FCA struggling to achieve goals set by aggressive five-year plan

Attemps to secure funds by spinning off Ferrari and postponing new models

2015/07/27

Summary

Recent developments of Fiat Chrysler Automobiles N.V. (FCA) are summarized in this report.
・FCA announced its new five-year business plan in May 2014, which included an aggressive global sales plan with an annual sales target of 7 million units in 2018. At the core of the plan are the globalization of the Jeep and the sales expansion of the Alfa Romeo.
・In 2014, sales of the Jeep successfully exceeded 1 million units. However, LMC Automotive, a British research firm, and many other automotive industry analysts were skeptical that FCA would be capable of achieving global sales of 7 million units in 2018. According to the forecast by LMC Automotive, FCA's 2018 global production will be 5.4 million units.
・FCA's sales have been buoyant but its profits have been comparatively thin. From 2015, FCA's CEO, Sergio Marchionne, has been arguing that companies in the automotive industry should improve their efficiencies through mergers and avoid needless capital investments. He was trying to persuade General Motors (GM) to merge with FCA, but GM declined the proposal.
・FCA plans to spin-off its luxury car unit, Ferrari SpA, to raise funds by the end of 2015. In June 2015, FCA revealed that many of its new model plans have been postponed.

FCA five-year business plan (announced in May 2014)

	Summary
Sales target: 7 million units per year	FCA aims for annual sales of 7 million units in 2018, a big increase from 4.4 million units sales in 2013. For sales by brand, FCA aims to expand global production and sales network of the Jeep, and the company also intends to expand the sales of upscale Maserati and Alfa Romeo brands.
Sales expansion in China and North America	For sales by region, FCA aims to achieve annual sales of 1.1 million units in the Asia-Pacific region by the end of 2018, which is more than five times the sales in 2013 (200,000 units). The company expects that the Jeep joint venture in China will contribute to most of this sales expansion. The company also aims for a 50% rise in sales in North America.
Maserati and Alfa Romeo	Maserati will enter the luxury SUV segment. The company will launch six models, which will cover all of the luxury vehicle segments. The company aims for an annual sales volume of 75,000 units in 2018 (15,000 units in 2013). As for Alfa Romeo, eight new models will be introduced by 2018. The company aims for an increase in annual sales from 73,000 units in 2013 to 400,000 units in 2018.
Jeep targets 1.9 million units in 2018	FCA expects that the sale of the Jeep will expand to 1.9 million units in 2018, which is an increase of 1.1 million units from the sales in 2013 (798,000 units). In 2013, five Jeep models were produced at four plants in North America. In 2018, six Jeep models will be produced at ten plants in six countries.
Financial target for 2018: Net profit of EUR 5 billion	FCA has set a net sales target of EUR 132 billion (EUR 86.6 billion in 2013) and a net profit target of EUR 5 billion (EUR 1.95 billion in 2013). The company plans to invest EUR 48 billion in the development of new models and production facilities for a period of five years.

Source: FCA Investor Day Presentations, May 6 and 7, 2014

Progress of five-year business plan (as of July 2015)

	Summary
Sales target: 7 million units per year	FCA sold 4.43 million units in 2013 and 4.75 million units in 2014, a 7.2% increase year-over-year (y/y). This rise fell short of the expected growth rate (10% per year) to achieve the annual sales target of 7 million units, but it was the highest growth rate when compared with those of major manufacturers.
Sales expansion in China and North America	Annual sales volume in the Asia-Pacific region increased from 200,000 units in 2013 to 267,000 units in 2014 by 34.2%. Production of the Jeep at the joint venture in China will start in the fourth quarter of 2015. In North America, the company has achieved a one percentage point increase of its market share from 11.4% to 12.4% (the company aims to gain a 14.4% market share by the end of 2018).
Maserati and Alfa Romeo	For Maserati, an upscale midsize SUV, Levante, will be introduced in the fourth quarter of 2015. Maserati's annual sales volume was 15,000 units in 2013 and 33,000 units in 2014. As for Alfa Romeo, production of a new sedan "Giulia" will start in November 2015. The Giulia is expected to generate high volume of sales. However, Alfa Romeo's sales declined from 73,000 units in 2013 to 67,000 units in 2014.
Jeep targets 1.9 million units in 2018	Sales of the Jeep increased from 798,000 units in 2013 to 1 million units in 2014. The Jeep was produced only in North America in 2013. Currently, the Jeeps are also produced in Italy and Brazil. Production in China will start by the end of 2015.
Financial target for 2018: Net profit of EUR 5 billion	FCA had net sales of EUR 86.6 billion in 2013 and EUR 96.1 billion in 2014, up 10.7% y/y. The company achieved its annual growth rate target of 9%. FCA had net profits of EUR 1.95 billion in 2013 and EUR 630 million in 2014. FCA's adjusted net profit did not increase much, which was from EUR 943 million in 2013 to EUR 955 million in 2014.

