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Guest opinion: Fiat-Chrysler – A game of hedging market risks well-played

By Franck Leveque and Prana Natarajan, Frost & Sullivan

One of the most talked about alliances in the automotive industry, in the recent years, is that of Fiat-Chrysler, for the right reasons. While Fiat’s European sales haven’t been recently very attractive, mainly due to sluggish macroeconomics in Euro Zone and increased competition in lower segments, Chrysler Group brands are helping Fiat stay buoyant in both Europe and the USA.

Despite the Panda and the 500 selling well in continental Europe, the trading profit shelled out by the Chrysler brands appears to be a more attractive figure. In January 2012, the US automotive market grew by about 11 per cent, compared to sales figures a year ago, which is clear sign of an upward trend in a market that has not witnessed such surges in the last four years. Chrysler’s sales, during the same period of comparison, have grown by a remarkable 40 per cent, on par with Volkswagen. This comes at a time when General Motors has posted a decline. Jeep sales in Europe have also helped the group achieve the 948,000 unit sales, promoting the group sales to about 7% in 2011.

Chrysler is a risk-mitigating tool for Fiat, with the enormous profits contributed by the brand. This is expected to be Fiat Group’s first steps in becoming a force to reckon with in the global automotive scene.

To ensure this success, Fiat is expected to partner with an Asian brand, who might be Suzuki, with special focus to strengthen APAC Operations, where neither Fiat nor Chrysler can yet play a remarkable role at the moment.

In a scenario where Fiat and Chrysler are shaping a new S-UV and C-UV global product range, Suzuki claimed that Fiat/Chrysler, which includes in his portfolio the iconic Jeep brand and already experienced a small but profitable partnership together, would be a better partner than Volkswagen.

By 2015, when Sergio Marchionne intends merging the two entities into one, Fiat-Chrysler would compete with Toyota, General Motors and Volkswagen even more fiercely. This justifies the large debt that has figured into Fiat Group’s book of accounts, resulting in a net debt of 5.5 billion Euros. The Chrysler stake is to be viewed more as an investment, than as a component that has increased Fiat’s debt ten-fold in the last year. As with every investment that has its own payback period, Chrysler is a brand that needs to be given its due time for a true reflection of its performance as an impact on the bottom line. Chrysler made a profit of US$225 million in the last quarter of 2011, which helped offset the losses made by Fiat in its home market in the previous quarter, taking into account a 2.4 per cent drop in sales of Fiat, Lancia and Alfa Romeo. Fiat’s strategy of playing the Chrysler card to leverage the booming sales in the US has proven to be profitable.

In terms of top-line contribution, Fiat’s home-bred brands barely showed any growth, as against Chrysler which helped the group more than double the revenues. It might be premature to deem the Chrysler debt in bad light, considering the Fiat-Chrysler brands together are expected to reap at least 1.2 billion in 2012. This would be a tough target to achieve if Fiat were to achieve it with homegrown brands.

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