market was “is he going to do it, or is he not going to do it?”. Because there’s a built-in conviction that it is the right way to do it. I’m old enough now to have gone through enough of these fashion cycles in the capital markets, to be able to tell fluff from reality.

We’ve got to be very careful. I was running an industrial group in the internet years. And I remember I used to go to analyst meetings in 1999, 2000,and .. the first question I was asked was, “what is your Internet strategy?” And I said, “I don’t have one.” Took 50 points off my valuation.

And so that’s fluff, that’s not reality. We’ve got to be careful that I don’t get pushed by the market to follow fluff, fashion. If in fact we do have the structural problem of value leakage, of substantial value leakage, then we need to look at this, and we need to act on it because you’re doing damage to the businesses.

AM: Was last year’s more formal legal separation of the businesses in some sense a preparatory step?

SM: We have done nothing in terms of the way in which we run these businesses today that has even remotely removed or reduced the possibility of a [separation] of the assets. Even though we’ve created some cross-sectoral functions – such as purchasing running across the business - all of these things in a matter of 30 days could be replaced by a contractual agreement between the parts, and continue to function in some other configuration, and allow us to get this [separation] done.

One of the things that you’ve got to be careful about is that you don’t get the lawyers to follow your industrial strengths…What I’ve found over the years is that I couldn’t particularly give a hoot what the legal structure is, as long as I can access the assets and the people. We were lucky because the inherent separation of the businesses existed when I arrived, and it was done also in anticipation of the potential sale to General Motors back in 2000, 2001 [of the car business]

JR: You’ve presumably had approaches from various parties for the autos business?

SM: I don’t think you have to sell the business. I think the only thing you have to do is create two separate economic realities …one trades on its own merits, which is the car side, and the other one is all the other capital businesses.

AM: So you would still control those businesses?

SM: Well, they could be owned by the same shareholders, but they would own two different sets of paper. The same shareholders would handle them and they can decide to keep both or one or the other.

AM: What do your shareholders and directors think of this? Has there been discussion of it?

SM: No, I think the discussion is premature.

AM: But they must be aware of these issues, just as you are?

SM: They’re aware of it, and I think that the board will listen…By the way, these are all hypothetical discussions. I don’t want you to walk out of here and say, “You know, Marchionne’s ready for the spin-off.” He isn’t. I told you what conditions need to be met.

Let me give you the counter argument to this one. You look at Toyota. Toyota today trades like a capital goods company not a car company. So a lot depends on what you do as a car guy.

AM: Which brings us into the next point, which is, you’ve achieved this magnificent turnaround, but industrially speaking you have to now talk about the sustainability of the company.

SM: I don’t have any doubt that current operating levels are sustainable. You may have a cold depending on where the cycle is, but you’re never going to catch pneumonia. And certainly it will never be lethal like the 2004, 2003 problem. It’s almost impossible.

JR: What if America tanks completely and takes Brazil with it? You’re so exposed to Brazil.

SM: I feel we’re not. The overall group is not. We need to have a pretty horrific contagion out of the US, I mean, you’d have to stop everything. And if that happens we’re not the only ones who are going to be in deep doo-doo, I think everybody is.

AM: But tell us what gives you the confidence to say that?

SM: Because the positioning of the brands in the businesses today has created a strength of market coverage which is not linked. The performance of the truck business is not underpinned on whether the Cinquecento is or is not a successful car. And so this multi-brand strategy…has created an environment which is connected completely on the industrial side – manufacturing, R&D, engine development, emission compliance standards – … but the market presence of the brands are independent of each other…I think the fact that Lancia may have a bad month is not going to make an iota of difference to the [other] guys.

AM: Is that a new thing?

SM: I think that that way of looking at the reality is new. The independence of the sectors has been here for a long period of time, but there’s never been a connection across the industrial backbone of the group, which is giving us huge benefits.

We’re talking about savings, just on the procurement side, of anywhere between 300 and 500 million [euros] a year, which we would have never been able to get unless we were a group.

What is truly different is the way in which these brands are being nurtured and managed. The only thing you had to do in this house in 2004 was not bleed. If you didn’t bleed, you looked like a hero, because you had one guy in the room that was just a haemophiliac, I mean, he was just all over the place. So if you sat there and didn’t need Band Aids, you were good, I mean, you were a star. In this world today, bleeding is a mortal sin, but the benchmark is not the loser inside the house, the benchmark is the other guy in your market. And so there was no notion of what the aspirations of these brands or these sectors are – now it’s completely changed. It’s no use coming to tell me and saying, I did better than Iveco … Look at your competitors, look at what John Deere’s doing, tell me how well you’re doing against them. So that kind of reframing of the aspirations in a competitive context is absolutely new to us. It didn’t exist, I don’t think they even discussed it; it wasn’t part of the culture.

AM: That’s why you’ve been talking [in public] about Toyota, John Deere and others?

SM: There are no compliments paid to ourselves inside this house. The benchmarks outside are so high and so good that until we even get close to these people …

AM: What would you pick out as the highlights of the journey that you’ve been on so far?

SM: Probably the growth of the leadership. I remember these kids in 2004; I remember what they were like. I remember distinctly the responses to issues; I remember the fears, the just sheer terror in some cases of looking at the competition. Today these kids will take on anything and maybe unnecessarily recklessly, in some sense.

AM: What’s given them that change of attitude?

SM: I think a couple of things. One is the fact that we’ve proved that we’re not losers and that, from a head-sense standpoint, is worth a lot because when you’re at the losing end of the game over and over again, unless you’re mentally unbalanced, it’s very difficult to be positive about what you do, it really is. So the fact that we made money in the last quarter of ’05 in the car side, to these kids it was like discovering America . I remember when I told them … I mean, we didn’t make a lot; we made jack shit money…but it was better than winning the lottery; they were just ecstatic. And that gave them the self-confidence to start looking at the future, for one, and to start looking at all of this as a phenomenal opportunity … because they saw that you could come out of the hole.

AM: But “these kids”, the management team, you changed almost all of them and then you changed quite a lot of them again, subsequently, and are still doing so.

