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Ciao, Fiat!

Automaker looks set to exit birthplace amid Chrysler merger

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Fiat, the century-old Italian automaker, appears poised to move its headquarters to the U.S. after its planned merger with Chrysler Group.

The move would be unprecedented in the automotive industry, experts said, because of Fiat's deep roots.

"To say that Fiat is pretty entrenched in Italy would be an understatement," said Mike Wall, director of automotive analysis for IHS Automotive. "There is a culture that has been baked in there."

Yet such a move would result from increasing globalization and the need for companies to locate in the biggest auto markets and centres of research and development. Sergio Marchionne, chief executive of both automakers, has been laying the groundwork for such a move in his frequent public comments both in the U.S. and Turin, home of the 114-year-old Italian company.

"You realize that Europe is becoming a less and less relevant fact in the scheme of things," Marchionne said recently in discussing Fiat's quarterly financial results. "That is not to take away from our historical roots. I think it's a recognition of economic conditions."

Fiat owns 58.5 per cent of Chrysler, acquired through a series of agreements that started with the Detroit automaker's bankruptcy restructuring and federal government bailout in 2009.

Marchionne has said Fiat expects to acquire the remaining shares of Chrysler, currently owned by a United Auto Workers union trust. The two sides are in litigation in Delaware over the price Fiat must pay for Chrysler's remaining shares.

Presumably the automaker would move to the Detroit suburb of Auburn Hills, Mich., where Chrysler is headquartered, but Wall said the merged company could also locate in New York or another city. Just last month, Marchionne was heavily wooed by Tennessee officials to locate the group headquarters in that state.

Such a move would likely draw the ire of Italian unions and politicians.

"There would be a healthy resistance to this from Fiat workers, Italian shareholders and the Italian government," Wall said, but he added there were some sound reasons behind a potential headquarters move.

"You look at where Fiat's profits are being generated, and it's here, in North America," Wall said.

Europe remains mired in recession, and most automakers are losing money there. European new-car sales fell 10 per cent during the first quarter of this year to 2.9 million, compared with 3.3 million a year earlier, according to the European automakers association ACEA.

Last year, Chrysler Group and Fiat sold 470,000 vehicles in Italy and 1.1 million vehicles in all of Europe, according to IHS Automotive Consulting. By comparison, the companies sold 1.7 million vehicles in the U.S.

During a recent earnings call, Marchionne hinted the headquarters would be located in the U.S. once the merger is completed.

"The thing that would certainly be the single largest factor in our consideration is the adequacy of the capital markets to support operations going forward," Marchionne said. "And I will leave it to you to decide where that market is."

Fiat had the ability to "shift its interest and to shift its resources to markets that are much more rewarding in terms of investment and return," Marchionne said.

There are other benefits that would help the combined company's business operations, said David Cole, a former University of Michigan automotive engineering professor who is now chairman of AutoHarvest, a non-profit intellectual property marketplace for the industry.

"The centre of gravity of the industry is here, both in leadership and technology," he said.

And that's important for the combined company that would count the U.S. as its biggest market.

Marchionne acknowledged as much: "Italy, in 2012, represented less than 10 per cent of the overall sales of this group. And I think that's a stark reality for somebody who has been a Fiat aficionado all of his life."

Moreover, about 70 per cent of U.S. auto research and development takes place in Michigan, which also is one of the world's major centres for automotive intellectual property, Cole said. All told, 350 industry suppliers have major research and development centres in Michigan. Technology titans Google, Microsoft and Intel also operate large offices in the region where they manage their relationships with the auto industry.

Even Chinese automakers, who don't yet sell cars in the U.S., are establishing offices in Detroit, Cole said.

"The Chinese have no lack of smart people or work ethic, but what they really lack is the automotive know-how, and that is why they are setting up offices here," he said.

A move to New York, because of its proximity to Wall Street, or even business-friendly Delaware, might make as much sense as Detroit, said Wall, the IHS analyst.

Others, such as Jack Nerad, executive market analyst for Kelley Blue Book, wondered if Marchionne might have something else up his sleeve, noting this was a little like the Yankees baseball team threatening to leave New York City.

"Sergio does some things that are provocative just to do them, maybe to send a message that is not so obvious. Maybe a message to the Italian government and to Europe as well," Nerad said. "He has been pretty vocal in his criticism of how the auto industry is being run and regulated in Europe."

Nerad added: "He might be trying to gain some changes in the way they are allowed to go about their business."

But if Fiat does wind up in Detroit, or a suburb, it will be a coup for the beleaguered city, which is plagued by a declining population, blighted neighbourhoods, high crime and a shrinking tax base.

Earlier this year, Michigan Gov. Rick Snyder appointed Kevyn Orr as emergency manager of the debt-ridden city, wresting control of Detroit's finances from Mayor Dave Bing.

Moving a global corporate headquarters to the city would be "ironic," Cole said, "because Detroit as a city has fallen apart. The problems are colossal."

Fiat is currently Europe's fourth-biggest automaker. Its share of the European auto market fell to 6.4 per cent in 2012, down from 7.3 per cent a year earlier.

Chrysler is the smallest of the Detroit Three automakers but has seen its sales grow steadily since the recession. It sold almost 1.7 million vehicles in the U.S. last year, a 20.6 per cent gain from 2011. Its share of the U.S. auto market grew to 11.4 per cent last year from 10.7 per cent in the prior year, according to Autodata Corp.

-- Los Angeles Times

Republished from the Winnipeg Free Press print edition July 19, 2013 A1

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