Fiat set to sacrifice Ferrari as family fights to secure survival

Close aides to Fiat honorary chairman Gianni Agnelli used to joke that if the family-owned football club Juventus had lost on Sunday, then Monday morning would be "hell" as the club's number one fan vented his frustration on hapless employees.

These days, however, "hell" runs from Monday to Friday as it has been Fiat itself that has lost winning form as indicated by the company itself this week. In an announcement that had more than a whiff of selling-off the family jewellery, Fiat on Tuesday said it would sell shares in its 90 per cent-owned, glamorous Ferrari sports car unit to reduce the spiralling debt accumulated by its core business, Fiat Auto.

For once, the figures returned by Italy's largest private sector company do not make positive reading. Fiat has reported a first quarter loss of €529 million on a 4 per cent drop in revenue to €14.1 billion. That loss represents more than the firm lost in all of last year.

Fiat Auto, which generates 45 per cent of group revenue, returned operating losses of €429 million as compared to just €16 million last year whilst its revenue dropped 11 per cent. Sales in the western European car market fell 20 per cent in April, reducing the firm's market share from 10 per cent to 7.9 per cent as its Stilo and Punto cars lost ground to market rivals such as the Ford Fiesta and the Peugeot 206 and 307 models. Even in Italy, market share fell from 35.5 per cent in 2001 to 32 per cent in April 2002.

These grim figures, coming on top of a disappointing 2001 year, described on Tuesday by Fiat chairman Paolo Fresco as "particularly tough", have inevitably had stock market repercussions.

Speculation that Fiat intends to sell off its stalling automobile division had already contributed to seeing its shares drop 23 per cent since the beginning of 2002, down to a current value of €13.63.

Fiat Auto head Giancarlo Boschetti sought to paint a brighter picture yesterday when he told an analysts' meeting that the car unit would lose less money in the second quarter than it did in the first and could have a "positive result" in the fourth quarter.

"Q2 will be better than Q1 but not dramatically so. In Q2 we will still be losing money but gradually move up to Q4 when we could see a positive result," said Mr Boschetti. He did not specify what kind of positive result the unit might report in the last quarter of the year but Fiat Auto usually reports at the operating level.

But the grim sales figures have prompted chairman Fresco and his team to initiate a drastic cost cutting operation entailing 3,000 redundancies in Italy and a further 6,000 outside the home market. In all, job losses will affect 9 per cent of the firm's staff in Italy and about 4.5 per cent of total employees.

Furthermore, Fiat this week not only announced plans for an initial public offering for its prized Ferrari unit but also invited venture capital groups to submit bids for its Comau tooling business, regarded as one of the world's leading manufacturers of vehicle robots and specialist assembly equipment, as well as for Teksid, a specialist foundry unit, and Magneti Marelli, a captive components supplier.

The above figures and corporate decisions would suggest that the company is in difficulty. Yet, Fiat has been in difficulty before and survived, most notably during the 1974 oil crisis when Fiat Auto sales crashed by 35 per cent. That crisis represented the first major hiccup in the post-war rise and rise of the 103-year-old Fabbrica Italiana Automobili Torino (Fiat), a company whose ability to provide a whole post-war generation with their first "utility" motor cars saw it weave its way into the very fabric of national life.

Italian Prime Minister Silvio Berlusconi this week responded to the Fiat crisis with an offer of an as yet undefined government intervention, saying: "The government is ready to examine the possibility of intervening, but without measures that could violate the free market and by offering equal opportunities to all market players".

Given Fiat's track record and given its size (it is still the world's sixth largest maker of cars and trucks with annual sales of more than 200 million vehicles), why then were commentators this week suggesting that this crisis could be "the most serious of all", as Rome daily, La Repubblica put it? Given also that the car industry, Europe-wide, is in recession, what is so specifically dramatic about Fiat's current problems? While it is not impossible that Fiat Auto could turn around and regain profitability by 2004, as promised by chairman Fresco on Tuesday, some commentators suggest that Fiat is in fact facing a longer term, ontological problem linked to its traditional family-run nature.

This line of analysis would suggest that Fiat's current problems, partly prompted by the disappointing performance of the Stilo (the model is only the seventh best seller in its segment, 20 per cent below Fiat's own predictions), also sound a wake-up call for the sort of difficult strategic decisions that, in Fiat's case, sometimes come second to the need to preserve the Agnelli family's central role.

For instance, 81-year-old Gianni "L'Avovocato" Agnelli, grandson of the founder of Fiat, has stated his reluctance to sell off the core car business in favour of a whole range of successful subsidiaries in insurance, publishing, engineering and so on. At the moment, General Motors owns 20 per cent of Fiat, with an option to buy out the other 80 per cent from January 2004.

It says much, too, about the family influence that Gianni Agnelli was recently obliged to issue a statement before travelling to the US for medical treatment lest his trip prompt further speculation about the company's future.

For the first time since 1943, he was not present for Tuesday's annual shareholders meeting, attended by his grandson John Philip Elkann, his heir apparent. When the ailing Agnelli finally hands over the reins to Elkann, it could be that his grandson will rule over a much reduced dynasty.