Case summary
Case 8 Fiat Chrysler Automobiles N.V. (2015)1: From an Alliance to a Cross-Border Merger
From an Alliance to a Cross-Border Merger
In 2015, Fiat Chrysler Automobiles N.V. (hereafter FCA) was the seventh-largest manufacturer of automobiles in the world. The company sold passenger and commercial vehicles in global markets. The Group’s automotive brands included Abarth, Alfa Romeo, Chrysler, Dodge, Fiat, Fiat Professional, Jeep, Lancia, Ram, SRT, Ferrari and Maserati. The Group also managed operations of production systems (Comu), com- ponents (Magneti Marelli), and iron and castings (Teksid). The company was formed in 2014 when Fiat from Italy and Chrysler from the United States sought a cross-border merger and created a new automotive entity.2 Table 1 briefly provides FCA’s history and brand portfolio.
In 2012, Chrysler and Fiat created a successful strategic alliance to share technology, manufacturing platforms, and other corporate resources. Unlike other corporate tie-ups and cooperative links, the Chrysler–Fiat alliance survived because of the companies’ sharing of knowledge and resources. In addi- tion, the two firms enjoyed a solid growth in their post-alliance integration. Chrysler manufactured the Chrysler brand, Jeep, Dodge, Ram, SRT, and other products and was headquar- tered in Auburn Hills, Michigan. Chrysler was founded as Chrysler Corporation in 1925. Fiat, on the other hand, sold a variety of brands that included Fiat, Alfa Romeo, Lancia, Fiat Professional, and Maserati and Ferrari sports cars. Fiat first started manufacturing cars in Turin, Italy, in 1899. After 2012, the two auto companies survived their financial exigencies and operational problems. The whole process forced the companies to go through restructuring and corporate changes that took place on both sides of the Atlantic. Chrysler’s alliance with Fiat initially provided the company with a tangible lifeline by which Fiat initially took 20 percent ownership in Chrysler.3
Chrysler in North America
Business history reveals that Chrysler was always a marginal player among the three automakers in North America because of its quality problems, weakened market share, and old tech- nology. The company remained behind GM and Ford in its quality rankings and sales. In the area of consumer satisfac- tion, Chrysler had problems making satisfactory scores. Right from its inception, Chrysler concentrated on those segments that required inexpensive autos by middle-income consumers. The company was further left behind in the auto industry with the arrival of Japanese competitors such as Toyota, Honda, and Nissan. No wonder Chrysler remained synonymous with its low quality image and distant competitor. At the same time, in minivans and the Jeep brand, the company was a competitive player and witnessed solid growth in North America.
Fiat’s Long-Term Plans and Corporate Strategies (2014–2018) In May 2014, FCA announced a five-year plan (2014–2018) that aimed at reinvigorating the company in the global auto industry. FCA projected that its sales would surpass seven mil- lion vehicles, eventually reaching revenues of 132 billion euro. The company planned to use its Jeep brand as the main growth vehicle because of its visibility and market share. FCA plans to use its Alfa Romeo brand to compete with Mercedes-Benz, BMW, and other luxury automotive manufacturers. Fiat is a visible automotive brand from Italy and carries a rich history in global business regarding its brand portfolio, business model, and growth. The company had survived cor- porate disruptions, labor crises, and new competitors. Most of Fiat’s problems arose from Italian labor laws, weakened business environment, and cost issues. From business history perspectives, Fiat had come a long way in the European mar- ket regarding dealing with quality areas and reputation.4 The company reinvented itself by fixing its brand portfolio and quality areas.
Like Chrysler, Fiat’s evolutionary growth and survival en- countered problems in the areas of technology and quality standards. The company history has been unique and reflects Italy’s industry-specific problems and rigid labor laws. Fiat was founded in 1899 and employed 35 workers in 1900. Between 1980 and 1985, the company reduced its labor force by cutting 100,000 jobs. In 1986, Fiat acquired Alfa Romeo from the Italian government and became the largest automaker in Europe.
