Chrysler and Fiat: the Past, the Present and the Future - Literature review Example

? The past, the present and the future: A case study of Chrysler and Fiat: Can opportunistic, forced or planned decisions really be considered as strategy? November 20, 2012 Table of Contents The past, the present and the future: A case study of Chrysler and Fiat: Can opportunistic, forced or planned decisions really be considered as strategy? 1 November 20, 2012 1 1. Introduction 3 2. Literature Review 4 3. Conclusions 11 References 12 1. Introduction In the new era of globalisation and internationalisation of businesses, a number of firms have taken up mergers, acquisitions and joint ventures. These activities are taken for a number of reasons. Some of these are to increase the competitive advantage, to make use of economies of scale, to enter different geographical or product segments, to cater to different customer groups and to increase the product range of offerings. Some of these alliances have proved successful while others have failed. The Daimler Chrysler alliance was regarded as a ‘Merger of Equals’ but it failed miserably. However, the joint ventures, mergers and alliances between Suzuki of Japan and Maruti of India were a huge success. The takeover of Jaguar and Land Rover of UK by Tata Motors of India has also proved to be successful (Begley and Donnelly, 2011). This paper will focus on the merger of Chrysler of USA and Fiat of Italy that was inked in January 2009. Important details of the venture, the reasons for the alliance and the status of the alliance are analysed. 1.1. Objectives of the research Some of the research objectives are given below. These and other questions will be answered in this paper What were the motivating factors behind the merger between Chrysler and Fiat in 2009? How has the merger affected the profitability of the company as it stands today? What are the strategic planning decisions facing Chrysler and Fiat in the future? 1.2. Proposed Methodology The methodology proposed for the research is secondary research. Sources for the research will include reputed online newspapers and reliable web sites and peer reviewed databases and journals. First, a brief review of the literature related to the theory of alliance and mergers is provided. This will help to understand the reasons and methods used for alliances. Next, a search will be done of important media and journal articles. These will be analysed in detail to obtain information that will help to answer the research questions. 2. Literature Review This chapter provides the literature review on Chrysler and Fiat mergers. The review will answer the research objectives in section 1.1. In this chapter, a brief review of mergers and acquisitions will first be done provided by a detailed review of Chrysler and Fiat merger. 2.1. Theoretical framework Joint ventures, acquisitions and alliances are designed to increase value for the shareholder. These terms refer to a formal process where two or more independently registered firms come together and share resources, merge management and operating processes and assume a new identity or increase the existing identity (Capron, 1995). Each company must bring its offerings to the table and these are valued to see how the other can benefit. Therefore, such mergers and alliances spread the risk among more than one party. These very good instruments and vehicles generate growth for the alliance partners (Cartwright and Schoenberg, 2006). Some of the opportunities that can be obtained with the joint ventures are briefly discussed as below. Access to new Technology: One of the partners would have new technology that the other partner can use in his own business. This new technology can then be shared for mutual growth (Dicken, 2007). Diversification: The alliance helps the partners to diversify their markets, customers and revenue sources. This is done by cross selling each other’s products in their own territory (Donnelly and Morris, 2003). Leverage partner competencies: Firms may exploit the core competencies for their benefit. Manufacturing, research, commercialisation, sales and distribution can be encouraged for each others benefits (Gomes, et al, 2010). Exploit Synergies: Synergies of each partner can be use. As an example, one firm may offer the other use of its manufacturing capacity, another firm can offer it huge dealership network to increase the geographical reach (Morris and Donnelly, 2006). Enter new markets and develop new products: It is possible that new products can be developed. These can be sold in new markets (Prittchett, et al, 1996). Gain competitive advantage: The alliance can help to gain a competitive advantage over the competition. This can happen, when the above factors are realised (Volpato, 2009). In addition, the alliance can help to attract and retain employees, maximise efficiencies and share the risks and costs. Next section will review the Chrysler and Fiat alliance in detail. 