SM: Yeah, I still do so. But a large chunk of them were either here or in different positions…If you look at the car side, we have removed some [and] we have lost a couple of the kids for personal reasons, which I understood. But most of that talent was in-house. I’m using a lot of the car guys now in the other sectors … Probably 20 per cent of the leadership in CNH comes out of the Fiat Auto side.

AM: Is that because you work with them more and you know them better?

SM: No, because I think they were very good at what they were doing and I had a shortcoming [which] they filled immediately. [Dealer]network development is not an art; network development is a very process driven target-setting process.

And the guy who runs it, we took him over to the car side and he now runs both the car and CNH [network]. Everybody does [dual jobs]. The guy who runs the spare parts business at CNH runs the spare parts business [somewhere else] ...

AM: You also got to the point where you’ve moved or dismissed a lot of people that you brought in as well.

SM: I make mistakes apparently too. I’m making less as I get older.

JR: Do you have a succession plan in place? Are enough of these kids, as you call them, sticking around and growing enough that when your time comes then you’ll be ...?

SM: We [just] finished [assessments of] roughly close to 800 people; it took us almost three and a half weeks to get it done. I spent a long time on the evaluation and the leadership in terms of making sure that we managed their careers and that we look at that pool as being the pool that will deliver the next [generation of leaders]…The whole objective’s to make sure that it works without me and that it works after me. I’m not going to be here forever, for God’s sake.

AM: Is what’s happened overly associated with you?

SM: There’s no doubt that I played a big role…because the way in which the process, the old structure was dismantled and the people, the chances that we took, the way in which we organised the business, the speed with which we executed, are all things that came out of the way I am. The system has done a great job of delivering leaders ...

The choice to join this life is a choice that you need to make…If you don’t like heat and you don’t bubbles, it’s the wrong place to come.

AM: Was there a point where you told all these people that, or you had them all in a room?

SM: I do this with them all the time…There are some people whom I respect tremendously and who cannot make that choice, who are not in a position to make it, for personal reasons.

AM: What choice?

SM: Of being part of the tribe, just being in this pressure cooker.

AM: What does being in the pressure cooker mean?

SM: It means that you are on this case 24 hours a day; you don’t have to be here physically, I don’t care. But you’re mentally engaged 24 hours a day; it’s a lifestyle issue, really.

AM: Compare that with the Fiat that you found?

SM: A lot of people here worked very, very hard, there’s no doubt. But whether they were working on the right things was questionable. [Another question is] whether they have this commitment to build a great industrial house. The thing that holds this group of people together, a couple of hundred people, is the commitment to that goal.

AM: It’s easy to say that, but what does it mean in practice?

SM: What it means is that when you get up in the morning and when you finish…ask yourself a couple of questions. One: Is the place a better place that it was the way you found it? And, second: have you moved at all any closer to closing the gap between you and the best-in-class competition? That’s all I care about, right. And the day this house will rest for about a microsecond is the day when that gap is gone.

JR: There’s no danger of complacency now creeping in?

SM: One of my roles here is to ensure that that complacency doesn’t take hold and some of these changes that you made references to earlier were changes that were made in order to avoid [that].

AM: Don’t people feel that it’s just a kind of relentless revolution that needs to calm down at some point?

SM: No … I don’t know what calming down into a sort of stasis or a static level would mean. The marketplace won’t let you. I’m not dictating the speed of the market or the guys that come in or go out … We are a player in a zoo; that zoo runs on its own speed, its own clock and unless we engage in that competition we’re going to be completely left behind. … we need to embrace [competition] as a concept, as a way of life. I’m not afraid of competition, I treasure it. I think it’s a healthy thing, I think it builds character, it builds stamina; it builds great organisations. And it breeds great leaders.

AM: So there’s no calming down as such. But is it very unsettling for everybody to be living with that?

SM: No, I don’t think so. I think not everybody can play this. …There is no entitlement here; this is a meritocracy in the true sense of the word. All of our leaders earn the right to lead every day, as I do, and I’ve been public on this. And they told me that I shouldn’t have said this when I came in 2004; I said that if I can’t deliver what I committed to, then I think you have every right to remove me. I have been public on this, and I firmly, firmly believe that this notion of accountability for what you promise as a leader is as important as your integrity.

I think we owe it to the people that work in this house. We have 185,000 people who are expecting the leadership to hold them safe, and you don’t hold them safe by lulling them into a false sense of security. You need to keep them sharp and you need to keep them close to the marketplace, you need to invest in them to make them prepare the way, and we do this. We do this culturally.

In this house, I made the comment to some people three or four days ago, we spent over €100m last year in training our people. You can’t keep on neglecting this. You can’t neglect the place where people live and where they work. I mean, when you came in 2004, did you see the style centre? The style centre was an abandoned machine shop. When I walked in there I thought an H-bomb had hit it. It was a disaster…We gutted that place and brought it back to life. You need to create a working environment that is equitable and that is fair. So we have rebuilt all the bathrooms, all the showers, all the changing rooms, all that stuff has been revamped. We are doing this across all the plants.

I don’t think by the way you can be a CEO and keep people living in those conditions. There is a large obligation that we all have … We don’t run these things to the last buck, we don’t starve businesses of capital, we don’t starve people of the right work environment. That’s not right. We do have a social obligation.

AM: You were talking about people who dominated your industry, and you are dominating your company, so I’d like to know a bit more about succession, what the market would think if you went under a bus.

SM: If I fell under a bus it would be an interesting experiment to watch. I’d prefer not to.

AM: You had a go in your Ferrari, didn’t you?

SM: Yeah, but that was just a scratch. It was overblown. Just to be clear, that car is a perfect car. It is made out of aluminium and is designed to take crashes and collapse. I rear-ended a guy, and I was absolutely safe. The airbags went off, I had no scratches on me, but people misunderstood the accident. So I understand the consternation. The real issue from my standpoint is that in our organisation - and I’m a member of the board so I worry about succession not just because I am the CEO - but I worry about this because I think it’s part of my duty. There are measures in place to ensure that if I do get run over we can respond. The issue is not the bus problem, because it could happen. The issue is a longer term issue. What are you doing to build good leader? That is a question that is very rarely asked. And so [we have placed] emphasis on the notion of leadership here, on the notion of allowing some of these kids (who are not [really] kids) to grow, to expose them to different things, to test them in different conditions. [It] is designed to create a pool of leaders from where my successor will come.