Global sales expanded in 2014

Global sales of FCA in 2014 were 4.75 million units, up 7.2% y/y. By region, FCA experienced significant sales growth in the North America and Asia-Pacific regions. FCA's sales in Europe increased slightly, reflecting the recovery of the automotive market. FCA's South American market share in 2014 was fairly good at 16.0%, up 0.2 percentage points from 2013. But because of a decrease in demand, it was down 11.0% in terms of y/y unit sales.

FCA's sales volume by region

(in thousands of unit)

Region	2012	2013	2014	YoY 2014/2013
North America	1,989	2,148	2,459	14.5%
Europe	1,174	1125	1,151	2.3%
South America	982	933	830	-11.0%
Asia Pacific	115	199	267	34.2%
Luxurious vehicles	14	22	40	81.8%
Total	4,274	4,427	4,747	7.2%

Source： FCA Press Release

FCA's U.S. market share expands

FCA's lineup consists of mainly SUVs and large pickup trucks that are popular in the U.S. market. In keeping with this trend, FCA sold 2.09 million units in the U.S. in 2014, up 16.1% y/y. FCA's U.S. market share in 2014 increased by one percentage point y/y.

Significant investment in three plants

Brazil	FCA built a new plant for the new Jeep "Renegade" in Goiana in the state of Pernambuco, Brazil, and the plant started operations at the end of April 2015. The total investment was BRL 7 billion (EUR 2.2 billion). The breakdown of the investment is as follows: BRL 3 billion for the assembly plants, BRL 2 billion for the supplier park, and BRL 2 billion for product development. Production capacity of the new plant is 250,000 units a year.
Italy	FCA has invested EUR 1 billion in its Melfi plant in Southern Italy. The company has also introduced the latest technology for the production of the new Jeep "Renegade" and the new Fiat "500X." With this technology, four different models can be produced on the same assembly line. Maximum daily output of the plant is 1,600 units when running on three shifts.
Canada	FCA plans to invest USD 2 billion in its Windsor plant in Ontario, Canada for designing and development of minivans, upgrade of facilities, and training of workers to produce new minivans. The Windsor plant shut down for three months from the end of February to the end of May 2015 for major upgrades to the facilities.

Increase in sales volume, little improvement in profitability

FCA 2014 financial results

(in millions of EUR)

	2012	2013	2014	YoY 2014/2013
Sales	83,765	86,624	96,090	10.7%
EBIT	3,434	3,002	3,223	7.4%
Profit before tax	1,524	1,015	1,176	15.9%
Net profit	896	1,951	632	-67.6%
Special factor	-244	1,008	-323	--
Net profit after adjustment (simulated)	1,140	943	955	1.3%

Source： FCA Press Release

In 2014, net sales were up 10.7% y/y, but net profit was down 67.6% y/y. This is due to the significant impact of tax adjustments incurred from a merger. The adjusted net profit after excluding temporary factors was EUR 943 million in 2013 and EUR 955 million in 2014. The profitability of FCA did not improve much, in spite of the considerable increase in sales.
Probable causes of slow growth in profitability in 2014 include: additional warranty costs incurred from recalls triggered by GM, big expenditures on research and development (R&D) in line with the five-year business plan, increases in investments in plants, and additional sales incentives to outdo competitors in the increasingly competitive U.S. market.

