The Fiat-Chrysler Case Study

An overview of strategic alliances

Nicole McAdoo Dan 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 Timeline
Key Dates
1899 1908 1945 1969 1986 and 89 1989 1991 1995 Mid to late 1990s 2001 2008

Events
Fiat is established by Giovanni Agnelli and other investors Fiat began exporting cars overseas Under Vittorio Valletta, Fiat entered an era of prosperity Fiat acquired Lancia (Italian) and merged with Ferrari (Italian) Fiat acquired Alfa Romeo(AR) and Maserati Fiat formed a joint venture with Chrysler to sell ARs in the US Chrysler decided to dissolve its Fiat partnership Fiat/AR pulled out of the US market Fiat tried to diversify into unrelated businesses, some of which failed. They faced a major drop in automotive sales Fiat went through restructuring, and emerged as one of the worlds largest industrial groups 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 SUVs, trucks, and sedans. In the 1970s Chrysler failed to meet the demand for small cars, there was a large drop in sales. Chrysler sales began to drop again in the 90s after failing to meet the demand for fuel efficient cars. In 2008 Chrysler asked for a bail out loan from the US government.

Chrysler Timeline
Key Dates
1925 1930s 1960s 1970s 1979 1987 1990s 1998 2007 2009

Events
Chrysler was founded by Walter Chrysler Became one of the top auto companies in the US after acquiring Dodge and Plymouth Chrysler began exporting large vehicles into Europe Oil crisis, government regulations, and consumer preference led to a sales decline for Chrysler Chrysler was on the brink of bankruptcy, US government gave the company $1.5 billion in a secured loan The auto maker was on top of the US market again acquiring Jeep, they also re-entered the European market Many Americans were more inclined to purchase small fuel efficient cars, this led to a huge drop in sales of large vehicles Chrysler merged with Daimler-Benz(DB), but the alliance was deemed to be a takeover not a merger Chrysler was sold by DB to Cerberus private equity group. Sales still continued to fall 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 Chryslers distribution channels.

Benefits of an Alliance (contd)

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.

Shared Resources
The case of car manufacturing
TECHNOLOGY
RESOURCES Financing Researchers

PRODUCTION

MARKETING
Contacts with Customers Sales People

Production Specialists Qualified personnel Chrysler employees are able to keep production jobs

Both companies share R&D cost

ASSETS

Research centre Factories Both companies Fiat 500 made at utilize new powerconverted Chrysler plant train engine COMPETENCIES Car design Quality Hybrid technology management, Engineering supply chain management Shared power-train Shared global engine technology suppliers
Global Strategic Management: Phillippe Lasserre

Car dealers Distribution of Fiats at Chrysler dealers Salesmanship Chrysler was in charge of handling the Fiat 500s US

marketing

Shared Engine Technology

Source: AutoblogGreen, 2011

Types of Vehicles

Source: Company Data, Citigroup Sales, Sept. 2011

Criticisms of the Alliance

Fiats 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 Chryslers 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 Fiats technology. Chrysler would be able to borrow and pay back the US government loan at a faster rate.

Question #1

What kind of alliance is Fiat-Chrysler?

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. (GESNECMA) 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.

Coalitions
COALITIONS POSITIONING Market reach Enhance competitiveness through cost reduction or the established standard Financing Sharing risks Examples from Fiat-Chrysler Fiat expands into the US while Chrysler expands into Europe New established standard of power-train engines and fuel efficient cars Risk lies mostly with Fiat, but Chrysler has the risk of paying back the US loan Fiat holds 20% share in Chrysler

CAPABILITIES RESOURCES

ASSETS

Distribution & manufacturing Customer services

Market knowledge Economies of scale Increased revenues Responsiveness Increased quality

Shared distribution and global suppliers Shared customer service for all Fiat, AR, and Chrysler dealers in the US
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

ECONOMIC VALUE

Co-specialization
CO-SPECIALISATION POSITIONING Create new business Develop new products Enhance competitiveness through specialisation Complement product line Complementarities of resources Risk sharing Complementarities of assets Complementarities of knowhow Maximization of assets utilization by each partner Faster time to market Product development (new revenue stream) Examples from Fiat-Chrysler Opened new business markets for both Fiat and Chrysler Developed new engine technology for new 2011 models 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) Distribution in new markets 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

CAPABILITIES RESOURCES

ASSETS ECONOMIC VALUE

Question #2

What are the different types of partner fits? How close is the fit between Fiat and Chrysler?

