Fiat Chief Retools Italian Car Maker

By STACY MEICHTRY

Fiat's downsizing is one of the first signs of how the European debt crisis is reshaping the
continent's corporate landscape. The process is brutal for car makers, who must pare a glut of
capacity built over decades. WSJ's Stacy Meichtry reports.
POMIGLIANO D'ARCO, ItalyRoberta Ruocco thought she had landed a job for life when her
father found her a post on the same factory floor where he had worked for decades, churning out
bumpers and dashboards for Fiat F.MI -5.33% SpA. Seven years later, she is bracing for a pink
slip.
"I'm hanging on by the fingernails," said the 28-year-old factory worker, who has been on
furlough and maternity leave for three years.
Fiat, like its native nation, is going on a diet. The company has long been the locomotive of the
Italian economy, employing 63,000, more than any other private firm in the country. But Fiat
boss Sergio Marchionne closed an assembly plant in Sicily last year, and this week he raised
doubts about the future of another Italian plant. Fiat slashed its plans to invest in Europe this year
by 500 million, or about $630 million, equivalent to 7% of the company's investment world-
wide. Mr. Marchionne aims to revamp other factories in order to squeeze more cars out of a
leaner workforce, as he did in Pomigliano.
Fiat's downsizing is one of the first signs of how the European debt crisis is reshaping the
continent's corporate landscape. The process is brutal for car makers, who must pare a glut of
capacity built over decades.
Consider this: In 2009, Fiat's five biggest Italian assembly plants produced 650,000 cars using
22,000 workers. That same year, a single Fiat plant in Tychy, Poland, produced 600,000 cars
with 6,100 workers. Too many inefficient plants, coupled with a plunge in consumer demand,
have left not only Fiat, but other car makers such as PSA Peugeot UG.FR -7.71% Citron and
Adam Opel, a unit of General Motors Co., GM -1.66% bleeding cash.
At the same time, European car makers' biggest safety nettheir national governmentsis
wearing thin. Leaders here have traditionally bent over backward to prevent the car plant
closures. The French government doled out 6 billion in loans in 2009 in exchange for pledges
from car companies to keep plants open. Italy has given billions in tax incentives to car buyers.
Like other European countries, Italy now is focused on slashing spending.

Nadia Shira Cohen for The Wall Street Journal
Idled workers Pamela Polcaro and Marco Petruzziello, as their son holds a union flag in front of
a dormant Fiat plant.
Fiat's revamp, the first significant restructuring in the European industry, could preface more
belt-tightening around the continent. Last month, Adam Opel announced plans to close a plant
after 2016, the first closing of a major auto plant in Germany since World War II.
Ignoring the factory glut will only lead to disaster, says Luciano Massone, an engineer who has
redesigned Fiat's assembly lines in an effort to reduce waste. "Sooner or later the collapse will
occur," he says.
The bailout of Spanish banks and instability in Greece have thrust Italy to the center of the debt
crisis. Investors have resumed their flight from Italian bonds, driving up Rome's borrowing costs
and putting pressure on Italy's biggest firms to reassess their ties to the country. Last month, Mr.
Marchionne said he expected Europe's annual car sales to drop below 10 million units, compared
with 13.1 million in 2011, "if the euro disintegrates."
Mr. Marchionne is getting help from the government, but of a different kind than before. New
legislation is expected to make it easier for companies to hire and fire workers in economic
downturns. The law allows large companies like Fiat to fire workers rather than placing them on
Italy's state-backed temporary layoff programa system whereby workers get paid two-thirds of
their salary while not working.
Fiat says it has no plans to cut jobs. Yet the company also hasn't made clear what it plans to do
with the one-quarter of its employees that unions say are on furlough. Workers at plants
undergoing overhauls will get called back to the factory floor once the makeovers are complete
and demand for cars recovers, according to Fiat officials. Other Fiat factories, like the one that
employs Ms. Ruocco, are in limbo with Fiat declining to say when, if ever, they will be revived.