AM: How many are there, and what are you doing with them?

SM: They are being pushed and shoved and moved and given as much exposure as they can. The overall pool, potential pool, the real pool is a lot smaller than you would expect. Probably the pool is maybe 250 inside this house. If you had to short list them, today it would be a very, very short list, because they haven’t had enough time.

AM: There were about 25 people on stage during [your last] investor day.

SM: There were about 25 [at a certain point], but 110 people [in total on stage during the series of presentations]. That was all the senior leadership of all the sectors in all the business.

AM: They were all men, by the way.

SM: That’s not true. There were a number of women on stage. Obviously there are not enough women, but this is true of everybody. When I look at the banking sector, there are not a lot of women. There is just an under-representation of women, and this is industry. This is engineering, this is production, it’s not the type of environment that would have historically attracted a large influx of women. It’s changing. We do have some engineering leaders who are women who are superb. But before they make it up the so-called growth structure of the sector, may take a long time.

JR: Can I just jump in with a couple of strictly automotive questions? I’m curious, what is your thinking about Alfa [Romeo] now? When do you think you can properly launch into the US market, and what is happening with the dollar? Has that changed your thinking about local production?

SM: We have always had the view that we had to produce in North America. The question was when do we do it. We all know that at 1:57 to the dollar nobody making a damn thing in Europe is going to make a profit in the US. You can’t. So we need to localise, and that’s why we’re open. I mean, I think where we do it, how we do it and with whom we do it is important.

JR: When can you do it? What year do you think you can go in?

SM: As long as I know I will do it, then the timing is less important. If I start in 2010 or 2011 producing cars in North America I would be happy.

JR: But you had spoken about 2009 before.

SM: No, of selling cars, and for that I can suffer the loss initially, as long as I know I’m going to be producing enough. I need to have enough local production to start making a profit.

JR: Are you talking to partners?

SM: Yes.

AM: But the advent of sales in North America is still on the same timetable as before?

SM: Yes.

AM: Even though it’s going to cost you.

SM: Yes, it doesn’t matter. Nobody makes any money introducing a brand at the beginning, so we know it’s going to cost us. But in the medium to long term, you need to be there. It’s too big a market, it’s too appealing a market for a brand like Alfa not to be there.

JR: So several partners. You would not go into a greenfield [new site]?

SM: If there was a greenfield, it would be partnered.

JR: With a contract manufacturer or another OEM [original equipment manufacturer]?

SM: We are not partial.

JR: You are talking to a few?

SM: I think we have options.

JR: Is Land Rover a possible joint partner for either selling or producing your vehicles, or developing?

SM: I think I have been public on this issue. We have a longstanding relationship with Tata. I think there is a commitment to share as much as we can with Tata in terms of the development of our respective businesses, and I think I would be more than pleased to collaborate with Tata in terms of Jaguar, Range Rover, if in fact it ends up being owned by them.

JR:Is Jaguar’s rear wheel drive platform, is that something that’s interesting for you, because it’s something that Alfa doesn’t have right now?

SM: That is one option, as there are others, in terms of a rear wheel drive option. The other thing that we’ve got to be careful about is that the rear wheel drive may be a solution for some part of the range of Alfa. It is not the answer to the brand itself.

JR: But you feel like you need a rear wheel drive offering within the brand?

SM: I think we need access. Either we develop it or we need to have access to a rear wheel drive platform, because that also needs to be the basis for the development of the Maserati brand to unfold.

JR: Also to develop Maserati.

SM: Well, we have a Quattroporte, the Gran Turismo, for which I already have a rear-wheel platform. But if we could find an industrially exploitable platform that could go from this segment to the higher end, that would be ideal.

JR: So you want a partner in the US for manufacturing, also for sales network? Are you interested in tapping someone’s sales network?

SM: There is no doubt that a relationship with an existing distribution network would be very helpful because it would just shorten the time to market.

JR: Is Land Rover’s distribution in the US something that’s interesting for you, the fact that they’ve got a pretty big sales arm?

SM: The only thing I can tell you is that I think the Range Rover/ Jaguar distribution network in the United States, either together or stand-alone, would have all the requisite elements for Alfa. So, whether we are interested in this or not is really a secondary issue. Structurally they would fit in, they would work for us.

JR: Have you spoken to Tata about this?

SM: No, because they are in negotiations. There is nothing to be discussed. I mean, let them do what they need to do.[EDITOR’S NOTE: After this interview, on March 25, Tata signed an agreement to buy Jaguar and Land Rover from Ford Motor for $2.3bn.] We have walked away from the deal. We were not interested in doing it. So, until that argument concludes, then what is in fact doable or not doable with them is to be seen. They are taking out some obligations as a result of the acquisition from Ford, if they go forward, and some of these conditions may prohibit the collaboration with us.

JR: So you don’t quite know what you would be getting out of that, so you are being circumspect?

SM: Yes – until we know.

AM: So you have not got any half plans already?

SM: No, we have half plans in the US; we don’t have half plans with Jaguar/ Range Rover.

JR: Half plans in the US, and Jaguar/Land Rover, it sounds like it’s just one of them but you are talking to other partners, including US OEMs?

SM: It’s possible.

JR: Have you spoken to Chrysler? You are not going to tell me if you did.

SM: There you are [laughter]. And also, in case you are going to go to [ask about] GM, I am going to confirm the same answer.

JR: You wouldn’t tell me.

SM: No, but we’re not there. I mean, I’m not there in a position where I can tell you, ‘I’ve looked at four, I like two.’ We are still exploring.

AM: Apart from Alfa, you have been talking about [relaunching] Iveco [in the US] as well. Given this pretty big hit, have you decided to go for organic and leverage the CNH network in some way?

