Fiat and GM:

The Troubled Alliance

Critique:
Sarah James & Nicole King
Case Study Analysis:
John Sallee & Ramiro Sanchez
 GM Background
• General Motors (GM) has led global
automotive sales since 1931
• Operates under various brands in the
U.S., Canada, Latin America, & Europe
• Provides a range of financial services
• European and Latin market ventures were
struggling
 Fiat Background
• Fiat was founded in 1899 by Giovanni Agnelli
• Introduced its first automobile in 1904
• In 1910, Fiat employed 50,000 workers and
became a driving force in Italy’s economy
• Ventured into U.S. market in 1970s but pulled
out a few years later
• Acquired several other Italian car companies
during the 1980s
 Fiat Background
• Experienced declining market share and
revenues in European and Latin markets
in 1990s
• Agnelli family continues to be the
controlling shareholder of the company
 Fiat Background
• Declining market share and increased
competition forced Fiat to search for a
partner
• Tried to merge with both BMW and Volvo
but unsuccessful
• Daimler-Chrysler attempted to buy Fiat
• GM intervened, offering an alliance
 GM-Fiat Alliance
• As a result of the alliance:
– Both companies obtained synergies
• Purchasing advantages
• Cost advantages
• “Powertrain”
– GM obtained a 20% stake in Fiat for $2.4
billion
– Fiat received 32 million shares of GM
– Put option for Fiat
– “Allies in cost, competitors in markets.”
 Central Issue
• Primary Issue • Contributing Factors
– Find an alternative to
the put option between
Fiat and GM without
hurting either company
or resorting to litigation
– Fiat diluted GM’s stake
to 10% by selling-off
portions of the
company after the
alliance
– Fiat continued to
increase its debt
– GM wanted no part of
Fiat’s billion dollar debt
– GM believed the put
option was invalid
 Vision & Goals
• GM Vision • Fiat Vision
– To be the world leader – “An Italian Company that
in transportation builds cars with original
styling and a wealth of
products and services intelligent solutions that are
through: therefore capable of
• Continuous guaranteeing a better
Improvement quality of everyday life”
• Customer Enthusiasm through:
• Innovation • Balance of value and
• Integrity good performance
• Safety
• Teamwork
• Continuous Innovation
• Individual Respect &
Responsibility
 Constraints to the Situation
• Primary Constraint
– GM wants no connection to Fiat
• Other Constraints
– Fiat has continues to lose revenue &
accumulate debt
– Fiat diluted GM stake through sell-offs
– Put option would only hurt GM and provide
marginal help to Fiat
 Functional Area Problems
• Management