FCA's profit and loss by region

With regard to earnings before interest and taxes (EBIT) by region, FCA's profit in North America was high. However, in 2014, it declined due to temporary expenses, such as merger costs, that added up (USD 505 million). Profits of luxury models and in the Asia-Pacific region exhibited significant growth. Though the profit in South America dropped sharply due to worsening situations in the market, FCA sustained positive figures on an EBIT basis.
As for the EBIT in Europe in 2014, it is worthy of note that FCA recorded a loss of USD 109 million, but its profits have improved. The EBIT has been positive two quarters in a row from the fourth quarter of 2014.

FCA's low profitability ratio in 2014

FCA's profitability ratio was notably low when compared with profitability ratios of major competitors. FCA's pretax profit as a percentage of net sales was a mere 1.2%, when that of Ford, GM, and Toyota Motor Corporation (the largest automaker) was 4.4%, 2.7%, and 10.6%, respectively.
One reason for the low profitability ratio was that European and South American businesses, which formed a large portion of FCA's total business, operated at low levels of capacity utilization. FCA's EBIT to net sales ratio in North America was 2.6%, while that of GM was 6.5%. Ford Motor Company's earning before tax as a percentage of net sales was 8.4%, which was much higher than that of FCA.
Ford has gotten ahead of GM and FCA with the execution of the "One Ford" strategy, and Toyota has led the industry with efficient production systems. FCA's profitability ratio was influenced by delays in the reorganization and consolidation of platforms and powertrains, and delays in achieving greater production efficiency.

FCA keeps R&D spending low, falls behind in development of electrified vehicles

FCA's R&D cost in 2014 was EUR 2,537 million. FCA's ratio of R&D cost to net sales was 2.6%, which was approximately 2 percentage points lower than that of major competitors-GM's 4.7% and Ford's 4.8%.
FCA has fallen far behind in the race for the development of electrified vehicles, including hybrid vehicles, electric vehicles, and fuel cell vehicles. FCA's electrified vehicles are less efficient in terms of cost. FCA will have difficulty catching up with competitors on its own and it will need to form strategic alliances with other automakers with expertise in electrified vehicles.

Ferrari spin-off plan

In the end of October 2014, CEO Marchionne's announcement on FCA's plan to spin-off its luxury car unit, Ferrari, surprised the automotive industry. FCA will spin-off Ferrari to raise part of EUR 48 billion to implement its five-year business plan. FCA currently owns a 90% stake in Ferrari. According to the spin-off plan, the company will sell 10% of its shares in the general stock market and it will sell 80% of its shares to FCA's shareholders. The remaining 10% stake in Ferrari will be owned by the founding family.
Ferrari will be listed in the New York Stock Exchange, as in the case of FCA, and it will be registered in the Netherlands. However, Ferrari will continue to be tax-domiciled in Italy and its automotive business operations will also remain in Maranello, Italy.
The spin-off that was initially scheduled for the end of June 2015 has been postponed by at least three months. CEO Marchionne repeatedly expressed his expectations that Ferrari's market capitalization will be EUR 10 billion.

Merger proposal to GM

From 2015, CEO Marchionne has been arguing that companies in the automotive industry should improve their efficiencies through mergers and avoid needless capital investments. He has proposed a merger to GM's CEO, Mary Barra. CEO Barra declined the proposal after consultation with GM's board of directors.
The chances of CEO Marchionne convincing GM to accept the proposal are slim. However, it is also true that the merger will create enormous amounts of monetary synergy which cannot be ignored by GM's shareholders immediately.

New model plans postponed

According to FCA's five-year business plan, the company will invest EUR 48 billion in the development of new vehicles and plants in five years. However, analysts have pointed out difficulties in allocating the funds from when the company first introduced the plan. In early June 2015, Reuters, Ltd. covered the news of FCA's postponements of more than 10 new models, in which the information was provided by suppliers.
Analysts expected that FCA would give higher priority to new models for Alfa Romeo and Jeep, and that it would postpone plans for other new models. In the end of June 2015, however, Jeep's CEO, Mike Manley stated that the redesign of Jeep's flagship "Grand Cherokee" would be deferred for more than a year.


