Acorn High H1 - 1920 x 116
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Acorn High H1 - 1920 x 116
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Can Fiat claw back to the black?

The chips are down for Italys most famous car-maker, Fiat. The firm is up to its eyebrows in debt, struggling to withstand the pace of an increasingly competitive market and facing restless trade unions worried about an uncertain future.

The situation is not exactly unique as Fiat has been no stranger to rough patches during its 105-year history. But the sheer size of the red numbers means its plight is worse than ever before. The group has lost some e6 billion in the last two years and its net debt is in the region of e22 billion.

Perhaps even more significantly, for the first time Fiat has to bridge the troubled waters without a member of Italys industrial royalty, the Agnelli family, at the helm.

Coming at the end of a string of family bereavements, the unexpected death of president Umberto Agnelli in May left the dynasty without an heir. Umbertos older brother Giovanni Gianni Agnelli, Fiats charismatic leader for 36 years, died in January 2003, three years after his 46-year-old son Edoardo committed suicide. In 1997 Umbertos son Giovannino, who was being groomed to take over the motor giant, died of cancer the same illness that claimed his uncle and his father at the age of 33.

The remaining Agnelli candidates, Giannis American-educated grandson, John Elkann, and Umbertos other son, Andrea Agnelli, are both only 28 and too inexperienced to assume full control. So for the first time, the buck stops with an outsider, Ferrari boss Luca Cordero di Montezemolo, but one who has been close to the Agnellis and Fiat for years.

The nation will be anxiously watching how Montezemolo fares. Employing 80,000 workers in Italy and 162,000 more world-wide, Fiat is Italys largest private-sector firm. But the car-makers significance stretches far beyond the number of people it employs. The firm is a national symbol. It was the engine in every sense of the word of Italys post-war economic and social development. By making affordable cars, like the legendary cinquecento model, Fiat gave mobility to ordinary Italians. In turn, money from those car sales enabled the company to build more factories, hire new workers and, again, generate more demand for its products. It was a virtuous circle that played a major part in Italys transition from agricultural to industrial society.

However, Fiats history was certainly not trouble-free. As early as the 1920s it had to downsize its workforce and lower salaries to stay alive. In the late 1960s and early 1970s production was severely disrupted by industrial unrest. In 1969 alone, strikes cost the company 15 million labour hours.

But the firm proved hardy and had a knack of creating virtue out of adversity. For example, it responded to difficulties caused by the oil shocks of the 1970s by automating many of its assembly lines, particularly at Turins massive Mirafiori plant. This gave it an edge in a tough climate, which helped it expand and diversify while others struggled.

The origins of Fiats current headaches date back to the 1990s, when foreign competitors, particularly from the Far East, started to make major inroads into its market share. Low prices alone no longer guaranteed success and its grip on the domestic market started to loosen. Fiat tried to fight back with innovative, distinctive-looking cars, especially smaller models. But revenues continued to drop.

For some time profits in other parts of the Fiat group which includes the Iveco truck-making division, the CNH agricultural and construction equipment unit and aviation and insurance subsidiaries disguised losses at Fiat Auto, the firms car division. But by 2002 the situation was so bad that the group registered a loss of e4 billion.

Then it was feared Fiat might pull out of car production altogether, taking advantage of the put option in a deal signed with General Motors in 2000. This agreement handed over 20 per cent of Fiat Auto to GM and gave Fiat the option to force GM to buy the remaining 80 per cent between 2004 and 2009. Fiat may still take up the put (although the two companies are currently involved in a legal wrangle to establish if its still valid).

However, thanks to Umberto Agnellis brief spell in charge following his brothers death, that painful prospect is less likely than it was. Umberto resisted the temptation to abandon car-making and gambled on turning the auto division around. Together with chief executive Giuseppe Morchio, he set about restructuring the group. He sold aviation and insurance businesses and a stake in Ferrari, both to slash debts and focus on core activities. He also closed eight factories and laid off some 12,000 employees, most of them outside Italy. The medicine seemed to work. The e4 billion loss of 2002 decreased in 2003 to e1.9 billion. Last year also saw Fiat release its revamped Panda model, which immediately won the 2004 European car of the year award.

The question now is whether this fragile recovery will be bumped off course by Umbertos passing. Indeed, when he died Fiat lost its two top men, for Morchio angrily resigned when Montezemolo was appointed president instead of him.

Some analysts are worried that Montezemolo has too much on his hands to fix Fiat. He is still head of Ferrari and is also president of Confindustria, Italys equivalent of Britains Confederation of British Industry (CBI). Most decisions will probably be taken by Morchios replacement as chief executive, Sergio Marchionne, a newcomer to the motor industry.

So the challenges are mighty and the future uncertain. Even in the best of scenarios, the group will not be back in the black until 2006. The Agnellis also risk losing about 8 per cent of Fiats shares if certain financial targets are not met by the end of the year (the family currently controls approximately 30 per cent of the groups stock). This is because creditors (mainly banks) will be able to convert e3 million of bank loans, which Fiat borrowed to stay afloat in 2002, into equity if the targets are missed.

Not all is doom and despair though. Marchionne appears to have understood that a company like Fiat cannot simply shrink itself to profitability. He wants to be positive and says he aims to focus on regaining market share, not putting people out of jobs.

Fiat needs a lot of work, but it has the capacity to become competitive again, Marchionne said. Its my intention to fulfil this.

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