SM: That part of the CNH network which is relevant. The CNH network is a relatively large network. It does a lot of coverage of the agricultural business in rural areas, which is certainly where you want your trucks to be. But we have a number of urban dealers, especially in New Holland, which potentially could be attractive. When I look at the alternatives in the United States, we have one big advantage, and that is the CNH infrastructure running a US or North American business is going to be very helpful - parts, service, technical support, customers, all these things exist. We don’t have to show up and create them. That is what makes our choice almost biased - we need a product and we need a distribution network. We have access to potential dealers that come out of this. So we instinctively will much prefer to [grow Iveco] ourselves because then we can control the quality of the development of the brand.

AM: You can return to a [merger] deal at a later stage in any case, can’t you?

SM: Yes, absolutely. But I need to get started. There is a shortage of candidates in the US, and so it’s no use going out there with fists on the chest and just sort of saying ‘I’m going to go and buy a company.’

JR: Is that sort of off the table now? Do you think an acquisition or a partnership with another truck maker, is that off the table, do you think?

SM: I think it is certainly going to be off the table before we decide to go in. Or we will decide to go in and then we can always modify it for inclusion, but it’s not going to be our first move.

AM: When are you going in?

SM: We will not be able to go in until probably third quarter, fourth quarter 2009 with a selection of offerings. Again, European-driven. Where the assembly takes place is up for grabs.

AM: Americans don’t like European [truck] cabs. They want ones with bonnets. You will be making those instead for them?

SM: We already make those in Australia, strangely enough. The Iveco brand in Australia does have the American-style truck bonnet. It is not structurally something that we cannot do. A truck fundamentally is an issue of engines. The big strength of Fiat is its knowledge of diesel engines and how well it knows that sector of the market. So, the styling issue, as to whether we make an American-style truck or not, is not relevant. Some of our European friends have gone in with something else. They have gone in with a European-style cab, Volvo has. Now, whether it’s any success as a truck or not I don’t know, but we are not restricted by the style choice. It is a style choice, it’s not a structural issue, and the engine is the engine.

AM: So you are going on your own in the first instance, and then maybe look at it again?

SM: I think in all likelihood, yes.

JR: And you haven’t made a decision about manufacturing locally?

SM: We will undoubtedly manufacture locally in the medium to long term.

AM: That is the same as Alfa, another 2011, 12 issue?

SM: It’s an 11, 12 issue. Engines maybe earlier.

JR: The Fiat Cinquecento – do you want to bring it to the US?

SM: Every time I look at that car and every time I look at what it’s done in Europe and whatever it is that I know of the US as a car market, which is now getting very dated and very stale, I’ve got to be very careful, I mean, I am there once a month at least. But I think that the idea of the Cinquecento, even as a brand within a brand, with a fully extended product range which goes beyond the Cinquecento into a station wagon and a convertible, is a product offering that I think we’d find in the US. I think we see a similar success with the Mini in the US. We need to replicate the Mini phenomenon in the US. To do this, we need to be ready to get it done.

AM: Meaning you are not yet? You are not now?

SM: No, I’m not, because I don’t have the full range. The convertible is coming out in 2009, the station wagon in 2010. Once we have these vehicles, then we’ll be able to look at this and say, you know, obviously they are designed and the investors are approved and we are tooling up to make them.

AM: But by then, this model will be halfway through its life, won’t it?

SM: Yes, but it’s like the Mini. The Mini doesn’t die. This is not the same thing. We will improve the Cinquecento no doubt, we might make changes to it, and we will make changes to it on the face that is coming. But it’s one of those cars that needs by necessity to keep its shape.

AM: So you see it as relatively timeless in that sense?

SM: It is timeless. We launched it in 1957.

AM: So it’s not something [for which] the market will demand something new?

SM: No, but it will demand different versions of the car and it will demand convertibles, station wagons, on-roads, it will demand something that is done to the car to extend its reach. But you can’t keep on making the Beetle. This is not the Second World War, where we just keep on making the same car.

AM: The Beetle didn’t work in the States, did it?

SM: There you are.

AM: The new Beetle.

JR: Why?

SM: It’s difficult to say. To me Beetle and Mini are two different phenomenons. The Mini had a completely different aura around it than the Volkswagen Beetle. The great thing about the new Mini is that it preserved a lot of the old, and when you looked at it, it was much bigger, like the Cinquecento has of the old. I think the Beetle probably went a bit too far in terms of redoing itself. Most of these guys get away with murder. The Beetle was a rear engine vehicle. The new one isn’t. The Cinquecento used to be a rear engine that we moved to the front. The market doesn’t appear to be caring about that distinction, but it cares a lot more about what’s in the vehicle. The Cinquecento has got a lot of historical aspirations of this country, of the group. I am not sure the Beetle had the same type of aggregation, of attributes in its history to deliver the same message. It is difficult to tell. That’s why we need to be very careful before we get really gutsy and say let’s go out there and just build the Cinquecento in the US. We’d have to do a lot of clinics with American consumers to find out how they would react to that.

JR: And you want a full range, it sounds like.

SM: By the time we do that, we’ll have the range, so by 2010 we’ll have the range.

JR: So not before, roughly 2010 might be when, conceivably ...

SM: It will probably coincide with the Alfa launch.

JR: What about other Fiat cars? You don’t want to do them in the US?

SM: No.

JR: Why not?

SM: Because the amount of money that’s required to invest in these brands, it’s very difficult. Alfa has a huge market recognition, a long history, the Cinquecento is iconic. Lancia would. have a huge problem trying to sell its stuff in the US. Nobody will understand what it is, nobody.

JR: So there’s no question about doing Lancia in the US.

SM: No.

AM: How many trucks could you sell in the US? What’s your ambition there?

SM: Too early to tell. I think that we need to be very careful about committing to numbers because we need to be disciplined about the way we approach this in the US …

AM: Who is your best in class for Iveco? For cars, you’d say Toyota …

SM: Scania, probably.

JR: And you’d say John Deere for CNH?

SM: John Deere by far, as is Scania by far for trucks.