2.2. Chrysler and Fiat Alliance This section provides a literature review of the alliance between Chrysler and Fiat. First, the status of the alliance is provided and then details of the benefits, reasons for the alliance and other issues are addressed. 2.2.1. Status of the Alliance Chrysler of USA and Fiat of Italy entered into an alliance on January 2009. As per the agreement, Fiat would invest in Chrysler USA plants for retooling to make new products. An opportunity was offered to Chrysler that was ailing, to restructure its operations. Chrysler would be provided access to design of fuel-efficient cars, competitive products, components such as power trains manufactured at Chryslers US plants (Belzowski, 2009). Fiat would also provide access and distribution of key growth markets of Europe and Asia and help to improve the financial stability and cost saving process at Chrysler. In return, Fiat would obtain access to the US market; have access to several of Chevrolet’s products such as the Cherokee Jeep, Dodge, Ram and other iconic brands. Chrysler would not offer any money in return but offer 35% equity to Fiat to start with (Agarwal, 2010). By July 2011, Fiat increased its holding in Chrysler to 53.5% after buying the stake owned by the governments of US and Canada. By 2012-year end, the stake of Fiat will increase to 58.5%. The holding company VEBA owns another 40% of Chryslers share and Fiat hopes to acquire some percent of these shares so that by 2016, the share of Fiat in Chrysler will be 70%. Thus, Fiat and its investment company Chrysler and Fiat Alliance owns a majority stake in Chrysler. Fiat was absent from USA for almost three decades (Natarajan, 2011). The alliance with Chrysler has allowed Fiat to launch its first car, a 500 cc car called Cinquecento. The access to USA markets through the Chevrolet brand and its distributors has helped Fiat to grow substantially in the profitable market of USA (Pisano, et al, 2011). 2.2.2. How merger has affected the profitability of the company Financially, the alliance is working very well. In Q2, 2011, Fiat automobiles made profits of 187 million on a turnover of 7.55 billion Euros. Out of this, Chrysler contributed 3.3 billion Euros in just June and it gave a trading profit of 150 million Euros. It is expected that Chrysler’s contribution to revenues would be more than that of Fiat products. In 2010, the ratio of Fiat to Chrysler products was 60:40. By 2018, this ratio is expected to change to 66:33. Thus, both Chrysler and Fiat are financially well off and profitability of both firms has increased (Bruce, et al, 2012). 2.2.3. Status of the two firms and motivating factors behind the merger The alliance and subsequent joint venture was a story and desperation since both Chrysler and Fiat were facing financial problems, stagnant, diminishing growth, and an erosion of customer base. A brief review of both firms is first done followed by a review of the motivating factors behind the alliance. Status of Chrysler before the alliance: Chrysler was once one of the leading car manufacturers in USA but subsequent lack of planning and direction had forced the carmaker into bankruptcy. In 1998, there was a much-acclaimed merger with Daimler Benz and this ultimately failed because of lack of cultural fit and over dominance by Daimler Benz. In this alliance, Chrysler was to make the volume-oriented cars while Daimler was to supply to the luxury market. This strategy did not fit the corporate thinking since Daimler wanted Chrysler to manufacture low-end mass-market cars (Jolly, 1999). It was something Chevrolet had not done and the German method of purchasing and production was not suited for volume markets. Very soon, Chrysler had operating losses of 4.7 billion USD. The acquisition fell through and Chrysler was then bought by a group of private investors called Cerberus Capital Management, an equity group from Wall Street. These were financial experts and to save on costs, they introduced new brands that were not compatible to market demands. They also used cheap materials, many engineering teams, key people were forced out, and the attrition rate increased to 41%. This forced a financial crisis and the Chrysler was forced into Chapter 11 bankruptcy reorganisation (Kuney, 2010). The President Obama administration came to its rescue and asked the firm to restructure itself (Rutenberg and Vlasic, 30 April 2009). An audit was done that showed Chrysler had very few fuel-efficient cars, few small and mid sized cars, eroded brand strategy and sales focussed in North America. Therefore, it was decided that a product sharing alliance was needed and Fiat was the ideal manufacturer. Status of Fiat before the alliance: Fiat had a long and chequered growth with brief bursts of growth and then stagnancy and dip in sales. The group was very diverse and had a number of brands such as Maserati, Iveco truck and engines maker, Magneti Marelli, CNH Global agricultural and construction equipment, Fiat Group Autos, Ferrari, Teksid, Fiat Powertrain Technologies and Comau. The problem with Fiat was that over the years, it had developed a number of small and compact cars. These included