The Fiat-Chrysler Case StudyAn overview of strategic alliances

Nicole McAdooDan Redman-Hubley

Jan Rohweder

02. Nov. 2011

Agenda

• Background information on Fiat and Chrysler• An in-depth look at the new alliance• Questions proposed by the case study• Current financial analysis of the merger• Conclusion• Questions and comments

Fiat

• Fiat (Fabbrica Italiana Automobili Torino) was founded in July, 1899.

• By 1908, the company was exporting to the US, France, Australia, and the UK.

• Fiat entered the steel, railways, power, and public transportation business.

• In 2008, the company witnessed a drop in demand in its domestic market.

• By 2009, Fiat realized it had to diversify its cars and enter into new markets.

Fiat TimelineKey Dates Events

1899 Fiat is established by Giovanni Agnelli and other investors

1908 Fiat began exporting cars overseas

1945 Under Vittorio Valletta, Fiat entered an era of prosperity

1969 Fiat acquired Lancia (Italian) and merged with Ferrari (Italian)

1986 and ‘89 Fiat acquired Alfa Romeo(AR) and Maserati

1989 Fiat formed a joint venture with Chrysler to sell ARs in the US

1991 Chrysler decided to dissolve its Fiat partnership

1995 Fiat/AR pulled out of the US market

Mid to late 1990’s Fiat tried to diversify into unrelated businesses, some of which failed. They faced a major drop in automotive sales

2001 Fiat went through restructuring, and emerged as one of the worlds largest industrial groups

2008 Due to drop in demand, Fiat closed most of its plants for a month

Chrysler

• Founded in 1925 from the Maxwell Motor Company. • After acquiring Dodge and Plymouth, Chrysler became a top automotive

company in the US.• After WWII, Chrysler began to focus on producing large vehicles such as

SUV’s, trucks, and sedans.• In the 1970’s Chrysler failed to meet the demand for small cars, there was

a large drop in sales.• Chrysler sales began to drop again in the 90’s after failing to meet the

demand for fuel efficient cars. • In 2008 Chrysler asked for a bail out loan from the US government.

Chrysler TimelineKey Dates Events

1925 Chrysler was founded by Walter Chrysler

1930’s Became one of the top auto companies in the US after acquiring Dodge and Plymouth

1960’s Chrysler began exporting large vehicles into Europe

1970’s Oil crisis, government regulations, and consumer preference led to a sales decline for Chrysler

1979 Chrysler was on the brink of bankruptcy, US government gave the company $1.5 billion in a secured loan

1987 The auto maker was on top of the US market again acquiring Jeep, they also re-entered the European market

1990’s Many Americans were more inclined to purchase small fuel efficient cars, this led to a huge drop in sales of large vehicles

1998 Chrysler merged with Daimler-Benz(DB), but the alliance was deemed to be a takeover not a merger

2007 Chrysler was sold by DB to Cerberus private equity group. Sales still continued to fall

2009 Company asked the US government for a $4 billion bail out loan

Time for an alliance?

Benefits of an Alliance

• In order for Chrysler to receive the government loan they had to show a long term viability plan which included possible mergers.

• Fiat needed to find a new market for its cars to balance the declining domestic market.

• Fiat would have a strategic partner with operations based in the US.

• Fiat would be able to utilize Chrysler’s distribution channels.

Benefits of an Alliance (cont’d)

• Chrysler needed fuel efficient engine technology to make smaller eco-friendly cars.

• Chrysler had to find a new CEO (terms of the loan).• Thousands of auto workers in the US would be able

to keep their jobs, and 573 new jobs would be created. – "In addition, production of vehicles for Fiat in North America

will allow Chrysler to increase its plant utilization, helping to preserve and create in excess of 5,000 manufacturing jobs,"

» Chrysler Chairman and CEO Bob Nardelli, March 2009

• Both Fiat and Chrysler would help each other launch new vehicle models in the US.

The case of car manufacturing

TECHNOLOGY PRODUCTION MARKETING

RESOURCES Financing Production Specialists Contacts withResearchers Qualified personnel Customers

Sales People

ASSETS Research centre Factories Car dealers

COMPETENCIES Car design Quality SalesmanshipHybrid technology management, Engineering supply chain

management

Chrysler was in charge of handling the Fiat 500’s US

marketing

Distribution of Fiats at Chrysler dealers

Both companies utilize new power-train engine

Fiat 500 made at converted Chrysler plant

Both companies share R&D cost

Shared power-train engine technology Shared global

suppliers

Chrysler employees are able to keep production jobs

Shared Resources

Global Strategic Management: Phillippe Lasserre

Shared Engine Technology

Source: AutoblogGreen, 2011

Types of Vehicles

Source: Company Data, Citigroup Sales, Sept. 2011

Criticisms of the Alliance

• Fiat’s expertise lay in compact cars which is only 4% of the US market.