AM: So it’s Toyota, Scania, and John Deere.

SM: It’s not a bad trio. If you want to go to bed with a nightmare, that’s a good trio to take with you.

AM: What do they do that you don’t?

SM: A lot, apparently.

AM: They’re all more profitable.

SM: By far. The stupid, non-Harvard Business School answer is, they do everything they do, better than we do.

AM: That’s quite galling, isn’t it?

SM: They do well; they do really, really well. They do distribution well. I am on the assumption that they do everything that they do better than we do. Which is a good starting point. I’ll let you know about that when we beat them on anything.

AM: Give me some examples of the things that you really need to match.

SM: I think distribution; the quality of distribution of Scania is superb. I think the way they’ve been able to keep the dealers pure. John Deere has done a phenomenal job of keeping an incredibly loyal group of dealers with them. One of the things that we needed to do here, for a long period of time, is that, I tell you the prices that you pay for these decisions. This goes back to the things that we were talking about the fashion cycle in the capital markets. When I was in the early part of my CEO career, and even in my life, before I even started this whole notion of EVA [economic value added], utilisation of assets was a big thing. So if you could outsource your paints, you would. And EVA in this house, back in the 90s, caused people to do a lot of outsourcing. … When you do that, it’s an ideal world, if you can use somebody else’s capital do it. You have two problems, 1, you can not become a sole customer or supplier, then you’ve done nothing, because you might as well own them, because you will not bring any technology to bear as a component supplier. But when the market gets tight, they don’t know you. Deere left a high level of vertical integration into the business. The argument why we didn’t do it was because, well, ‘we don’t have to because on the down cycle we’ll bleed less.’ That may be true, but we lost core competences and in a tight market we lost access to components. So, huge logistics issue for us, if you want 2008, last quarter of 2007 negatively impacted on the margins of CNH and will continue to have a negative impact in 2008 - these are things they have avoided.

AM: This is because of suppliers that you let go?

SM: Yes. Because they were not tooled up to deal with us. We were not in control of the supplier base.

AM: The recent engine problem that you had, was that because of that?

SM: That was actually a bizarre malfunction of a supplier which had nothing to with. that because we’d been making that part for a long period of time, he just went outside of the [inaudible] space. And once it does… it’s a stupid part with a very low tolerance.

JR: They closed, they shut down for what, a day or two wasn’t it? It was last month.

SM: We shut, it impacted whole pile of plants here because we had to put people on layoff because didn’t have engines, and out of our Bielsko-Biala plant.

AM: And you were closed for...

SM: Three or four days.

AM: What did that cost you?

SM: Over fifty million [euros]

JR: What is Toyota doing that you want to be doing. It should be a long list.

SM: …You know, in order to be a good CEO you’ve got to be absolutely paranoid. These people are just fixated with waste and quality. It runs in their blood. And if you get an organisation that focuses on the avoidance of waste … I mean, I had a meeting with the manufacturing guys yesterday at CNH. One of the biggest opportunities that we have is to remove the waste inside a CNH plant. Not only a waste of… I’m talking about the wastage in the production process, the way in which we tool up the line, whether we could on the line, outside the line, how much inventory we keep on the lines, cycle times. All these issues, which for an industry which is not used to being hammered, like the car business, they’ve had the luxury of time to continue to run these things in a quasi-artisanlike fashion. These are master workmen. To make a tractor is an art. It requires 20 years’ worth of experience. We sit here, and unfortunately there’s a very large industrial process involved in doing this which we’re not… you know, we should be on this issue at the speed of light. We’re getting there now because of the sequence of issues that we had to deal with, this was there, it is costing us in margins a huge amount of money; huge.

JR: Because of what?

SM: Because it’s waste.

AM: But what are you wasting?

SM: If I can improve cycle time, we know the market is tight, if I can take out 15% of the cycle time in a line, you’re talking about a capacity increase of 20% of what I’m doing. And instead of retooling, tooling, for additional volumes, I don’t have to do any of this.

JR: Isn’t scale something Toyota has that you don’t? I mean, when VW talks about benchmarking Toyota they’re talking largely about numbers; they’re just saying they want to get bigger, they want to become so dominant in every market, every segment. Do you think you’re the right size as Fiat Auto?

SM: Yes, the proof of the pudding is General Motors; they’re big. Size has not helped them one iota. Ford are big.

JR: Are you happy with the size that Fiat Auto is in terms of units, in terms of vehicle coverage?

SM: The answer is that whether you talk to me or to my successor, the answer should always be no. Right? You can never be happy with any volume levels. At these levels I think we have an adequate basis on which for you to create a competitive organisation. I don’t think that a difference of one to four between us and Toyota is going to be the difference between us making those margins Toyota is doing or not. I don’t think it has anything to do with it.

JR: You’re completely uninterested in size.

SM: No, no, I’m very much interested in size as long as the size is a consequence of market share gains off an industrial base. But the acquisition of mass to accomplish the arguable efficiency gains associated with scale, I would never do.

JR: You wouldn’t be interested in a Carlos Ghosn-like alliance or… I mean surely you must be disappointed that this thing with Avtovaz didn’t come off in Russia?

SM: I’m only disappointed because I think we had a very long emotional attachment to this business. I mean, we were the ones that started it up in Tolyatti a number of years ago.

JR: Why didn’t you get the deal?

SM: Because we weren’t willing to pay the price that was being asked and because of the fact at that price I could not see… and with the level of commitment we would have had to make to this deal, to this business, I didn’t see the [ability] to get returns out. I think there’s a consciousness inside this house here today about the fact that we must be able to return something on capital invested and the cost of capital notion is crucial. We can’t keep on pissing away wealth here. We need to make money, right? And as crude and as crass as that is, I don’t think anybody falls in love with any project because we’re convinced it’s strategically, quote unquote, in an economically undefined context that it will be a good thing. Yes, I’m on the page; tell me I need to bleed for two years, but then at the end of the three years we’re all going to merrily walk away into a bank and deposit cash. But don’t tell me that you need to be strategic in the long term. Strategy in that sense is not sense.

