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Automotive Traveler Magazine: 2011 07 Fiat-Chrysler Reorganization Page 1

Opinion: The Significance of the Fiat-Chrysler Reorganization

The U.S-Italian conglomerate's center of gravity clearly shifts to North America. Richard Truesdell charts the changes and looks at what lies ahead for Fiat-Chrysler CEO Sergio Marchionne and his international management team.

I have always had more than a passing interest in Chrysler and--thanks to the Italian half of me on my mother's side--in Fiat as well. So, I keep a watchful eye on business activities in Auburn Hills. Over the last 10 days, much news has come from the consolidation of Fiat and its American partner Chrysler.

Developments began on 21 July, when Fiat completed buying out the ownership stakes of the U.S. and Canadian governments--the final step in concluding Chrysler's 2008 U.S. Treasury-brokered bankruptcy.

Fiat's ownership now stands at 53.5 percent. The company is poised to be awarded another 5 percent when it starts selling a 40-m.p.g. car based on a Fiat-supplied platform in the fourth quarter of this year or the first quarter of 2012. (The United Auto Worker's benefits fund, the VEBA, holds a 41.5-percent stake in Chrysler, the value of which is being negotiated between the UAW and Fiat.)

The next development came with the release of the Chrysler Group's second-quarter financials. At first glance, the results did not look as good as expected, with the group showing a $370 million net loss.

Yet this figure reflected a one-time accounting charge earnings of $551 million when it purchased the remaining U.S. and Canadian government stakes in the company. Factor in this one-time charge, and Chrysler Group shows a positive operating profit of $181 million on sales of $13.7 billion.

This is an increase of 30 percent over the same quarter in 2010--made while Chrysler increased its share of the North American car and light-truck market from 9.4 percent to 10.6 percent. With automakers typically fight tooth and nail for a tenth of a percentage point of market share, such a performance is nothing short of miraculous.

While Chrysler did benefit from earthquake- and tsunami-related shortages of Japanese-built vehicles, it has increased its profit margin while increasing its profit per unit, reflecting reduced incentive spending. It has done so while being almost a non-player in the subcompact B-segment (Ford Fiesta) and compact C-segment (Chevrolet Cruze) categories.

With Fiat-engineered small cars in the near-term pipeline, Chrysler's market-share numbers are poised for further gains.

In the wake of this financial news, CEO Sergio Marchionne announced his long-anticipated shake-up of senior management yesterday. Marchionne is moving aggressively to consolidate Fiat and Chrysler operations worldwide in the hopes of realizing cost savings of $1.4 billion (one billion euros) by 2014.

The members of the combined Fiat-Chrysler senior management team, dubbed the Group Executive Council, will report directly to Marchionne. This change will reduce the number of direct reports to Marchionne from more than 50 to just 22, substantially streamlining the overall structure.

With a heavy Fiat presence in the GEC, some observers feel a sense of déjà vu, recalling the aborted DaimlerChrysler "merger of equals" in 1999. This is a somewhat unfair characterization of the combined management team.

A detailed breakdown illustrates that the GEC calls upon executives from all parts of the combined global Fiat-Chrysler operation.

Chief Operating Officers

Brand Heads

Industrial Process Leaders

Support and Corporate Managers

Including the five COOs, the council has 11 executives from Fiat, nine from Chrysler, and one from Case New Holland. The composition of the GEC boasts a decidedly international flavor.

As COO of the Asian market and in charge of Jeep (perhaps the combined group's most valuable international brand), Mike Manley is now seen as a key player. Fiat-Chrysler must step up in the rapidly developing markets in both China and India.

This is especially true given reports that both Alfa Romeo and Maserati will each receive versions of the highly acclaimed Jeep Grand Cherokee in the next 18-24 months.

All are, or will be, built at the Jefferson North plant in Detroit, in addition to the Dodge Durango. The Alfa Romeo and Maserati versions of the Jeep Grand Cherokee-based platform are expected to receive bespoke Maserati powertrains.

(It should be noted that development of the current Jeep Grand Cherokee started while Daimler and Chrysler were still united, as well as that the Grand Cherokee shares some of its underlying platform with the recently introduced Mercedes-Benz ML-Class SUV.

At the recent press launch of the ML-Class in Montana, Mercedes-Benz spokesperson Steve Cannon, vice president of marketing for Mercedes-Benz USA, was quoted as having said of the two, "It's not even a question of separated at birth. They were separated before birth"--a claim many industry insiders with knowledge of their development process would dispute.)

The Ram Truck and SRT (Street and Racing Technology) brands, responsible for all Chrysler performance vehicles, were not represented in the new brand structure. While some observers this side of the Atlantic might feel this is a slight to their managers, it is more likely due to the fact that neither is seen as a global brand.

Ram Truck brand sales are limited to the Western Hemisphere and constitute an important (and profitable) part of Fiat-Chrysler's North American brand portfolio. SRT is a niche brand, supplying what are termed halo vehicles for the Chrysler, Dodge, and Jeep lines.

In the weeks and months to come, look for Mr. Marchionne to reshape Chrysler's Board of Directors. Chairman C. Robert Kidder and members Douglas Steenland, Robert Thompson, and Scott Stuart were all appointed by the U.S. Treasury. George F.J. Gosbee represented the Canadian government's interest. With neither government holding a financial stake in Chrysler now, it makes sense to replace them.

In the wake of these carefully choreographed moves, the next six months will be crucial for the Turin- and Auburn Hills-based automaker. With Sergio Marchionne retaining direct control over all North American operations, the so-called gravity of the combined Fiat-Chrysler enterprise has clearly shifted to our shores.

Gianluca Spina, chairman of the business school at Polytechnic University of Milan, was quoted in Automotive News yesterday as saying, "Marchionne's decision to keep the role of overseeing the business in North America shows that the center of gravity of the combined entity will be in the U.S. The integration process is going extremely fast, as is Marchionne's style."

As he completes the integration of Fiat and Chrysler, Sergio Marchionne promises to be one of the automotive industry stories to watch for the remainder of 2011. Based on his track record of first turning around Fiat six years ago, and now orchestrating Chrysler's own stunning reversal of fortune, nothing should surprise us.