Valentine's Day divorce

BUSINESS

General Motors and Fiat

Feb 17th 2005
From The Economist print edition

Fiat and General Motors celebrate the end of an affair

FULL-PAGE adverts ran in Italian newspapers on February 15th, announcing the settlement of Fiat's dispute with General Motors (GM). The ads celebrated the return to purely Italian ownership of a great national asset and called for Italians to rally round and support it. Before the deal was done, Fiat Auto, the world's weakest volume carmaker, had owned a put option which could in theory have forced the American firm to buy it. In return for €1.55 billion ($2 billion) from GM, that option has been given up. GM also gave up its 10% stake in the Italian firm and agreed to scrap a joint-venture formed with Fiat to make engines and gearboxes.

Despite the joy professed by both firms, there does not really seem much to celebrate. In effect, Fiat has escaped from an industrial liaison that was supposed to be its salvation. The compensation, though higher than most industry observers expected GM to pay, amounts to only 18 months' outflow of cash from Fiat Auto. Since the alliance was formed five years ago, GM's European arm and Fiat have racked up huge losses. GM refused to put any more money into Fiat when asked to do so two years ago.

GM's spin doctors have hailed this week's deal as a great result for its shareholders. In return for over $4 billion (the original investment plus the exit fee), GM's boss, Rick Wagoner, points to cost savings resulting from the joint-venture worth $1 billion a year (mostly from joint purchasing contracts with Fiat) and to a half share in a diesel-engine factory in Poland. GM has also acquired important intellectual property rights in diesel technology, an area where it was weak. These gains will survive the end of the joint-venture.

Yet, in fact, the marriage proposal to Fiat was one of the daftest decisions made by GM in many a year. It agreed to the put option only because it was terrified that Fiat's controlling Agnelli family would engineer the sale of the firm to DaimlerChrysler instead, thereby crushing GM's Opel and Vauxhall brands. Ironically, given DaimlerChrysler's dismal record with other acquisitions, GM might actually have benefited from another Teutonic takeover.

Fiat, for its part, has bought some more time and the freedom to cast around for other help. One possibility is to float Ferrari, in which it holds a 56% stake, to raise more cash. Already Fiat has decided to take Maserati out of Ferrari and put it into Fiat Auto alongside Alfa Romeo: between them these premium brands, if managed properly (for a change), could help save Fiat Auto, though it still suffers from massive over-capacity in its plants.

Fiat's chief executive, Sergio Marchionne, has also talked about doing one-off joint-ventures with the likes of PSA Peugeot Citroën, with which it already shares a factory making vans and people carriers. But who would want to get more deeply involved with a firm as weak as Fiat? Chinese manufacturers (already picking at the scraps of MG Rover), desperate for engine technology and an entrée to Europe might be tempted. What would Fiat's ads hail then? The return of Marco Polo?

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