Fiat's Boss Believes He Can Raise Chrysler From The Dead
Story from The Economist

IT IS just as well that high-stakes industrial poker is a game familiar to Sergio Marchionne, the chief executive of Fiat Group. In 2005 he laid the foundations for Fiat’s spectacular recovery by extracting $2 billion from General Motors (GM) as the price for removing a put option that would have forced GM to buy the then-ailing Italian car firm. But even by his standards the next few days will be a daunting test of nerve and stamina from which only two outcomes are possible. Either Mr Marchionne will end up in control of Chrysler, the smallest of Detroit’s Big Three—or he will have quit the table, consigning the sickly carmaker to almost certain bankruptcy. Everything hinges on the negotiations taking place between Mr Marchionne, America’s Treasury, Chrysler’s current management, the unions and secured debt-holders.

Mr Marchionne is confident that a deal can be done that keeps Chrysler out of the bankruptcy courts, but he recognises that a lot can still go wrong. There are signs that the unions, particularly in Canada, where much of Chrysler’s manufacturing capacity is based, feel they have already conceded enough. The senior lenders, which include JPMorgan Chase and Citigroup, are going back and forth with the Treasury over how much of a “haircut” they will have to take on the $6.8 billion they are owed, and whether they will get a compensating equity stake. The Treasury itself will take some convincing to release the $6 billion it has promised in exchange for a credible recovery plan. Although Mr Marchionne has wowed the administration’s auto task-force with his forceful personality and blunt style, officials still fear that even with Fiat’s help, Chrysler may be too far gone to be turned around.

Why does Mr Marchionne believe he can salvage something from a firm that the rest of the industry sees as a basket-case—and which has defied the best efforts first of rich, successful Daimler and later of Cerberus Capital Partners, a sharp-elbowed private-equity group that acquired an 80% stake in Chrysler from the Germans two years ago? Quite simply, because he has done it before. When the Agnellis, Fiat’s dominant shareholder, turned to Mr Marchionne, a corporate troubleshooter who was running another company in which they had an interest, they knew that Fiat’s car business, representing half the group’s turnover, was dying. Poorly led, bleeding cash, heavily indebted and saddled with ancient factories, stroppy unions and outdated products, Fiat had become synonymous with failure at every level.

Italian-born but raised in Canada, where he qualified as both a lawyer and an accountant, Mr Marchionne conforms to none of the caricatures of either country. Instead of sharp suits and elegant circumlocutions, he favours shapeless sweaters and brutal (expletive-laden) frankness; instead of patient consensus-building, he bulldozes his way through, burying corporate politics and flattening dysfunctional hierarchies as he goes.

Mr Marchionne’s approach to Chrysler, if a deal can be done, is likely to be similar to what he did on arrival at Fiat in 2004. “The single most important thing was to dismantle the organisational structure of Fiat,” he recalls. “We tore it apart in 60 days, removing a large number of leaders who had been there a long time and who represented an operating style that lay outside any proper understanding of market dynamics.” In their place Mr Marchionne brought in a younger generation of executives who could respond to his demand for accountability, openness and rapid communication. Two key requirements that everyone had to understand were the need for speed and an end to the crippling political battles that resulted in scarce capital being wasted on little or no standardisation of parts and a ridiculous number of platforms (19 in 2006 will become six by 2012). The time taken to bring new cars from “design freeze” to production was reduced from 26 to 18 months, and a succession of handsome new models followed, capped by the launch in 2007 of the Fiat 500, the cool, retro-styled city car that embodied Fiat’s renaissance.

When a Fiat-Chrysler alliance was first mooted a few months ago, the idea was that in exchange for access to its small-car platforms and fuel-efficient powertrain technology, the Italians would receive a 35% stake in Chrysler. Now, although its initial stake will be scaled back to 20% and cannot reach more than 49% until Chrysler has repaid all the money lent to it by the taxpayer, Fiat will be much more firmly in the driving seat. If the deal is done next week, Mr Marchionne will be named chief executive and a new board of mainly independent directors will be recruited by Fiat and the Treasury.
The need for speed

The model chosen to run Chrysler will be like the one used by Carlos Ghosn when Renault formed its alliance with Nissan. Mr Marchionne will split his time between the two firms, while a hit squad of Fiat managers (some of whom are already crawling over Chrysler) will force through changes and develop synergies between the two organisations. The Italians have been shocked by how bloated Chrysler’s management still is—there are nearly ten times as many people in external communications as there are at Fiat—and the plodding, committee-bound decision-making process. “If this thing comes off”, says a Fiat senior executive, “they’re really in for a shock.”

Yet Mr Marchionne’s confidence that Chrysler can be saved using the same medicine that revived Fiat still does not fully explain why he is willing to risk trying to pull off an unlikely second miracle. Doesn’t he risk damaging his reputation and stretching Fiat’s thin management resources to breaking point? The answer is that he believes the car industry’s crisis will lead to consolidation and that Fiat, for all its recent success, is less than half the size it needs to be to survive in the future. And though he might not be ready to admit it, he has done pretty much all he can with Fiat in its present form—and there is a good deal more excitement and satisfaction in being the hunter rather than the hunted.