Alfa Romeo 4C (Source: FCA)	Jeep Renegade (Source: FCA)

FCA's new model plan

Release year	Model	Summary
2014	Alfa Romeo 4C	- The Alfa Romeo 4C is designed at Alfa Romeo's design center in Turin, Italy. The vehicle is built at the Modena plant in Italy. Production of the 4C started in 2013, and it was released in 2014. Due to the limited production volume of carbon-fiber cockpits, the annual output of the 4C is currently 2,500 units and it is distributed as follows: 1,000 units for Europe, 1,000 units for North America, and the rest for other regions.
	Chrysler 200	- The Chrysler 200 is a midsize sedan that has replaced the first-generation Chrysler 200 and the Dodge Avenger. The vehicle is produced at Sterling Heights plant in Michigan, U.S. The new model was released in May 2014 as a 2015 model.
	Dodge Challenger	- Production of the 2015 Dodge Challenger, a two-door muscle car, started in the third quarter of 2014. The interior has been completely changed, and an 8-speed automatic transmission has been introduced as standard equipment for the first time in the car segment of this vehicle. The vehicle is produced at the Brampton plant in Ontario, Canada.
	Dodge Charger	- The 2015 Dodge Charger, a four-door muscle car with fully redesigned appearance and interior, was released in the fourth quarter of 2014. This vehicle is a sister model of the Challenger and it is also produced at the Brampton plant in Ontario, Canada.
	Jeep Renegade	- Jeep's first subcompact SUV "Renegade" was released in Europe in October 2014 and in North America in March 2015. This vehicle is a sister model of the Fiat 500X. The vehicle is produced at the Melfi plant in Italy.
2015	Ram ProMaster City	- The Ram ProMaster City is a compact front-wheel drive (FWD) van/wagon for commercial use. The vehicle was developed based on the Fiat Doblo. It was released as a 2015 model in January 2015. The vehicle is produced at the Bursa plant in Turkey.
	Fiat 500X	- The subcompact SUV, 500X, was released in Europe in February 2015 and in North America in June 2015. This vehicle is a sister model of the Jeep Renegade. The vehicle is produced at the Melfi plant in Italy.
	Chrysler 300	- The greatly improved large sedan, Chrysler 300, was released in the first quarter of 2015. The vehicle is produced at the Brampton plant in Canada. An 8-speed automatic transmission "TorqueFlite" has been introduced as standard equipment for the first time in the car segment of this vehicle. The new automatic transmission has helped improve fuel efficiency of the vehicle.
	Fiat Compact Sedan	- This is a new compact sedan. The Fiat Compact Sedan made its appearance at the Istanbul Auto Show in May 2015. The vehicle is produced at the Bursa plant of Tofas, a joint venture between FCA and a Turkish company-Koc Holding AS. This new model will be on sale in Turkey in November 2015, and it will be exported to other European and Middle Eastern countries later. Its name has not been disclosed yet.
	Fiat Roadster	- The Fiat Roadster is a sister model of the Mazda Roadster (MX-5). Fiat developed the vehicle with Mazda Motor Corporation. The vehicle is produced at Mazda's Hiroshima plant in Japan. Its name has not been announced officially yet, but it is reported to be "Fiat 124 Spider."
	Alfa Romeo Giulia	- The Giulia is a new midsize sports sedan. This model has succeeded the name of a luxury compact car that was produced from 1962 to 1978. This rear-wheel drive (RWD) vehicle is positioned as a competing model of the BMW 3 series and the Audi A4. Production will start at the Cassino plant in Italy in November 2015. It will appear in the European market in the first quarter of 2016 and in the North American market in the second quarter of 2016.
	Maserati Levante	- The Maserati Levante is a new midsize luxury SUV. This RWD vehicle is positioned as a competing model of the Porsche Cayenne. This model is scheduled to be available with either a twin-turbo 3.0-liter V-6 engine, a twin-turbo 3.8-liter V-8 gasoline engine, or a 3.0-liter V-6 turbo diesel engine. The vehicle is produced at the Mirafiori plant in Italy. The vehicle is scheduled for release in the fourth quarter of 2015.
2016	Fiat B segment	- This is a new Fiat-brand model in the B segment, which is in line with FCA's five-year business plan. Detailed plans have not been announced.
	Jeep Compact SUV	- This is a compact crossover SUV that will replace the current-generation Jeep Compass and Jeep Patriot.
	Chrysler Town & Country	- The Chrysler Town & Country will replace the current-generation Dodge Caravan and Chrysler Town & Country. The vehicle will be produced at the Windsor plant in Canada.
	Chrysler 100	- The Chrysler 100 is a compact car that will compete with the Toyota Corolla and the Chevrolet Cruze. The vehicle is scheduled for release in 2016. The vehicle is planned to be equipped with either a four-cylinder 2.0-liter turbo engine or a four-cylinder 2.4-liter engine.
	Alfa Romeo Midsize SUV	- This midsize SUV will compete against the BMW X3 and the Audi Q5. The vehicle is scheduled for production at the Cassino plant in Italy.
	Maserati Alfieri	- The Maserati Alfieri is a large two plus two luxury sports coupe that made a debut at the Geneva Motor Show in 2014. The vehicle is planned to compete with the Porsche 911 and the Jaguar F-type. The vehicle is scheduled for production in 2016. In 2017, a convertible version will join the lineup.