• Many automakers were facing financial difficulty as the recession was taking place in the US.

• US auto sales decreased from 17 million to 13.2 million in 2008.

• Claimed it was a reckless gamble by Marchionne.• Fiat would have to invest in restructuring Chrysler

plants and dealerships.• Business analyst feared this would be another

takeover like the Daimler-Chrysler merger.

Terms of the Alliance

On April 30, 2009 a non-binding term agreement was signed between Fiat and

Chrysler.

This agreement was approved by the European Economic Area, the US Treasury,

and the government of Canada.

Terms of the Alliance • Fiat starts with a 20% equity stock in Chrysler (non-cash transaction).• Fiat is able to utilize Chrysler’s dealer network, supplier base, and

production facilities.• Both companies share the cost for R&D.• Chrysler's Michigan plant would be retooled to produce Fiat autos.• Fiat would have to share all of its world class small engine technology

with Chrysler. • Chrysler dealers would be able to stock and sell Fiat and AR vehicles.• Chrysler could reduce its vehicles CO2 emission to meet current US

standards using Fiat’s technology.• Chrysler would be able to borrow and pay back the US government

loan at a faster rate.

What kind of alliance is Fiat-Chrysler?

Question #1

Alliance Definitions

COALITION ALLIANCE: Competitors (sometimes also distributors and suppliers) group together to gain a global access or to establish a common standard. (Sony and Philips with creating the DVD)

CO-SPECIALIZATION ALLIANCE: Companies join their unique capabilities to create a business, or to develop new products, technologies, or reinforce their competitiveness through specialization. There capabilities must be complementary to each other. (GE-SNECMA)

LEARNING ALLAINCE: Companies join together to a gain a mutual learning from each other. (GE and Nummi)

Global Strategic Management: Phillippe Lasserre

Fiat-Chrysler

• Two types of alliances can be used to describe Fiat-Chrysler:– Coalition Alliance– Co-specialization Alliance

• Fiat-Chrysler does not meet the requirements to be a learning alliance.

CoalitionsCOALITIONS Examples from Fiat-Chrysler

POSITIONING • Market reach• Enhance competitiveness

through cost reduction or the established standard

• Fiat expands into the US while Chrysler expands into Europe

• New established standard of power-train engines and fuel efficient cars

CAPABILITIES

RESOURCES

• Financing• Sharing risks

• Risk lies mostly with Fiat, but Chrysler has the risk of paying back the US loan

• Fiat holds 20% share in Chrysler

ASSETS • Distribution & manufacturing• Customer services

• Shared distribution and global suppliers• Shared customer service for all Fiat, AR, and

Chrysler dealers in the US

ECONOMIC VALUE

• Market knowledge• Economies of scale• Increased revenues• Responsiveness• Increased quality

• Both companies share market knowledge in respect to their home market

• Shared cost of R&D and technology saved Chrysler billions

• Hoping to see an increase of Chrysler cars with the new engine technology

• Increase of sales in the US for both companies

Co-specializationCO-SPECIALISATION Examples from Fiat-Chrysler

POSITIONING • Create new business• Develop new products • Enhance competitiveness

through specialisation

• Opened new business markets for both Fiat and Chrysler• Developed new engine technology for new 2011 models

CAPABILITIES

RESOURCES

• Complement product line• Complementarities of

resources• Risk sharing

• Fiat specializes in smaller cars while Chryslers specializes in larger cars • Shared distribution and global suppliers• Risk is shared between both Fiat and Chrysler (majority with Fiat)

ASSETS • Complementarities of assets • Distribution in new markets

ECONOMIC VALUE • Complementarities of know-how

• Maximization of assets utilization by each partner

• Faster time to market• Product development• (new revenue stream)

• Able to utilize new technology (power train engine)

• Fiat is able to enter the US market faster due to manufacturing facilities and dealer networks already in the US

• Companies share new engine developments

• Increased revenue from a broader market

What are the different types of partner fits? How close is the fit

between Fiat and Chrysler?

Question #2

Partner Fit

• A partner fit is where maximum value is created through shared goals and objectives. It is also the development of a well-defined strategy that incorporates a partner's approach to their customers and markets.

• Categorized by having:

An effective and efficient alignment

A focus on achieving and maintaining a good fit

Finding the right partner

• The four types of partner fits, are cultural, strategic, organizational, and capabilities.

Cultural Fit

• Cultural fit is characterized by the compatibility among the partners in terms of shared business objectives, competitive approaches, ways to manage, and communication.