Fiat Panda, Fiat Croma, Fiat Grande Punto, Alfa Romeo 159, Alfa Romeo Brera, Fiat Bravo and Fiat 500. These had a limited market in Italy, Europe and parts of Asia. Fiat had problems of high manufacturing costs since the Italian Unions were not ready to accept lower payment terms. Fiat had also entered into an agreement with General Motors whereby, Fiat was to sell the automotive assets after a gap of four years. GM ultimately took back the penalty and dissolved the agreement since it had its own problems and it could not lend funds to Fiat. After the agreement was dissolved, Fiat developed a number of alliances and these included Tata, Severstal, Ford, Chery, Suzuki and firms from Poland, Turkey and Brazil (Jacobson, 2011). Fiat was regarded as a leader in Power train and engines. Many automobile manufacturers such as Tata, Ford, Suzuki and others purchased engine and power trains from Fiat. Fiat was tied down by the lack of viable designs and brands for the premium priced models, compact car segments and sedans. In the automobile sector, Fiat was regarded as a small car manufacturer who could never compete with the large firms such as GM, Ford, Chevrolet, Toyota and others. It was also destined to operate in the lower and crowded, non-glamorous market of small cars. It was thus scouting for a respectable automaker who had a reach in USA and who had good brands. Chevrolet was an acceptable brand since it had a very good reputation, it was based in USA and more important, it had filed for bankruptcy (Ciravegna and Maielli, 2011). Motivating factors: The reasons and motivating factors for the alliance were discussed in the previous sections. Fiat has expertise in small cars with fuel-efficient diesel engines and these are used in Europe. Fiat supplies to these markets but it lacks depth of large brands and lacks exposure to North America that sees maximum number of petrol automobiles that are larger and more powerful. Fiat can use its engines and diesel technologies on SUVs and light pick-ups and bigger vehicles. Incidentally, large firms such as Toyota, Mercedes, Ford, GM, BMW, Audi and Volkswagen offer diesel variants on all their large vehicles and SUVs. While Fiat has the expertise of engines and power trains, it did not have the product knowledge of larger automobiles. It wants a car brand that is a 'native' in North America, the car brand should have large cars and the firms should be agreeable to merger. This would allow Fiat to extend its footprint to USA, a region that it had not operated in a significant manner before. Chrysler estimates that the cash value of infusion of technology for power trains, vehicle, and platforms from Chrysler would be more than 6 billion USD, the amount of loans requested from the US government (Lacity, et a, 2011). In addition, if Chrysler had the skills and the will to take up development of these technologies from the start, it would take at least five years of development time, by when the current technology would have changed. Therefore, Chrysler would cut out the learning curve. Until 1998, Chrysler was a successful and iconic US brand and it fell into bad times after the merger with Daimler. By the time Chrysler managed to come out of this alliance, the market had changed. There was a need for fuel-efficient cars that looked elegant. Existing brands such as Ram could be refitted with fuel-efficient, low carbon emission, Fiat diesel engines and sold in North America, Asia and other markets. Fiat was the ideal partner for such a venture and it was ready to supply tools and mass manufacturing technology that would lower costs, to Chrysler’s plants in USA (Nascimento, et al, 2009). Thus, a win-win situation was created. 2.2.4. Strategic planning challenges that face Chrysler and Fiat Some major strategic planning challenges face the alliance. These are discussed in this section. Fiat had learnt bitter lessons form its relation with Tata motor distribution in India where the Fiat marquee was never pushed with zeal by Tata that wanted to sell its own brands. There was thus the challenge of credibility and fears of dominance that had to be overcome. The main task of the management is to make the alliance viable. Other challenges originate from business and marketing processes and integration of technologies (Brown and Eisenhardt, 2005. These are discussed in this section. Bring in economies of scale - Costs can be reduced, efficiency of production increased and economies of scale can be achieved when there are more common components across Chevrolet and Fiat models. Individual cars sell because of their brand value and unique features of the car. Savings can be obtained when there is a coordination of architectures and platforms between different brands of the car. Common components that can be standardised for different platforms include chassis, drive trains and gear systems, internal engine components such as pistons, crankshafts, fuel pumps, wiring and wiring harness, hydraulic systems, seating systems and many other components that are hidden (Schilling, 1998). External