Production Forecast by LMC Automotive: FCA Group's production will be 5.4 million in 2018

(LMC Automotive、June 2015)

According to LMC Automotive's forecast in May 2015, Fiat Group's productions in 17 major countries will be 4.7 million in 2015, up 0.5% from the previous year. And its productions in 2018 will be 5.4 million up 14.7% compared to 2014.
FCA has embarked on an aggressive five-year plan, targeting 7 million units of global sales in 2018. The turnaround strategy is to focus on higher-margin vehicles - a re-invention of Maserati and Alfa Romeo. Also FCA aims to increase Jeep sales with global production.
FCA's goal is to double group profit and lift annual sales by 61% in the next five years, but does FCA have time for this premium strategy? The resources required to turn around Alfa Romeo pose particular challenges and senior management continues to fuel speculation that FCA is seeking another OEM partner to better secure the group's long-term future.
By brand production, Fiat brand will increase from 1.7 million units in 2014 to 1.95 million units in 2018. The Fiat production will be helped by the volume expansion of Turkey, Poland, India and China. LMC Automotive forecasts that the production of Jeep will be 1.4 million units (1.9 million unit target), and those of Maserati and Alfa Romeo will be 44,000 units (70,000 unit target) and 260,000 units (400,000 unit target) respectively.
North America remains FCA's largest production region but the global goal of the Jeep brand will push production growth into other counties, mainly China. China will begin local production of the Jeep brands in the fourth quarter of 2015.