In 2004, Fiat recruited a well-known turnaround executive Sergio Marchionne to become its CEO. In 2005, Fiat and GM dissolved their five-year partnership when GM paid Fiat $2 billion in cash to get out of the partnership.5 In 2007, Fiat introduced its iconic Cinquecento 500 model after 32 years. In early 2009, Fiat announced a deal to acquire 20 percent of Chrysler in exchange for a technology-sharing pact and distribution networks in Europe and North America. During the same period, Marchionne also showed interest in acquiring GM’s Opel and Vauxhall brands in Germany and the U.K.
Global Auto Industry in 2015
The global auto industry has been one of the largest industries in the world that affects countries, regions, cities, and businesses in every major nation and emerging market. In
the United States, Japan, and Europe, auto companies often became part of their country-specific policies and national prides.6 The global auto market is somewhat uneven regard-
cost issues, diverse markets, new technologies, and supplier- related issues.8 The auto industry is also an amalgam of complex and modular technologies and assembly-line opera- tions that includes suppliers/parts manufacturers, raw material providers, and outsourcing firms. At the global level, these entities are highly diverse, intertwined, and dynamic. Small disruptions in the industry can cause major delays in the industry’s value chains and technology platforms.9
The auto industry has witnessed cross-border alliances, joint ventures, and other corporate tie-ups that mostly aimed at economies of scale and market expansion.10 In 2015, only three American auto manufacturers prevailed in North America (General Motors, Ford, and Chrysler), and Japan had three major firms: Toyota, Honda, and Nissan. Europe has been left with four large auto companies (Daimler, Volkswagen, Fiat, and Renault–Nissan). The auto industry has witnessed major structural changes in the forms of strategic alliances and col- laborative activities, R&D networks, distribution agreements, joint ventures, and equity stakes. The reasons behind these changes are the industry’s evolutionary processes, revenues, net profit, and economies of scale in manufacturing. As of 2015, the auto industry is in the process of reaching out to Silicon Valley regarding sharing mobile technologies from the smartphone in- dustry and its related areas.11 Table 2 and Table 3 compare and contrast this data from 2014 to 2016 and provide industry-level rankings on seven auto manufacturers in the industry.
Changing demographics and rising costs have compelled large-scale auto manufacturers to move assembly plants to low cost economies. In addition, consumer demand in emerg- ing markets has forced large auto manufacturers to move fa- cilities abroad to take advantage of cheaper labor and market opportunities. Auto analysts believe that in the coming years, only a small number of auto manufacturers will be left at the global level because of consolidations and mergers. Companies maintaining strong quality standards and competitive technolo- gies will be able to compete and survive. At the same time, the global auto industry will continue to see consolidation in its major markets.
Synergies and Challenges Faced by Fiat Chrysler Automobiles
Since 2013, Fiat and Chrysler have made major structural changes to meet their integration goals. Academic and practitio- ner studies authenticate that strategic alliances link two or more companies’ operations by combining manufacturing resources and knowledge.12 These tie-ups combine R&D, produce devel- opment, distribution networks, and other areas in knowledge sharing. Strategic alliances mostly aim at seeking economies of scale and improving productivity.13 Interorganizational coop- eration is a unique competitive weapon that helps companies to expand their managerial and financial resources.14 This was the same situation with the Chrysler–Fiat strategic alliance in 2012 that brought changes to the companies. The alliance allowed Chrysler and Fiat not only to survive in the auto industry but also to expand in global markets. In its initial phase in 2009, Fiat owned 20 percent of Chrysler and later raised its stake to 58.6 percent in 2011. Table 4 provides information on the Chrysler–Fiat alliance, which saw a diverse array of changes and developments between 2010 and 2013.
The Chrysler–Fiat strategic alliance was heavily influenced by competition in the auto industry, which had witnessed down- sizing, massive losses, and weak consumer demand. The auto manufacturers from North America have been heavily burdened with debt and expensive labor union contracts. Chrysler was in a dire situation and saw Fiat as the only available partner for survival. Other factors that helped form the alliance were R&D opportunities, access to markets, and long-term rationalization in manufacturing. Within the global auto industry, we now dis- cuss the status of FCA and its alliance and future developments as follows.
