FIAT SPA Case Study Copenhagen Business School
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MSc. in Economics and Business Administration Cand. merc. Strategy, Organization and Leadership “From International to Global” – FIAT S.P.A. case study Student: Marco Marinozzi 05/09/2014 Supervisor: Christer Karlsson Ph.D. Number of pages: 87 Number of characters: 237,861 Copenhagen Business School – 2014 1 Abstract We live in a World of uncertainty, where business cycles are shortening and competition is increasing, requiring companies and their strategies to be suitable to continuous changes and adaptations. Just like it happened in other sectors, the economic crisis Western economies have been experiencing in these years heavily influenced the Automotive Industry’s dynamics. The Car Industry is in fact strongly linked to the business cycles, as showed also by Haugh et al. (2010). The sector has always been characterized by a high intensity of rivalry, and such rivalry and increasing concentration will inevitably lead to a struggle for survival out of which only a few groups will emerge. The industry is capital intensive and with a high capital-to-labor ratio. In the past years production has been moving increasingly towards emerging countries particularly due to decentralization processes and outsourcing. The outsourcing phenomenon is also provoking shifts and changes along the industry’s value chain, with suppliers gaining more and more power. The saturation of traditional markets, accompanied with an overall negative business cycle, is pushing car- makers to look for new ways to sustain their production, currently affected by over-capacity problems in many regions of the World. Many Automotive Industry’s CEOs are aware of the fact that change has to take place within companies in order to face the Globalization of Markets, but the majority of them don’t believe such transformation should include activities like mergers, acquisitions or alliances, as showed by a study conducted by Price Waterhouse Cooper (2014). The Italian car-manufacturer FIAT S.p.a. constitutes an exception in this context, and this is the reason why it got involved in a complex M&A deal with Chrysler LLC. The present work has a speculative nature and exploratory purpose. It is grounded on a network perspective and it takes into account the economic landscape described above, including social and political elements in order to better understand and describe the process of strategic and organizational change which arises from a M&A agreement in crisis time. The study analyzes FIAT Spa’s process of Globalization through the acquisition and successive merger with Chrysler LLC, an operation that led to the creation of the 7th biggest group in the car industry, with a production volume of about 4.5 Million vehicles. Data come from three direct interviews with people involved in the Auto-industry at different levels and with different roles. Moreover three indirect interviews have been used, the interviewee being FIAT’s CEO, Sergio Marchionne. Other sources of information come from documentaries and the internet. The case is interesting because of the size of the deal and its actual and potential influence on the industry; moreover it represents one of the most remarkable examples of recent reorganization attempts. In particular, the focus is on the strategic and organizational challenges faced by FIAT from the network point of view and the consequences for the value-chain during the company’s process of globalization. The case study considers the way change originated, was supported and enacted through time. 2 Table of Contents 1. Introduction 6 2. Literature review 8 3. Methodology 11 3.1 Research Design 11 3.2 Data Collection 12 3.3 Validity and reliability 3 3.4 Delimitations 14 4. Theoretical Framework 14 4.1 Value chain and Network paradigm 14 4.2 Business strategies in the Automotive Industry 18 5. Data 25 5.1 Automotive Industry:World production, Suppliers, Car-makers, M&A, main markets 25 5.1.1 World production 25 5.1.2 Suppliers 26 5.1.3 Car-makers 29 5.1.4 M&A in the Automotive Industry 31 5.1.5 Market analysis and Dealership results 33 5.2 FIAT: History, Production, Brand portfolios, Market shares 44 5.2.1 Brief history of FIAT 44 5.2.2 FIAT’s target: Brief history of Chrysler 47 5.2.3 Production: Facilities’ worldwide distribution and performance 49 5.2.4 Brand portfolios 54 5.2.5 Market shares 55 6. Analysis 59 6.1 Global Automotive industry’s structure 59 6.1.1 Recent M&A deals 65 6.2 FIAT S.p.a. strategy: brand portfolio and operations 66 6.2.1 A diversified strategy 66 6.2.2 Reasons behind the deal and synergies 68 6.2.3 The acquisition process and the 2010-2014 Business Plan 74 6.2.4 The merger and the 2014-2018 Business Plan 77 6.2.5 A “good” or a “bad” deal? 79 7. The network around FIAT 82 7.1 Relationship with suppliers 83 7.2 Relationship with Trade Unions 86 3 7.3 Alliances and Joint Ventures 86 7.4 Dealers 86 