FCA's production forecast through 2018

		2012	2013	2014	2015	2016	2017	2018
FCA	Fiat	1,858,576	1,834,739	1,722,374	1,617,635	1,739,034	1,812,640	1,951,432
	Jeep	722,968	798,006	1,089,198	1,240,872	1,187,719	1,320,692	1,398,004
	Chrysler	373,163	342,682	382,457	397,122	496,107	576,884	611,878
	Ram	395,083	468,141	512,285	572,510	586,892	563,403	591,364
	Dodge	786,012	870,437	815,242	741,741	647,971	575,500	491,511
	Alfa Romeo	92,371	77,346	65,970	55,882	117,735	207,794	259,657
	Maserati	6,113	21,043	40,211	34,420	41,136	43,572	44,083
	Lancia	75,692	70,832	64,116	52,806	51,573	42,134	34,633
	Ferrari	7,121	6,901	7,254	7,271	7,574	7,985	8,194
Total		4,317,099	4,490,127	4,699,107	4,720,259	4,875,741	5,150,604	5,390,756
USA	Jeep	714,648	793,911	1,064,906	1,067,234	925,979	782,091	765,603
	Ram	227,453	291,464	315,900	332,198	316,883	349,061	366,290
	Chrysler	151,639	130,786	159,054	221,320	226,948	241,288	274,111
	Dodge	237,081	282,055	176,271	185,110	173,885	171,758	149,874
USA sub-total		1,330,821	1,498,216	1,716,131	1,805,862	1,643,695	1,544,198	1,555,878
Italy	Fiat	390,863	395,476	379,910	483,069	439,888	416,850	281,887
	Alfa Romeo	92,371	77,346	65,970	55,882	117,735	203,232	251,926
	Jeep	0	0	23,303	136,679	113,460	104,810	101,526
	Maserati	6,113	21,043	40,211	34,420	41,136	43,572	44,083
	Ferrari	7,121	6,901	7,254	7,271	7,574	7,985	8,194
	Lancia	27,168	9,471	2,972	0	0	0	0
Italy sub-total		523,636	510,237	519,620	717,321	719,793	776,449	687,616
Mexico	Ram	167,630	176,677	196,385	240,312	270,009	214,342	225,074
	Jeep	0	0	0	0	0	175,332	204,141
	Dodge	178,716	183,353	197,153	187,108	136,230	145,740	147,549
	Fiat	81,824	66,090	71,494	65,292	60,750	64,895	63,097
Mexico sub-total		428,170	426,120	465,032	492,712	466,989	600,309	639,861
Brazil	Fiat	818,037	755,476	675,190	478,688	489,571	508,543	533,053
Brazil	Jeep	0	0	0	26,508	53,654	59,551	62,273
Brazil sub-total		818,037	755,476	675,190	505,196	543,225	568,094	595,326
Canada	Chrysler	221,524	211,896	223,403	175,802	269,159	335,596	337,767
Canada	Dodge	355,732	357,201	372,730	325,926	294,460	214,288	149,075
Canada sub-total		577,256	569,097	596,133	501,728	563,619	549,884	486,842
Poland	Fiat	245,366	182,695	198,287	189,951	183,142	174,381	325,058
Poland	Lancia	48,524	61,361	61,144	52,806	51,573	42,134	34,633
Poland sub-total		293,890	244,056	259,431	242,757	234,715	216,515	359,691
China	Jeep	0	0	0	9,434	89,464	180,169	240,257
	Fiat	0	0	0	0	12,371	22,806	59,535
	Dodge	13,546	47,828	69,088	43,597	43,396	43,714	45,013
	Alfa Romeo	0	0	0	0	0	4,562	7,731
China sub-total		13,546	47,828	69,088	53,031	145,231	251,251	352,536
Turkey	Fiat	186,133	185,352	165,985	217,089	316,159	346,985	337,169
Serbia	Fiat	25,425	116,134	103,969	94,291	105,191	113,955	154,969
India	Fiat	11,032	8,071	13,614	11,010	53,422	74,339	92,111
India	Jeep	0	0	0	868	4,843	17,916	22,565
India sub-total		11,032	8,071	13,614	11,878	58,265	92,255	114,676
Argentina	Fiat	73,863	104,891	95,538	59,896	51,381	39,638	53,503
France	Fiat	15,206	13,416	15,789	13,684	14,118	26,763	26,979
Japan	Fiat	0	0	0	3,086	11,655	11,644	11,540
Iran	Fiat	0	0	0	0	0	10,178	10,431
Venezuela	Fiat	0	2,042	521	1,579	1,386	1,663	2,100
	Jeep	8,320	4,095	989	149	319	823	1,639
	Dodge	937	0	0	0	0	0	0
Venezuela sub-total		9,257	6,137	1,510	1,728	1,705	2,486	3,739
Hungary	Fiat	8,868	5,096	2,077	0	0	0	0
Russia	Fiat	1,959	0	0	0	0	0	0

Source: LMC Automotive "Global Automotive Production Forecast" (June 2015)
(Notes) 1.	Data indicates figures of only small-size vehicles, including passenger cars and light commercial vehicles with gross vehicle weight of under 6 tons.
2.	All rights reserved. Reproduction of any data will require permission of LMC Automotive.
3.	For more information or inquiries of forecast data, please contact LMC Automotive.

Darko Milosevic, Università Lum Jean Monnet, Bari, Italy (Dr.rer.nat./Dr.oec.)

Darko Milosevic, Dr.rer.nat./Dr.oec.