Fiat’s Worst Nightmare

Mayor Sergio Chiamparino re-turned home from Salt Lake City, proudly carrying the official Olympic flag that will be safely tucked inside Turin city hall for the next four years while the city prepares to host the 2006 Winter Games. But Turin is running low on Olympic spirit. Now more than ever, the No. 1 concern here is cars. Despite talk of economic diversification and hopes for an Olympic boost, this is still very much a company town, Fiat’s town; and the automaker is living through one of the bleakest periods in its 102-year history.

The company released troubling 2001 year-end numbers in late February, including its first net loss since 1993; the car division finished in the red for the third time in four years. That was followed by last week’s report that overall February car sales in Italy were down 12.3% compared to last year. The dire straits are forcing the chiefs at Fiat — which has branched off over the years into the insurance, publishing and energy businesses — to consider whether the time has come to sell the treasured auto division. For the Agnelli family, which founded Fiat in a Turin garage in 1899, that is a gut-wrenching prospect — but a very real one. In January 2004, Fiat will have the right to exercise an option to sell its auto division to General Motors for a still-to-be-determined price. The option was part of a March 2000 deal between the auto giants to form an alliance that included a $2.4 billion stock swap giving GM a 20% share in Fiat.

Fiat is desperate to find a product that can sell strongly in Europe and help plug the drain on its share of the Italian auto market, which fell from 60% to 39% in the late 1990s. Gregory Melich, an auto industry analyst for Morgan Stanley in London, says a reorganization in December that cost the auto division chief Roberto Testore his job didn’t go far enough. “There are serious problems,” says Melich. “They are losing market share and burning ?500 million to ?1 billion a year.” Fiat’s heavy debts, weakening brand and lagging technology turn away both investors and consumers. Shares recently slid to nine-year lows, and no boost is expected after last month’s announcement that the car division had posted fourth-quarter operating losses of ?432 million against a profit of ?71 million last year. Fiat share prices did get an unexpected upward bump after the March 1 announcement that the Libyan Arab Foreign Investment Co. (Lafico), Libya’s foreign investment arm, had bought 2% of Fiat stock for an estimated ?125 million.

Outside the massive Mirafiore plant, the last piece of Fiat’s production machine left in Turin, workers say a sell-off feels inevitable. Cristina Occhipinti, a 14-year Fiat veteran who works in the parts division at a joint Fiat-GM power-train division, is pessimistic: “Maybe they’ll send us to work in America,” she quipped, “but I don’t think so.” A sale to GM could spell the end to Fiat manufacturing in Turin, where the company employs 30,000 people, down from 140,000 two decades ago. Rumors swirl that Fiat may close down Mirafiore on its own.

Fiat officials continue to deny, with varying degrees of certainty, that they want to sell. Many in the industry believe that honorary chairman Gianni Agnelli, who turned Fiat into a worldwide industrial force in the 1960s, is intent on holding on to the car division. Yet his younger brother Umberto, chairman of the Agnellis’ holding company, may be ready to sell after watching the auto division bleed profits from the family’s successful banking and insurance interests. Fiat chairman Paolo Fresco, who returned to Italy in 1998 after rising to the top ranks of General Electric, is known to tout former GE chairman Jack Welch’s mantra that any troublesome division of a business conglomerate should be sold, fixed or shut down. Asked recently about the prospects for the auto division, Fresco said, “If I had to decide today, I would hold on to it.” Not exactly a ringing endorsement.

Back at city hall, public officials insist that keeping Fiat locally owned — and Mirafiore chugging away — is as important as ever. But, says vice mayor Marco Calgaro, Fiat does not hold the only key to the city’s future. “Turin is changing,” he says, pointing to new high-tech research firms and a high-speed rail link with Lyons, France. Lest we forget, there is also a certain Olympic flag stashed away inside city hall.