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Fiat Chrysler's Worryingly Limited Plan For The Future

Has their CEO made a bad strategic choice?

17Feb

As new challenges are thrown at the automobile industry, leading companies are being forced to adapt or die, with environmental restrictions putting further pressure on a sector already battling with the imminent arrival of automated vehicles and a lack of remaining emerging markets to exploit.

And traditional production is facing intense, imminent competition from new areas, with electronic cars paving the way for automated vehicles by becoming more practical every year. Even Apple are said to be muscling in, with the iCar set to ‘give Tesla a run for its money’, with all the brand power and technological intrigue that comes with a new Apple product.

Fiat Chrysler’s unorthodox CEO Sergio Marchionne was characteristically defiant during his fourth-quarter earnings presentation in January 2016, though. The former UBS Vice Chairman turned around Fiat’s fortunes in just two years - having been appointed CEO in 2004 - but faces significant trials in the coming years. Marchionne acknowledged the major issues facing the industry in his address, but refused to accept their severity, instead focusing on the positives and proposing to stand by or improve on targets already described as coming from “Fantasyland”.

Regarding the industry-wide drive to boost volume - with developing-market expansion all-but coming to an end - Marchionne was particularly dismissive, citing the increase in demand for both trucks and SUVs as enough of an assurance of the company’s immediate future, at least. Indeed, larger vehicles have grown in popularity of late, as 2015 saw a 22% rise in Fiat Chrysler’s sale of SUVs and trucks - with car sales plummeting by 19% - the truck industry has seen an average 9% growth across the four most popular brands.

Ford estimates that by 2020 SUVs could make up a huge 40% of the entire market, with improved fuel economy and a reduction in the size of models driving more customers their way. Such a growth would see SUVs and trucks make up over half of all sales of new autos come the close of the decade, and Fiat Chrysler clearly intend to be right in the middle of the increasing demand.

As for challenges regarding emissions, companies including Fiat Chrysler are getting around regulations by purchasing the carbon credits made available by competitors’ (as yet largely unprofitable) electric-car programs. In fact, Tesla Motors turned a profit for the first time in their 10-year history in 2013 largely thanks to their policy of selling their carbon credits to other automakers.

Fiat Chrysler’s sunny outlook comes, in part, from the current oil-price nosedive that has made larger autos a far more attractive prospect for a potential buyer. Marchionne clearly sees SUVs and trucks as the future and plans to cut production of smaller, lower-margin sedans in favour of the more profitable larger vehicles. He has been seeking to find a partner to produce the sedans they need to make up their full range; a dangerous strategy in itself, with Bloomberg’s Edward Niedermeyer expecting the company’s go-to option to be that of rebranding Mitsubishis as Dodges or Chryslers.

But Marchionne’s dismissal of such fundamental issues reeks of short-termism. His projections rely on an extended wave of optimism surrounding larger vehicles and a continued lull in oil prices. The latter may be here to stay but, with technology in the industry moving faster and garnering more interest than his SUVs ever will.

For Fiat Chrysler to properly address both the present and fast-approaching issues, Marchionne’s projections must, in part, come to fruition, with the company needing to possess both the cash and scale to meet the challenges head-on. The Italian-Canadian CEO has been trying, unsuccessfully, to organise a merger that would give the world’s seventh-largest auto maker the facilities to adapt and secure their future. Without it, Ford Chrysler risk becoming a dinosaur, left behind by competitors more willing to accept and buy into the changing industry landscape. 

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