Nadia Shira Cohen for The Wall Street Journal
Roberta Ruocco is on leave from a plant in Naples that produces plastics for Fiat.
That is making unions and governments nervous. Unions say the possible wave of layoffs in
Italy's poorer southern regionssuch as Campania, where Pomigliano is locatedcould drive
people to take jobs in the country's "black" economy, where salaries are paid under the table and
organized crime syndicates loom large.
"Let's face it. The choices made by Marchionne could reduce the potential for the rather
extraordinary components sector in Campania," says Minister of Regional Development Fabrizio
Barca.
Mr. Marchionne has remained unwavering about the need for belt-tightening. "We can no longer
make exceptions for the Italian system," he said in December.
Ms. Ruocco's path to Fiat began in 2005, when her father, Raffaele, lined up a job for her on the
same factory floor where he worked. Located on the outskirts of Naples, the factory supplied
plastic consoles, dashboards and bumpers to an assembly plant in Pomigliano D'Arco, where Fiat
produced Alfa Romeos.
Ms. Ruocco knew little about the automotive industry other than it provided steady work. Her
59-year-old father worked at the plastics plant his entire career. "I entered the gates of paradise,"
she recalled.
At the time, the factory was owned by Ergom, one of the many suppliers in the region with a
symbiotic relationship with Fiat. The firm relied on Fiat to fill its order book. As Ergom ran into
financial trouble in 2007, Fiat bought the company for what it described as a "symbolic" fee in
order to preserve a crucial supplier.