JR: So it came down to price mostly?

SM: The reason why we didn’t do it was price.

JR: Yes. The only reason?

SM: At the end of the day it was the only reason I think.

JR: No other requirements they were making about the Lada brand or anything like that?

SM: No. I don’t think it was… I don’t think… there were no business constraints.

JR: But getting back, you’re not necessarily interested in… you wouldn’t want to build an alliance with another car maker for Fiat Auto?

SM: I could.

JR: You could?

SM: I could, and we do all the time. I don’t mind… we’ve done platforms, we’ve done models, we’ve done engines.

JR: Like a capital tie-up, I mean joining your company to another one?

SM: No, I think that’s going to be highly unlikely. Because I don’t see them. I don’t see them. I mean even the Nissan Renault relationship was always maintained arms’ length between Louis Schweitzer and Carlos Ghosn until Carlos became the CEO of both. I mean, it was always arms’ length. Nothing filtered back up until Carlos became the CEO in 2006.

JR: Why is that something you don’t want to do? Because you don’t think one executive can or should run two car companies?

SM: Because when you do these things one guy needs to run it. And you need to have absolute clarity of leadership in the process. And then one of the cultures of the two is going to have to disappear. So you need to be so strong in what you do that you need to be able to assert it. Toyota has historically refused to do this because they knew the danger. They knew the danger of… I think, I mean I haven’t talked to Watanabe about this, but I think they were afraid that if they walked in and they said, by the way, ‘Hi, my name is Toyota and I come from Japan and I’m going to show you how to make cars,’ that a lot of people in Italy, Germany, France, anywhere else there was a car business that they could have entered into, or America for that matter… ‘Oh, hey, we were making cars here for 100 years, we’ll tell you how to make cars. I mean, this kind of nonsense doesn’t work, right? It just doesn’t. The cultural clashes, and we saw this with the GM issue. We were dwarfed by their size.

AM: With your GM issue.

SM: We were dwarfed by their size. It may not have been a good looking bear, but it was still a bloody bear. And we dealt with the bear operationally. You know, the one to four ratio of volumes was always… you know, ‘We’re big, we’re powerful, we can do anything.’ It’s a pretty intimidating environment to operate in, to begin with. And secondly all the ones that I’ve seen done have not delivered value. The exception is Nissan/Renault. The GM Fiat relationship did not work. All the acquisitions by Ford have been … a lot of them are being unwound. I don’t see a long list of stellar successes from this M & A world - it didn’t happen. And it can’t be just a one-off event, right? And there’s been too much consistency in the inability to deliver value from these deals that I don’t think it’s hapchance, I don’t think it’s luck. There’s something structural to this. So in the absence of better information, when you’re in my position what you do is that you try and… you know you need to do it because you need to lower the cost of the investment and you need to derisk or lower the risk of the process. And so you much prefer to do this on a targeted basis where the amount of risk that you take on with a partner is limited. If it doesn’t work you’ve blown one model, one engine, one relationship; but you have not blown up the whole Fiat going on.

AM: And how many alliances have you forged since you’ve been there. I mean, we’re talking about it must be over a dozen now or more.

SM: There’s over… I think just …Yes, 29 alliances. Across all the businesses. Now, some of these, I mean, to be honest some of them are listed… are they going to be of earth shattering significance to the development of Fiat in five years? The answer is probably no.

AM: But what’s the sum financial effect of that? What have you saved in investment and all the other things?

SM: For every deal where I’ve found a partner, on the development of an engine, on the development of a platform, or my manufacturing a car for them, I’ve saved 40% of the investment associated with it and I’ve kept 100% of that.

AM: But you haven’t kept 100% of the revenues, have you?

SM: No, no, no. If I had to spend $100 to make something, to make X, I spent 60 and I get everything I wanted out of the original investment.

JR: That’s your benchmark and that’s your business model for …

SM: No, that’s the way in which it worked.

JR: Okay.

SM: To make something with you it cost me 120. If I make it on my own it costs me 100. So we go up 20 bucks, we share the 120 half-half. And we both end up getting the same result. It’s that simple. The number could be 60, it could be 70, I don’t particularly care, but I’ve knocked off anywhere between one third and 40% of the costs associated with the development.

AM: Don’t you have to…?

SM: The best way to look at this, [VW Chairman Ferdinand] Piech has been incredibly vocal about this, or at least he was in the past, about platform sharing, about the fact that you can build everything off the same platform. He runs, what, ten brands? The Golf platform makes the Golf, makes the thing for Seat …

AM:Skoda.

SM: That is no different for him than it would be for you and I agreeing to share a platform together. His savings, what he saves out of that development, is what I would save as a partner doing the same thing. Having a stand-alone platform, which is not shared, has got a cost of a third higher, 40% higher, than it would be otherwise. That’s all. You just look at it in those terms, everything else is …

JR: Okay. And you’re talking about the US, could we even go off-record just to get an understanding of the process, like how many partners you’re talking to, when you might have a decision?

SM: There’s not very many. You know the partners in the US, you can count them on… you don’t even need a full hand to count them, so let’s assume that we know them all and we talk to them from time to time about a variety of options.

JR: A variety of options on teaming up for manufacturing and when might you make a decision on this?

SM: It will not be for now. We keep on … we need to have a very clear idea…

AM: But we’re talking about Alfa here, aren’t we?

SM: We need to have a full idea, a firm idea, of the full product range that will come to the US in Alfa, and that’s not final.

AM: Okay.

SM: But we’ve gone miles in the last 30 days, by the way, on the Alfa range, so we’re not far away from completing the exercise. But then we need to sort of instrumentalise it.

JR: And what about Tata… you said you really haven’t been talking about anything on Jaguar Land Rover, anything specific?

SM: I think they’re contractually prohibited from talking about it.

JR: Probably, because they’re in this other exclusive talks.

SM: They are, there’s union negotiations.

JR: Okay, so this is something for later?

AM: For later.

SM: Getting close.

JR: What about broadening of your relationship worldwide and or in India.