8. Conclusion 88 9. Discussion 89 10. Bibliography and references 90 11. Appendices List of Tables and Figures Table 1 - Strategies to face unfavorable conditions during M&A Table 2 - World car production in 2012 and 2013 Table 3 - Global Mega-suppliers Table 4 - Car manufacturers 2012 ranking by production volumes Table 5 - Top 15 car manufacturers in 2013 by sales Table 6 - Top 15 car markets by sales Table 7 - Brazilian Automotive industry’s market shares Table 8 - : Volumes of production in Germany between 2007 and 2013 Table 9 - Registrations in Italy from 2008 to 2014 – Passenger vehicles Table 10 - : Market shares’ distribution in Italy - 2013 Table 11 - : Vehicles’ sales in Italy – Forecast Table 12 - Vehicles’ production in Italy – Forecast Table 13 - FIAT brand-portfolio in Passenger-cars Table 14 - Chrysler brand-portfolio in Passenger-cars Figure 1- Automobile manufacturers’ typical production stages Figure 2 - Basic types of configuration strategies Figure 3 - Light vehicle assembly volumes outlook and M&A deal volumes (2001-2019) Figure 4 - PwC survey’s results about CEOs restructuring plans for the next 12 months 4 Figure 5 - Vehicles (PC + CV) per capita and vehicle density Figure 6 - Total sales of new-car dealership in the US (2002-2012) Figure 7 - NAFTA facilities’ distribution and affiliate suppliers Figure 8 - NAFTA plants’ capacity utilization Figure 9 - LATAM facilities’ distribution and affiliate suppliers Figure 10 - LATAM plants’ capacity utilization Figure 11 - EMEA facilities’ distribution and affiliate suppliers Figure 12 - PwC survey’s results about CEOs restructuring plans for the next 12 months Figure 13 - APAC facilities’ distribution and affiliate suppliers Figure 14- Brazil competitive scenario Figure 15 - Figure 15: FCA in the World as of June 2014 5 1. Introduction We live in a World of uncertainty, where business cycles are shortening and competition is increasing, requiring companies and their strategies to be suitable to continuous changes and adaptations. Just like it happened in other sectors, the economic crisis Western economies have been experiencing in these years heavily influenced the Automotive Industry’s dynamics. The Car Industry is in fact strongly intertwined with the business cycles, as showed also by Haugh et al. (2010). The sector has always been characterized by a high intensity of rivalry, and such rivalry and increasing concentration will inevitably lead to a struggle for survival out of which only a few groups will emerge. Possibly, as stated by both FIAT’s former President Umberto Agnelli (1985) and the current CEO Sergio Marchionne 1only six huge manufacturers will emerge. The Agnelli family, owner of FIAT, several times expressed the desire to create a company with a global mindset and global aspirations in order to face the fast-growing changes brought by globalization. It is reasonable to believe the recent crisis accelerated such process and the last ones to adapt their strategies to changing conditions will be out of competition. In fact, at the moment, the competition is not anymore on production volumes, but on quality and sales, since car manufacturers are facing over-capacity problems. Outsourcing, de-verticalization processes, strategic alliances, organizational changes and M&A today have to be seen not only as a way to increase volumes but also to acquire know-how and influence directly the supply chain and the distribution channels. Many Automotive Industry’s CEOs are aware of the fact that change has to take place within companies in order to face the Globalization of the Markets, but the majority of them don’t believe such transformation should include activities like mergers, acquisitions or alliances, as showed by a study conducted by Price Waterhouse Cooper (2014) among 87 CEOs in the Automotive Industry. This belief is mainly due to the current economic situation, in fact, among the various aspects of their Business which might need change in order to address the new global trends, only 30% of the CEOs interviewed by PWC declared to have concrete plans or completed programs related to M&A strategies and only 22% identified the location of key operations and headquarters as a fundamental issue, while much more attention was paid to Customer retention, Talent Strategies and Technology Investments. Therefore, . Its major owner and former chairman, Giovanni Agnelli, always claimed that FIAT was born and conceived to be an international player with a central role, an industrial giant. Such view testifies the constant need and desire of the company to expand, although it has always been characterized by a size paradox, i.e. being too small and financially instable to acquire and too big to be easily acquired. The expansion view of Agnelli has been brought forward by Sergio Marchionne, who took the lead in 2009 and immediately started to look around in search for possible ways to enter new markets and realize the global dream of FIAT.