AFP/Getty Images
An employee worked on a car assembly line producing the Fiat 500 in a factory in Tychy,
Poland, on April 6, 2009. In 2009, Fiat's five biggest assembly plants in Italy produced 650,000
cars using 22,000 workers. That same year, a Fiat plant in Tychy produced 600,000 cars with
6,100 workers.
That move allowed Ms. Ruocco and her Ergom colleagues to keep working under contracts that
entitled them to nearly ironclad job protections. If Fiat ever tried to fire her, Ms. Ruocco would
have the right to appeal the decision in court and get rehired if a judge ruled that the dismissal
was made without "just cause."
But workers learned their livelihood would ultimately depend on the plastic factory's main
lifeline: the Alfa Romeo assembly plant.
As the financial crisis gripped Italy, Fiat slowed its factories across the country. In 2009 Fiat
discontinued the Alfa 159 altogether. Production at the plastics factory was slashed, and Fiat
began to ease workers into the temporary layoff program.
Older workers, including Mr. Ruocco, agreed to take early retirement, believing the move would
allow younger workers like his daughter to stay on the factory floor. Instead, Fiat cut further into
Ms. Ruocco's working hours while ratcheting up her time on the state-backed layoff program.
Under the program, she collected two-thirds of her 1,200 monthly salary. Ms. Ruocco decided
to start a family and went on paid maternity leave, which paid about 80% of her salary.
By then, Mr. Marchionne had turned his focus to Detroit, pulling off a daring takeover of the
nearly bankrupt Chrysler LLC with the help of billions in government loans from the U.S. and
Canadian governments. As the North American car market recovered, Chrysler staged a
comeback in part by using Fiat technology transplanted from the car maker's Italian factories.
Fiat began to rely on Chrysler profits to offset money-losing operations back home.
Mr. Marchionne turned his attention back to Italy in early 2010. Among other problems, Fiat's
assembly plants were plagued by persistent labor unrest and endemic absenteeism: Outbreaks of
sickness, backed by doctors' notes, often coincided with popular soccer matches.
In April 2010, Mr. Marchionne unveiled a five-year overhaul for Fiat. It envisioned spending
16 billionnearly 70% of planned global investment for that periodto double Fiat's Italian
production and ensure the company's long-term future in its home market.
There was a quid pro quo: Unions would have to agree to new work rules, including shorter
breaks for factory workers and double the potential overtime hours, which ran counter to the
leisurely pace of Italian life. A large chunk of pay would be pegged to performance in addition to
seniority. And Fiat's labor leaders would have to agree to stand by while Fiat placed thousands of
workers on furlough.
"Take it or leave it," Mr. Marchionne told union leaders, according to Bruno Vitale, a top union
official who attended the closed-door meeting. "If you don't back our project there's already a
plan B ready, and I guarantee you it won't be pretty," Mr. Marchionne said. Fiat declined to
confirm Mr. Vitale's account.
Negotiations dragged on for months. In the fall of 2010, Mr. Marchionne made a move that
showed he was serious. He shifted production of the Fiat 500Lone of the few new models the
car maker had planned to build in Italyto Serbia.
Unions bosses scrambled to reach an agreement, fearful that Mr. Marchionne might pull even
more production from Italy. "We didn't want to give Marchionne an alibi," Mr. Vitale says. All
but one union agreed to the new terms.
The Pomigliano plant was the first to go through the Marchionne cost-makeover. Under the 800
million plan, the refurbished plant would build the low-cost Panda city car rather than pricey
Alfa Romeos. Fiat shut down the plant, putting all of its 5,000 workers on furlough while it re-
engineered the factory to reduce the human effort that goes into assembling Fiat cars.
Employees were trained to work to eliminate extraneous movement. New machinery rotated cars
so they would move down the assembly line in a way that obviated the need for workers to bend
over and stretch to get the job done.
Extra footsteps, said Mr. Massone, the Fiat engineer, can cost the plant millions of euros a year
when multiplied across the entire workforce. "We measure out everything we do. If a project
doesn't pay for itself, we don't do it."
Since the plant reopened in December Fiat has hired back only 3,000 of the original 5,000
workers. Supervisors were given assessment tests before being called back, and in some cases
priority was given to younger workers, according to Fiat and workers. Fiat is also appealing a
recent court order to reinstate 145 additional workers at Pomigliano. A judge ruled the workers
were unfairly left at home because they belong to a union with a history of rabble-rousingan
allegation that Fiat denies.
The ruling has rekindled tensions that were underscored this week as Mr. Marchionne delivered
somber remarks in Turin at a presentation of the Serbian-made 500L. He said the welfare of
Fiat's Italian factories hinged on the success of Chrysler and on his plan to one day export
Italian-made cars to the U.S. If the European car market remains in a slump, Mr. Marchionne
said, "there's one plant too many in Italy."
The revamp in Pomigliano left Fiat factories that once supplied the assembly plant staring into
the abyss. Fiat created a new plastics department inside the revamped assembly plant, so it no
longer relies on the plastics factory that employs Ms. Ruocco. Fiat aims to relocate just over half
of the plastic plant's 1,000-strong workforce to the new plastics department, according to unions.
Other workers remain in limbo, and Fiat has given little information about what it plans to do.
For more than a decade, Pamela Polcaro, 34, and her husband, Marco Petruzziello, 37, built Alfa
Romeo engines at a Fiat engine factory in Pratola Serra, located just 30 miles east of Pomigliano
D'Arco.

Today, the engine factory no longer supplies the assembly
plant, because Fiat now sources engines for the Panda from
its plant in Poland. Fiat plans to build a new gas engine at
Pratola Serra in 2013, but won't say whether the new motors
will be enough to revive the factory's workforce. For now,
Fiat is telling the engine plant's 1,800 workersincluding
Ms. Polcaro and Mr. Petruzzielloto stay home most days
of the month.
Under the temporary employment program, Ms. Polcaro and
Mr. Petruzziello collect two-thirds of their 1,500 monthly
salaries. After three years on the program, however, their
finances have been stretched thin.
The couple recently considered buying a small house after
their landlord announced that rent was going up to finance
higher property taxes being demanded under Italy's latest
austerity measures. A local banker, however, told the couple it was "useless" applying for a loan
without secure jobs.
"We were like adopted children, but today the future is uncertain," Ms. Polcaro says.
Write to Stacy Meichtry at stacy.meichtry@wsj.com
A version of this article appeared July 6, 2012, on page A1 in the U.S. edition of The Wall Street
Journal, with the headline: Fiat Chief Retools Italian Car Maker.