• Finance

• Sales

• Marketing
 Management
• No one at the top seems to be in
agreement

• No real direction

• Family vs. Creditors

 Finance
• Finances are an issue for both companies
– GM faces the payment of billions of dollars for
retiree health and pension plans
– Fiat in continuous battle with creditors
• Neither company has a firm financial
footing
 Sales & Marketing
• Problems in these areas can be attributed
to management problems
• Management lacks clear direction,
therefore:
– Sales will continue to lag
– Marketing will be inefficient
 SWOT Analysis – GM
• Strengths • Opportunities
– Size – Alternative out of put option
– Industry sales leader for 76 obligation
years – Join with other automaker
– Diversified • Threats
– Improved market share in – Losing money in avoidable
Europe situations
• Weaknesses – Massive layoffs if forced to
– Long-term financial strains comply with put option
– Losses from prior alliances – Introducing non-fuel
– Put option obligation efficient vehicles
 SWOT Analysis - Fiat
• Strengths • Opportunities
– Strong customer – Revamp company
relations – Put option with GM
– Has held on through • Threats
two decades of
financial strife – Failure to pay down
loans
• Weaknesses – Creditor threats to
– Huge debt totaling $6 dissolve company
billion in 2002 – Loss of put option
– Family owned – Loss of customer
loyalty
Porter’s Five Forces of Competition
• Threat of New Entrants
– Low for start-up companies
• Industry categorized as oligopolistic
– Buyouts or partnerships more of a threat but
still unlikely
• Rivalry Among Competitors
– Very high
– Few players create tougher competition
– Alliances and JVs intensify rivalry
Porter’s Five Forces of Competition
• Bargaining Power of Suppliers
– Moderate bargaining power
– Auto giants can easily establish relationships with
other suppliers if agreements are unattractive
• Bargaining Power of Customers
– Very high level of bargaining power
– Key players now face competition from used cars
– Shorter terms of ownership are on the rise
– Customer needs must be met or sales will be lost to
competitors
Porter’s Five Forces of Competition
• Threat of Substitute Products
– Fairly low
– Possible substitutes include:
• Public transportation
• Bicycles
• Walking
– Most people enjoy the freedom of their own
vehicle
 Relevant Alternatives
• Alternative #1- Honor the Put Option
– GM could honor the put option and invest
more than $2 billion in Fiat
– Already invested around $2 billion when
alliance was formed
– Total of $5 billion invested in a non-profitable
venture
– This option helps Fiat but damages GM
 Relevant Alternatives
• Alternative #2 – Invalidate the Put Option
– Based on the sell-offs and their now diluted
stake, GM could attempt to negate the put
option
– Lengthy and costly litigation may result if this
option is pursued
 Relevant Alternatives
• Alternative #3 – Avoid GM-Fiat Merger
– Large initial costs for GM
– Long-term benefits for GM
– Same financial outcome for Fiat
– Family retains ownership of Fiat
 Best Alternative
• Alternative #3 – Avoid GM-Fiat Merger
– GM no longer faces the potential of being
saddled with a declining company
– GM learns a lesson for the future
– Fiat still receives its $2 billion with the
possibility of more due to penalty payments
– Family retains ownership and customer
loyalty
 Implementation Plan
• If put option is • If put option remains:
invalidated: – GM should hope Fiat
– Continue alliance to sees a turnaround
take advantage of finding it unnecessary
synergies to exercise the put
– GM should refrain option
from investing – Or, GM should hope
additional money in Fiat can hold on until
Fiat the put option expires
in 2010
 Additional Information
• February 14, 2005
– GM paid $2 billion to avoid being forced to
acquire Fiat
– Fiat Auto had little market value and had $10
billion in debt
– GM & Fiat continue to cooperate in certain
areas, especially in diesel-engines
– Since 2000, GM-Fiat have generated $2
billion in savings
– Not enough for GM Europe or Fiat to rebound
 Additional Information
• July 25, 2006
– In first half of 2006 Fiat revenues jumped 21%
– Positive operating profits for 3rd consecutive
quarter
– What would GM’s original stake be worth
today?
– Did GM make a mistake by bailing out?
 Points to Consider
• "GM has no choice but to • “With some fine new cars
settle," said Ferdinand and financial figures to
Dudenhoeffer, director of the match, Fiat has staged an
Center of Automotive astonishing recovery.”
Research at Gelsenkirchen (Economist, 2008)
University in Germany.
• "They made a mistake when
they agreed to the put
option, and this mistake will
cost money. They will try to
get out of it as best they can
with negotiations and a legal
challenge."  (CNN, 2005)
 Resources
Italian Car Makers,(2008) www.autozine.org/Manufacturer/Italv/htm

CNN Money, GM, Fiat to take stake in each other, Mar. 3, (2000)
www.money.cnn.com/2000/03/13/worldbiz/gm_fiat

CNN, (2005). GM Fiat still in Standoff. Retrieved April 26, 2008 from:
http://money.cnn.com/2005/02/02/news/international/gm_fiat/index.htm

The Economist. (2008). Fiat rebirth of a car maker. Retrieved April 26, 2008 from:
http://www.economist.com/displaystory.cfm?story_id=11090197

The Earth News, Fiat pulls auto option talks brake to a halt, Jan. 25, (2005)
www.earthtimes.org/articles/show/1356.html

2005/06 corporate Responsibility Report, Our Vision and Values,

gm.com/corporate/responsibility/.../06/300_company/2_twenty/320.html

FACTfile-Fiat Grande Punto, (2007), ItalianCar.net,

www.intaliancar.net/site/FACTfile/fiat/GrandePunto/GrandePunto-2.html

GM will pay $2 billion to dump Fiat, Feb. 14, 2005, www.detnews.com/2005/autoinsider/0502/14/A01

Hitt, Ireland, Hoskisson- Strategic Management 7th Edition Competitiveness and

Globalization: Concepts and Cases, Copyright, 2007

BusinessWeek, July 25, 2006, Fiat’s Comeback-is it for real?, Edmondson, Gail,
www.businessweek.com/globalbiz/content/jul2006/gb20060726_749437.html