SM: I’ve always been prepared to discuss opening up with Tata… and the question with Tata is that we need to find absolute convergence of objectives otherwise talking about ‘I love you, you love me,’ doesn’t do much. We need to be able to find real live sort of targets and objectives, and ones that are not butting heads. I mean, our expansion ambitions for trucks, for example, may butt heads with theirs. And [in that case] you know, the chances of us being able to do something… Engine development is another story. Engines they can work with us on, because I think that they will need engines and we could probably provide them with the basis to get [inaudible]. But we continue to look… as you get more and more familiar with your partners you know more and more about them. And you need to be able to share some of these ideas with them. Some of these things happen over dinner, by the way, when you’re just having a coffee and this crazy idea comes up, why don’t you go do something. Or ‘I’m planning to do this, are you interested in joining us?’ It’s that simple. And then these things take time.

AM: We need to finish up, don’t we?

JR: Yes.

AM: John spends a lot more time than I do talking to the outside industry experts and people but there’s a lot of scepticism that the growth trajectory of the company is sustainable over the next few years. Your numbers are being queried and all this other stuff, quite apart from debt ...

SM: Our numbers are being…?

AM: Well the numbers … are you going to make your targets?

SM: Our numbers are not being queried, the targets are being queried.

JR: The targets are being questioned, yes.

AM: So I guess you just need to finish by summing up for us about a little bit more detail on your conviction that what you have here is sustainable and not just something that’s been turned round and rescued.

SM: To begin with you’re asking me to defend a 2010 world that has not yet happened, so the only thing I can tell you is what have we done and what have we put in place to make sure that that becomes real. And you’ve spent… how many days are you here now? Three and a half days, you’ve met enough people in here to give you a flavour for what’s going on.

JR: They all have plans, but what the analysts are saying is that you’re assuming the best of all worlds’ possibilities for each of the business divisions, right?

SM: Oh, please, that’s nonsense.

JR: That you’re not packing enough conservatism in, maybe, or surprises…

SM: When I stood up in front of the analysts in July 2004 I told them that I was actually going to make money in the car business they all looked at me and said, ‘This guy has just been smoking an illegal material and I don’t know who… maybe it’s the heat of July in Italy but…’ and we have now done this for four years in a row. Fiat could not be saved, and we proved that it could be saved. Car businesses cannot make money; we’re now making money. We couldn’t do this, we couldn’t do that. We’ve done a number of things, I think, to take this issue off the table and when you look at the targets that we set back for ourselves in 2004 for 2007 we have blown the lid off all of them. Debt levels, margins, growth, gross numbers being delivered. So the business is now phenomenally better than we even forecast in 2004. So it’s not as if we have a history here, certainly I don’t, coming from outside of the industry, of embellishing objectives going forward.

AM: But it’s easy to argue that you started from a very bad position and so to a certain extent there was low-hanging fruit, there were easier gains to make than harder gains. Now you’ve got a much better functioning machine.

SM: Yes. That’s interesting. I mean I don’t know whether making 5% margins, in excess of 5% margins, in the aggregate for those businesses was picking low-hanging fruit. I mean with all due respect a six seven year basis point shift from a negative one to a positive five, is not picking up low-hanging fruit. If it was that easy this would have been done by most people. All targets which aspire to close a gap with the best in class competition is by definition reflective of a level ambition which is uncommon. Not a lot of our guys go out there and benchmark Toyota and say, ‘I want to be like that.’ They may from a quality standpoint, but I think that our sincere hope is to try and clean our organisation that can deliver like they do. We made 3.2 billion last year of operating profit. Our target for 2010, three years later, is five billion. It’s a billion eight shift, which over a three-year period, given the fact that we were making negative numbers, in the scheme of things is something which … it’s palatable, we all understand the language, it’s not unusual, right? It’s not as if we’re going to go from three to 15. We’re going to go from 3.2 billion to five.

AM: It still seems like a lot to me.

SM: Well, it’s a lot of money to me too and I don’t want people to underestimate the difficulty in getting it. But numerically it’s not a huge shift. None of these businesses by the time of 2010 will be best in class competitors, none of them. The five billion reflects the inadequacy of the achievement of this set of objectives. The car business will not be best in class, the CNH will not be best in class, and Iveco will not be. And the thing that I’ve told our guys is as we keep on improving numbers is that none of them should lull themselves into thinking that the competition is going to stand still. We saw that from the Scania numbers that came out for last year which were outstanding. John Deere Q1, January 31st 2008 … So as we moved on, they have. And the gap keeps on just being there. And my biggest frustration is in the fact that compared to them, we’re not making a significant dent in the gap. I mean the five billion is the five billion. We’ll make the number, I’m not worried about it, right? The real issue is how much of that gap will be closed by 2010. That’s the only thing I really care about.

JR: I don’t think anyone’s saying that you’ll be best in class in every division, but maybe that you might be making best of all worlds assumptions and maybe not quite factoring in for surprises and downturns. Are you conservative enough?

SM: We assumed a flat automotive market until 2010. I haven’t assumed one car worth of growth anywhere.

JR: Okay, that’s factored in?

SM: That’s all factored in.

JR: Okay.

SM: By the way we have assumed flat markets in all the businesses - all of them.

AM: I mean, it is likely that the US is going into a pretty bad recession and that everybody else is going to suffer.

SM: No, but I hate to say this, we are at a recession, you know.

AM: So everybody’s going to suffer quite tremendously from that lack of economic growth.

SM: I said this publicly: if there’s no contagion out of the US into the other economies, I couldn’t care less.

AM: And if there is?

SM: If there is I’m going to see a drop in demand in all the markets in which we function. And if we do we’re going to have a reduced demand, reduced volumes. And we’ll have to adjust our industrial structure to deal with that drop.

AM: But you’re still confident that the numbers are still valid numbers?

SM: For 2010.

AM: Yes.

