Fiat Agrees to Boost Domestic Car Production to over 1 mil. Units; Targets Closure of Termini Imerese Plant

Fiat has revealed plans to the Italian government to boost domestic passenger car production by more than half by 2012, according to a Reuters report. Fiat is looking to support the Italian economy with the plans and shore up support from the Italian government to implement restructuring plans which involves closing the loss-making Termini Imerese plant in Sicily. However, Fiat chief executive Sergio Marchionne confirmed that the plans to increase the Fiat Group's Italian production to such an extent will require massive investment, support from the government and more flexibility from the powerful Italian industrial unions. Marchionne and Fiat have been pushing for restructuring within its domestic production operations and as a result there have been verbal clashes with Italian Industry Minister Claudio Scajola (see Italy: 27 November 2009: Fiat Chief Executive Rejects Criticism of Plans for Sicily Plant). Scajola, who was at the meeting and discussed the Fiat proposals with Marchionne. In the past he has said he wants Fiat to produce more than 900,000 cars in Italy. After the meeting the minister released a statement which said, "We appreciate Fiat's intention... to increase Italian production by 50 percent, as the government has requested." However, Scajola went on to call for Fiat, the unions and the local government to meet to discuss the OEM's plans to end passenger car production at Termini Imerese by the end of 2011.

Talking about the decision to close Termini, Marchionne stated during his presentation that action was required to ensure Fiat's domestic production: "We need an act of courage right now to take the weak points out of the system and concentrate on the strong ones." European governments, including the Italian government have introduced a range of scrappage and tax incentives in order counteract the vicious downturn that hit the global passenger car market in 2009. Marchionne stated that according to Fiat's estimate, the Italian passenger car market could fall to 1.7 million units in 2010 without a gradual phasing out of incentives, from about 2.1 million units expected this year. With the continuation of tax breaks, it could be stable, he added. The government is focused on incentives for natural gas-powered cars, foreign carmakers' group UNRAE says, which could add about 80,000 units to 2010 sales. The government has said it will extend incentives past the 31 December 2009 deadline in some reduced form, but it said nothing more on the issue on Tuesday.

However despite the uncertainty of the domestic market environment which is vital if Fiat is to economically produce such large numbers of cars in Italy, Fiat had "ambitious" plans for Italy and was prepared to pour some 8 billion euro (US$11.4 billion) into Italian plants over the next two years. Marchionne said 11 new models would be introduced in the two-year period, including new versions of the Fiat Panda, Lancia Ypsilon and Alfa Giulietta.

Outlook and Implications

Marchionne's plans are aimed at ensuring volume passenger car production remains robust in Fiat's heartland and gaining government and union support for much-needed strategic restructuring. However, there appear to be some elements of the plans that would almost certainly weaken the company's competitive position across the European marketplace. It seems to see how either partially or fully moving production of the Panda from its current location at the Fiat Auto Poland (FAP) facility in Tychy, Poland to Pomigliano d'Arco will improve Fiat's competitive position. Production costs at the latter will be higher, the plant will not enjoy the economies of scale of the FAP plant and it will also require substantial investment simply to shift the line from Poland to Naples as highlighted by Marchionne. He said, "Building the future Panda at Pomigliano would guarantee very high volumes... [but] you are talking about a radical intervention which would require huge resources."

It seems slightly incongruous that when the rest of the global automotive industry is going through a period of consolidation in an effort to address overcapacity, Fiat is announcing plans to increase production in its domestic market by such a large amount. However, it appears that Marchionne is playing a typically shrewd game. He needs the continuing support of the Italian government and the Italian industrial unions to carry out restructuring and this is the quid pro quo required to successfully carry off restructuring the Termini plant where on average it costs 500 euro more to manufacture a car than at an equivalent production site on the mainland. However, it is still a difficult commitment to justify economically, especially when Marchionne has been such a vocal critic of the willingness of other European governments to bail carmakers out (see Europe: 8 December 2009: Chrysler-Fiat CEO Criticises European Bailouts, Needs to Split Jobs). Indeed in the past he has come out statements such as "the number of cars produced per worker is totally out of proportion" compared with plants in Brazil or Poland. "It doesn't correspond with any industrial logic." Marchionne denied that Fiat's plan was effectively being subsidised by the Italian government. The company and the Italian government must be careful not to fall foul of European Commission competition law as direct subsidies to support national carmakers are banned. He said, "It's not true that we're getting government aid. We have tax credits of about 800 million euros".