1. What went well in the alliance? After the alliance, the top managers of Chrysler and Fiat planned and came up with major synergies that aimed at a common R&D platform, restructuring, streamlining global operations, and image building in both companies (see Table 2). Both Chrysler and Fiat raised their quality ratings and established dealer networks in Europe and the United States. Although downsizing was pursued to cut cost and operations, this did not cause the companies to lose sales. Both firms developed common assembly platforms in those sectors where technologies were similar. By 2014, the alliance had brought major cost savings and simplified R&D-related activities that helped suppliers and dealers (see Table 4).
2.Problems that surfaced in the post-alliance integration In the post-alliance integration, Fiat’s sales declined in the European markets in 2011 because of the economic down- turn. Dealing with labor unions in Italy and their work ethic–related issues also hampered corporate efficiencies in the alliance. Chrysler’s U.S. operations mostly went well because of stable financial resources and sales (see Table 4).
3.Globalization and the changing global auto industry Globalization is a major force affecting countries and their industries.15 The same applies to the global auto industry that continues to be dynamic yet highly competitive in sales and market shares. Regardless of the auto industry’s consolidations and mergers and acquisitions, opportunities are available to those companies that bring new technolo- gies and auto models. After the merger, both companies have the potential to target new markets in North America, Europe, and emerging markets (see Table 4).
4.Leadership of Sergio Marchionne As of 2015, Marchionne enjoys a great reputation in Italy and North America because of his turnaround and managerial quali- ties. Under his leadership, the alliance worked well and helped the two companies merge. Originally trained as a chartered accountant and solicitor, Marchionne joined Fiat in 2004 and was able to convince the board to seek major changes in difficult times.16 Marchionne sought a planned and systematic restructuring of Fiat by concentrating on new technologies and models. Fiat successfully realigned its management structure and was able to show profit (see Table 4).
5.Brand portfolio and new models In 2015, FCA’s brand portfolio seems compatible within the global auto industry. Both companies manufacture small cars that are in demand because of high gasoline prices and cost issues. In their alliance, the companies have successfully pooled their resources to consolidate brand portfolios that aim at significant cost savings in R&D and technology platforms. The companies’ joint dealer networks have brought required savings and efficiencies as well
6. Issues related to the new company History books tell
us that Fiat left the North American market in the eighties because of its weakened market share, quality problems, and mismanagement. To reenter the North American market, Fiat needed a well-established auto manufacturer that knew the market and had the technology to compete. Chrysler was the only choice available for this growth plan. As we evaluate the alliance and the companies’ merger, it is evident that the tie-up was a logical choice on the part of Fiat, which desperately wanted to come back to North America for future expansion and growth (see Table 4).
7. Status of Fiat Chrysler automobiles in 2015 Table 4 provides information on the status of FCA since 2013. In 2014, the new company listed its shares on the New York Stock Exchange and plans to list on the Milan Stock Exchange (Borsa Italiana) as well. Although complex in its form and structure because of Italian and American corporate cultures, the cross-border merger has stood well in the industry and will continue to grow in com- ing years. FCA was incorporated in the Netherlands, domiciled in the U.K., and listed its shares on the New York Stock Exchange. The company is slowly reducing its Italian heritage and would like to grow as a global player that operates like a multinational corporation. At the same time in the United States and emerging markets, FCA has had to deal with its aging brand portfolio and weakened quality standards.17 This may lead to addi- tional alliances and possibly another merger with an auto manufacturer.18 In March 2015, Marchionne proposed a mega merger to General Motors executives but was de- clined.19 The company plans to sell five million vehicles by 2018 and would have new automotive models.20 This is an ambitious plan that could see competitive headwind because of the overcrowded markets and cost efficiencies (see Table 4).