Business Objectives: growth and profitability, risks, long/short term approaches, and shareholders vs. stakeholders

• Both, Fiat and Chrysler want to increase their growth and profitability

• Both companies share long term shareholder approaches

• Both companies face risk (Fiat more so)

Competitive Approaches: customer orientation, pricing, importance of quality, and importance of technology

• Companies utilize the new power train engine technology

• The new vehicles are designed to meet customer needs and trends (eco-friendly)

Cultural Fit (cont’d)

Ways to manage: leadership style, and trust/control• Fiat and Chrysler had to decide what was the best management practice to use for the merged companies• Both Fiat and Chrysler shared the same CEO after the merger

Communication: openness/secrecy, formal/informal, and the importance of personal relationships

•Both companies were open about the alliance, releasing press materials and statements leading up to the alliance•Previously Chrysler was not as open about its financial statements (due to the fact they were recording a lot of losses

Strategic Fit

• Strategic fit: a management term that involves the matching of the mission and strategies of an organization to its internal structure and its external environment. (It is characterized by the harmony, shared or coherent goals, and strategic posture).

• Main objectives of Fiat-Chrysler– Fiat was searching for a partner who could give the company

a much needed push in the North American car market. (global reach)

– Chrysler was searching for a partner who could help them in manufacturing smaller fuel-efficient cars on a global scale. (competitiveness enhancing in a fast way)

Strategic Fit (cont’d)• Strong substantial cost-savings

– Fiat is able to use Chrysler’s extensive dealer network, supplier base and production capacity in the US, saving them upfront costs.

– Chrysler is able to save three to five years development-costs. It would increase Chrysler’s ability to repay the government loan sooner.

• Product Differentiation/ widen their product portfolio

– Fiat will be able to widen their product portfolio to include larger cars for the US market.

– Chrysler needed product differentiation to be competitive in the US market because of the changing consumer preferences.

• Competitive Enhancing

– Fiat distribution to North America would be much easier, offering greater a volume of Fiats in the future. Expanding scale economies in the A, B and C/D segment.

– Chrysler has access to A and B-segments with Fiat’s products. They also gain Fiat’s fuel technology (standards for emission and fuel efficiency)

Strategic Fit Chart

Best Case: one leader and one follower. In this case Fiat is the leader and Chrysler is the follower.

Organizational Fit

Capabilities Fit

Partner A Partner BBusinessNeeds

Products

Resources

Process

Knowledge

Assets

Fiat

Fiat

Fiat

Fiat

Fiat

Chrysler

Chrysler

Chrysler

Chrysler

Chrysler

Green = the stronger partnerO

verla

ps

Gaps

Many

None Many

NonePerfect Fit

Problematic(attribution issues)(high investments needed)Problematic(high investmentsneeded)

Problematic(attributionissues)

= Fiat/Chrysler

How can you identify if an alliance is likely to succeed?

Question #3

INDIVIDUAL EXCELLENCE• Both partners are strong• Each has something to contribute• Positive intent

8 criteria for a successful alliance (the 8 I’s)*

IMPORTANCE• Fits strategy of both partners• Long term view

INTERDEPENDENCE• Partners need each other• Complementing capabilities• Nobody can do it alone

INVESTMENT• Partner shows commitment• Willing to invest further

INFORMATION• Reasonable open communication• Sharing of operational information

INTEGRATION

• Shared operating procedures• Numerous connections• Teachers/learners

INSTITUTIONALIZATION• Clear responsibilities• Clear decision processes

INTEGRITY• Mutual trust and respect• Honesty

*The 8 criteria are suggested by Rosabeth Moss Kanter in “Collaborative Advantage: The Art of Alliances”, Harvard Business Review, July-August 1994

Eight Criteria

• The Fiat-Chrysler alliance has 6 out of the 8 criteria:– Importance– Interdependence– Information– Integration– Investment– Integrity

The alliance does not have institutionalization and individual excellence.

–Importance

•The alliance is important to Fiat because it allows Fiat to utilize Chrysler's dealer network. They can enter the US without any upfront cost.

•It was important for Chrysler because it could use Fiat’s technology to help meet the market demand for smaller, more fuel-efficient cars. The alliance also saved Chrysler billions on R&D.

•In the long term, the alliance will help Chrysler pay back the US government a faster rate.

–Interdependence•Both companies depended on each other for sharing technology and resources.•Fiat failed in its first attempt to enter the American automotive market because it was lacking manufacturing resources and a large distribution channel.• Chrysler is dependent on Fiat’s new power train technology so it can break away from manufacturing large gas guzzling vehicles.• Ken Bensinger wrote that “Neither has what the other one does. The whole is greater than the sum of its part.” This clearly demonstrates the interdependence between the two companies.