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 (contd)

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 (contd)

Strong substantial cost-savings
Fiat is able to use Chryslers 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 Chryslers 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 Fiats products. They also gain Fiats 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
Business Needs
Products
Process
Knowledge

Partner A Partner B

Fiat Fiat Fiat Fiat

Chrysler Chrysler Chrysler Chrysler

Overlaps

Fiat

Chrysler

Many

Problematic (attribution issues)

None

Perfect Fit

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

Resources Assets

None Gaps

Many

Green = the stronger partner

= Fiat/Chrysler

Question #3

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

8 criteria for a successful alliance (the 8 Is)*

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

INFORMATION
Reasonable open communication Sharing of operational information

INTEGRATION
Shared operating procedures Numerous connections Teachers/learners

IMPORTANCE
Fits strategy of both partners Long term view

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

INSTITUTIONALIZATION
Clear responsibilities Clear decision processes

INVESTMENT
Partner shows commitment Willing to invest further

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:
Interdependence Importance Importance Both companies depended on each other for sharing Interdependence Investment technology resources. The alliance and is important to Fiat because it allows Fiat to utilize Integrity Integration Information Information Instead of in Chrysler taking Fiats technology, the company Chrysler's dealer They can enter the US without any Fiat failed itsnetwork. first just attempt to enter the American automotive There seems to be mutual trust between the two automotive Chrysler retooling its Michigan plantinformation to make the Fiat 500 is invested 179 million to further develop the power-train engine upfront cost. market because it was lacking manufacturing resources and a Both companies share operational as well as Integration companies with Fiats CEO Marchionne saying, By bringing a clear sign of integration. They are also integrating Fiats technology. large distribution channel. any new information from research and development It was important for Chrysler because it could use Fiats together Fiatwith Chryslers rich heritage, strong North technology into their new 2011 vehicle line up. Investment endeavors. Fiat has shown a willingness to invest even more into Chryslerto is dependent on Fiats new train technology technology help meet the market demand for smaller, more American presence, and talented andpower dedicated work force Chrysler by increasing their share from 20% to 35% if Chrysler so it can break away from manufacturing large gas guzzling fuel-efficient The alliance also saved Chrysler billions on will createcars. a powerful new automotive company. Integrity hits certain benchmark goals. vehicles.

R&D. Ken Bensinger wrote that Neither has what the other one In the long the will help Chrysler back the US does. Theterm, whole is alliance greater than the sum of itspay part. This The alliance does notrate. have institutionalization government a faster clearly demonstrates the interdependence betweenand the two individual excellence. companies.

Question #4

Is there evidence that the alliance is yielding the expected benefits?

Current Facts & Figures

Sales

Source: Company Data, Citigroup Sales, Sept. 2011

Current Facts & Figures

Trading Profit & Revenues

Source: Company Data, Goldman Sachs Research estimates, 2011

2011 Profit
Profit: Fiat/Chrysler expects to close 2011 with a profit of 851 million.
Chrysler already contributed 556 million to Fiat-Chryslers profit. Chryslers sales rose by 24 percent, while (excluding luxury brands Ferrari and Maserati) Fiats 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

[Chryslers] 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 (contd)

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-fromfiat/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-shareby-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-reports3Q-profit-212-million-2nd-quarterly-profit-since-bankruptcy>.

Questions and Comments

(thank you)