SM: But this recession will not last until 2010. Let’s be clear. Unless you’re in the banking world in which you think that the world’s going to end tomorrow, you know that this thing has a clock to it. We’ve lived through this before. And I don’t want anybody in this house, or anywhere else out there, to get alarmed that the end of the world is next. It isn’t. We’re having a severe market correction brought about by some very unhealthy financial practices in the US market, which now, because of their size, are impacting a whole pile of people. Having said this, somebody will pay the bill of that exuberance and in all likelihood it’s going to be the shareholders of the financial institutions that played And the world will go on. It will go on.

AM: But isn’t it going to affect global demand?

SM: No, because today’s world doesn’t depend on the US. For the first time in a long time we don’t live or die by US demand. China, on the one hand, has been a huge exporter into the US. China has to deal with its own growth ambitions. If the minute that China has a moment of breathing room and it says, I can now deal with my own affairs, and deal with its own in-house demand and not heed the US thirst for imports, it will be a good thing for the world; we’ll get some level of equilibrium in there where China will be able to deal with some issues that it’s not been able to deal with.

AM: There’s a tremendous number of people who don’t agree with you.

SM: I’m sure.

AM: In terms of this decoupling issue.

SM: Well, I can tell you right now that if we’re going to look at market evidence of the decoupling, I can tell you that market demand for everything that we make which has got an industrial spin to it, i.e. trucks, engines, hasn’t suffered a single iota of a blip since this nonsense started in the United States. Zero. Now, tell me, I asked you about the contagion issue. It spills over, we stop doing things in Europe, because now everybody’s panicking that this thing is really … that the world is in fact coming to an end. If that happens and psychologically the European consumer, the European market, starts believing it, by definition we’ll have the impact on demand. But in the absence of that tainting, this is a US issue. And I don’t care.

AM: But they’re already downgrading growth estimates for Italy alone.

SM: Italy will do what Italy needs to get done. Germany is having the best year it’s ever had. 2007 was a phenomenal industrial year for Germany. In 2,000 years basically.

JR: It’s not bad for cars either.

SM: It’s not bad for cars – the demand in February was outstanding. You know, I know that I can construct a nightmare scenario; if you like to I will build one for you. And I will go and live in it for a while, and we do anyway.

AM: You said that you’ve stress-tested your numbers and targets against things like that.

SM: 20% down, and we still make money.

AM: 20% drop in ... ?

SM: Volumes.

AM: Across the board?

SM: Across the whole businesses. And we still make money.

AM: You still make your targets.

SM: No, we still make money, that’s not what I said. Listen, if that was true, if I could meet the targets at 20% volumes I lied to you about the objectives.

AM: Okay. But you stay profitable.

SM: Stay profitable and after we restore working capital level we still generate cash. So those are big issues. I mean, for a house like this, with its pedigree.

JR: You’ve been steering us away from acquisitions this whole time, right? You have an increasing amount of cash on your balance sheet. Isn’t there going to be pressure from shareholders to either pay it back to them or to do something with it?

SM: There you are. There is an alternative.

JR: Which is what?

SM: I can give it back to them. Buy back stock, big dividends. I’ve never been a hoarder of cash. I don’t care.

AM: Is it too early to talk about buy backs?

SM: No. We’ve announced that we’re going to renew authority at the AGM. We want the authority to go back and buy back shares. And I want to. We haven’t done this now … I was vilified, I was crapped on, to use a more vernacular term, by the analysts on the call as to why I was not buying back shares and I tried to explain to them. I said, look, I have a different read of the equity markets than you do. And the immediate, indignant, response of the analysts was, ‘Well, then you’re playing the market when you decide to buy back or not.’ I said, look, my guess is that we’re going to be sitting on an equity market which is not going to be the most generous in the next six months, so for me to go in and buy shares now is not really the wisest use of my cash. There’s going to be a better time to buy. I couldn’t say this publicly because I’m effectively inviting people to sell Fiat stock, right. But fundamentally this market, and the brewing of this market into this condition, the writing has been on the wall for a long time, right? It was a market that was loaded for a correction. The financial institutions’ problems just brought it to the table. I don’t think it’s over. I don’t think that this issue of volatility of the capital markets is finished. You know, we’ll intervene at the most opportune time to get this done. But I’ve told the analysts and I continue to repeat it: I’m not advertising the trading strategies of Fiat on a share buy back. That’s nonsense.

AM: What could Fiat shares get to on their potential at the moment? 25, 26?

SM: I rely on analysts’ reports. I don’t want to set a price target for Fiat. I much prefer to be guided by the markets in steady state conditions. These markets are nonsense. I’m a firm believer in a well functioning market - let the market set the price. Obviously current prices against… you know, a five billion operating profit against the price of 12 euros you know, we’re talking … it would be three times earnings, which is nonsense.

AM: Borsa Italiana, by the way, you can reckon is never going to be a well functioning market, not for a company your size, and with so few other stocks to play.

SM: There’s a bigger question on the Borsa Italiana in the way in which European exchanges run, which when you look towards the US has just as a potential pool of capital trading is different. And I’m not sure that it’s an issue vis-a-vis Borsa Italiana.

AM: But your shares are unusual for being the subject of speculation pretty much every trading day, even in ordinary markets.

SM: True.

AM: And it doesn’t happen to other large companies in other countries as much.

SM: Yes, I can’t gauge, to be honest. There’s no doubt that being so large, so visible, as an industrial house in this country attracts a lot of attention on which people trade. Probably much more than it would somewhere else. That part of it is absolutely accurate.

AM: But you can always factor that into this calculation that you say that you might have to make in the future about whether you’re being fairly valued.

SM: But a large part of our shareholdings are foreign now, a large portion.

AM: Has that grown quite a lot? Can you give us some numbers on that?

SM: I don’t know what the last count is, I don’t think we do give out that information at all.

AM: But Italy and non-Italy, you would do, wouldn’t you?

SM: Since I’ve been here it’s been marginal.

AM: Okay, we’d better stop because we’ve been talking for hours.

SM: I’ve enjoyed it. These are interesting times. I just think we need to be absolutely focused on running the business, and I keep on saying this. There is no cure for any of this nonsense other than hard work and staying on the ball.

John Reed is the FT’s Motor Industry Correspondent. Adrian Michaels is the FT’s Milan Correspondent