–Information•Both companies share operational information as well as any new information from research and development endeavors.

–Integration•Chrysler retooling its Michigan plant to make the Fiat 500 is a clear sign of integration. They are also integrating Fiat’s technology into their new 2011 vehicle line up.

–Investment•Instead of Chrysler just taking Fiat’s technology, the company invested 179 million to further develop the power-train engine technology. •Fiat has shown a willingness to invest even more into Chrysler by increasing their share from 20% to 35% if Chrysler hits certain benchmark goals.

–Integrity•There seems to be mutual trust between the two automotive companies with Fiat’s CEO Marchionne saying, “By bringing together Fiat…with Chrysler’s rich heritage, strong North American presence, and talented and dedicated work force will create a powerful new automotive company.”

Is there evidence that the alliance is yielding the

expected benefits?

Question #4

Current Facts & Figures

Source: Company Data, Citigroup Sales, Sept. 2011

Sales

Current Facts & Figures

Source: Company Data, Goldman Sachs Research estimates, 2011

Trading Profit & Revenues

2011 Profit

• Profit: Fiat/Chrysler expects to close 2011 with a profit of € 851 million. – Chrysler already contributed € 556 million to Fiat-Chrysler’s profit.

– Chrysler’s sales rose by 24 percent, while (excluding luxury brands Ferrari and Maserati) Fiat’s sales decreased to € 128 million by September.

• Net debt (Fiat/Chrysler): 5.8 billion US dollars– Mainly because Fiat had to face extra payments to the

Canadian and American government to increase their share of stocks in Chrysler.

2011 Profit Notes• “[Chrysler’s] market share in the U.S., its biggest and most lucrative market,

increased nearly two points to 11.4% in the [third] quarter...This house continues to be fully focused on financial performance and making outstanding cars and trucks by fully leveraging its alliance with Fiat,”

– Fiat-Chrysler CEO Sergio Marchionne Oct. 2011

Future Potential • “Having exercised a wide range of options, Fiat is likely to end 2011 with a

59% equity stake in Chrysler, leaving the UAW pension and healthcare fund VEBA as the only minority shareholder, with an equity interest of 41%.”

• Goldman Sax, 7/2011

Source: Company Data, Goldman Sachs Research estimates, 2011

Future Potential (cont’d)

Source: Company Data, Goldman Sachs Research estimates, 2011

Conclusion

• The alliance seems like a great new start for Chrysler (company was able to pay back gov. loans this year).

• Chrysler still has work to do with diversifying its vehicle line up, to attract a greater amount of consumers.

• Fiat underestimated the profitability of the current US auto market, future US sales could be high once the recession is over.

• Even though Marchionne has not hit his current sales goal he seems capable and determined to make this alliance a success.

References• Korzeniewski, Jeremy. "Chrysler Restructuring Plan Places Heavy Emphasis on Hopeful

Fiat Models." AutoblogGreen. 18 Feb. 2009. Web. 30 Oct. 2011. <http://green.autoblog.com/gallery/chrysler-restructuring-slides-with-help-from-fiat/1369856/>.

• "Chrysler Blog." Chrysler Group LLC: Chrysler Corporate Blog - Dodge, Chrysler, Jeep, Chrysler Financial, Mopar, GEM. Chrysler, 16 Mar. 2009. Web. 25 Oct. 2011. <http://blog.chryslerllc.com/blog.do?p=entry>.

• Citi Group. Fiat SpA (FIA.MI) Another Change of Personality. Rep. 2011. Print. • Goldman Sachs. ACTION Buy: Fiat (FIA.MI) Return Potential: 80%. Rep. 2011. Print. • ICMR:Cenrter for Management Research Fiat –Chrysler Case Study• Lasserre, Philippe. Global Strategic Management. 2nd ed. Basingstoke [England: Palgrave

Macmillan, 2007. Print. • "New Vehicle Market Share By Brand In America - April 2011." GOOD CAR BAD CAR. Web. 30

Oct. 2011. <http://www.goodcarbadcar.net/2011/05/new-vehicle-market-share-by-brand-in.html>. • Snavely, Brent. "Chrysler Turns Quarterly Profit of $212 Million, Gains Market Share | Detroit Free

Press | Freep.com." Detroit Free Press | Detroit News, Community, Entertainment, Yellow Pages and Classifieds. Serving Detroit, Michigan | Freep.com. 27 Oct. 2011. Web. 30 Oct. 2011. <http://www.freep.com/article/20111027/BUSINESS0103/111027021/Chrysler-reports-3Q-profit-212-million-2nd-quarterly-profit-since-bankruptcy>.

Questions and Comments

(thank you)