features such as distinctive body styling, flaring, and design of body works, bulbs, bonnet and other items that give the car its distinctive looks have to be made individually for each model. The common components can be standardised for different platforms such as sub compact, compact, sedan, premium, SUV and other categories (Krishnan and Ulrich, 2001). This strategy is followed by leading car manufacturers such as Toyota, Ford, Suzuki, Volkswagen, Nissan-Renault and others. These firms decide on a certain range of engine power and cubic capacity and provide common and interchangeable parts for engines used in a certain engine. Chrysler and Fiat have made some development in this field where Lancia and Jeep, Chrysler-Jeep-Dodge models, Lancia Thema, Grand Voyager minivan, Chrysler 200 Cabriolet and Lancia Flavia are packaged and rebuilt models with a high amount of common components. Other common component models are the Fiat Freemont model, Dodge Journey crossover, Fiat professional and RAM and other models. (Natarajan, 2011) The advantage of such a strategy is that it is possible for assembly plants and manufacturing to be set up in multiple locations, manufacture components at any location and use across models in the specific model range. The challenge is to identify car models that will be taken up for common component integration, standardising the components, identifying supplies and beginning operations (Orsata and Wells, 2007). Operating in emerging markets - Emerging markets include China, India, Brazil, Russia, Africa and Far East. In these markets, the prestige of owning a car is far greater than the actual use of the vehicle. Demand drives the supply and the cost factor is very important. Fiat has high sales in Brazil while Volkswagen has set up three joint ventures in China while GM managed to revive the fortunes from China. The debacle with Tata motors in India means Fiat must revive itself in India and both Chevrolet and Fiat are absent from China (Pavlinek, 2008). In India, Pakistan, China and African nations, diesel price is kept at half the cost of petrol and thus the demand for diesel cars is high. In these regions, the demand for compact cars is high and there is a rising demand for sedan class vehicles. Fiat with its diesel engines and compact cars can directly cater to the compact class while Chevrolet with its sedan and SUV class, fitted with diesel engines can capture the upper end of the market. The challenge is in integrating the two firms for common components and platforms, setting up plants in these countries and beginning operations (Whitford, 2011). Operating in mature markets - These are markets such as UK, Europe and USA. The demand is for vehicles with high emission control features, cars using green technologies and cars that have advanced technology and electric cars. Fiat with its diesel and low emission, low consumption engines and Chevrolet with its high profile vehicles can take up this challenge. Fiat has helped Chevrolet to replace the old 'gas guzzling' eight-cylinder engines with smaller four cylinder engines. A number of technical solutions are used to reduce fuel consumption and this is to provide an eight-nine speed gearbox with automatic and dual clutch transmission (Germano, 2012). The 'multi air engine system' of Fiat that allows valve timing to be set individually for each cylinder helps to increase performance by 20%. Distinctive features of the cars such as torque, power, and acceleration are not compromised. Bio fuels and ethanol fuel engines developed by Fiat can be used for Chevrolet engines. The 3000 cc Pentastar engine of Chevrolet can be used by Fiat to offer hybrid vehicles. The challenge is to integrate the products, components and supply chains across the emerging and developed markets so that economies of scale and common component use can be increased (Arsovski, et al, 2010). 3. Conclusions The paper has seen how the Chevrolet – Fiat alliance was formed, the motivations and strategic challenges that must be overcome. It is clear that the alliance can create a win-win situation for both firms. Fiat with its expertise in fuel-efficient, low emission diesel engines and power trains and its market of Europe and Brazil can help Chevrolet with its high value brand cars to sell in Europe and emerging nations. Some challenges were seen that must be overcome. These include bringing in economies of scale with interchange of common components across Fiat and Chevrolet models of the same class. Other challenges are providing products and using the right strategy for emerging and mature markets. If managed properly, the alliance can achieve its targets of being the sixth largest automotive group in the world. A portfolio of compact and sedan class cars running on high fuel economy diesel engines will certainly form a winning combination. References Agarwal, R., Barney, J. B., Foss. N. J and Klein. P. G., 2010. Heterogeneous Resources and the Financial Criss: Implications of Strategic Management Theory. 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