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CHAPTER 1: INTRODUCTION

1.1 Introduction

Globalisation, competitive market pressures and increasing customer demands has lead

Companies to constantly evaluate the business environment and implement strategies in order to

remain commercially competitive and successful. One of the available strategic options to a

Company is forming a strategic alliance with another firm to join forces and work together in

order to address concerns such as resource shortages, reduce product development cycles, adding

additional production facilities and distribution channels.

Fiat is one of the largest automotive manufacturers in the world, catering to major segments of

the passenger and commercial vehicle market. The automotive industry is considered highly

competitive due to the maturity of the market, similar products and number of manufacturers. The

buyer is mainly influenced by price and product performance. Manufacturers are highly

concerned with product cost which is influenced by many external factors such as legislations,

raw material costs, currency exchange rates, energy costs and taxes as this affects the final

product pricing. The aim is to attain competitiveness while sustaining profitability.

The recent global financial crisis has added to the woes of the industry and vehicle manufacturers are

taking a number of strategic decisions in order to remain competitive. In the past year the automotive

industry has seen a number of bankruptcies, restructuring efforts and consolidations. The business

environment is constantly changing and it is essential that an organisation continuously evaluates

its position within the market and plans effectively for the future. The strategy of a business is

developed to achieve the organisational goals and is shaped by the strengths and weaknesses of

an organisation and also the macro-environment that it survives in which highlights the threats

and opportunities.

Lately a number of organisations have entered into strategic alliances with one or more partners.

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This dissertation studies the reasons and motives behind such alliances and the opportunities an

alliance provides to the companies. The recent alliance between Fiat Group and Chrysler has been

investigated to obtain a better understanding of strategic alliances. The recent financial crisis has

also been studied with regards to its effect of acting as a catalyst for alliances within the

automotive industry. This external environment analysis coupled with analysing Fiat’s current

market positioning has resulted in a number of recommendations for the future direction of Fiat’s

strategy.

1.2 Problem setting

“Cars are expensively priced items, which makes them peculiarly vulnerable to any downturn in

confidence, GDP, wealth and income.” (Warren - The Telegraph, 2009)

The automotive industry is a highly competitive industry and has been greatly affected by the

recent financial crisis. The lack of availability of finance and a hampered consumer confidence

has lead to a decline in demand and a substantial amount of overcapacity within the industry. This

lead vehicle manufacturer to re-consider their strategies in order to sustain themselves in the

recession and remain competitive for the future.

In 2009, Fiat Group formed a Global strategic alliance with Chrysler. Fiat’s decision to form an

alliance with Chrysler needs to be studied and the current industry scenario needs to be analysed

in order to provide recommendations for Fiat to remain competitive. Therefore the problems that

arise from this event are:

1. What are the motives behind the Fiat-Chrysler alliance?

2. What Benefit would the alliance provide to both Fiat and Chrysler?

3. How the recent recession and other external factors affect the automotive industry?

4. What is the current position of Fiat in the automotive industry and what steps should it

take to remain competitive in the future?

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1.3 Aim and Objectives

The aim of this dissertation is to examine the need for the Fiat-Chrysler alliance and weigh the

opportunities offered by the alliance. Consideration will be also given to the macro and micro

environment in order to provide recommendations for a sustainable future for Fiat.

The objectives of this Dissertation are:

1. To analyse the need for the Fiat-Chrysler Alliance. 2. To analyse Fiat’s current position in the Global Automotive Marketplace 3. To analyse the external and industry environment that might affect Fiat 4. To provide recommendation for Fiat to remain competitive in the future.

The dissertation will also provide a background into the theory of strategic alliances as a strategic option. It will also provide information about:

1. What is a strategic alliance and why companies form strategic alliances.

2. The opportunities an alliance provides to a company.

3. The effects of the External factors and Business environment on the strategy of a firm and

how to consider these factors when making strategic recommendations and decisions.

1.4 Limitations / Constraints

The scope of the dissertation is limited to Fiat Group’s automotive business and the Fiat-Chrysler

Alliance that was formed in 2009.

Also, in July 2010, Fiat Group’s board approved the plan to separate its industrial and automotive

businesses into two separate companies in order to create to a global automotive company in

collaboration with Chrysler (Fiat Group, 2010).

The issues discussed and recommendations outlined in this dissertation revolve around Fiat’s

automotive business only and author is aware that Fiat Group’s future strategic decisions may be

affected by the state of other businesses and activities of the conglomerate.

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CHAPTER 2: LITERATURE REVIEW

2.1 Strategic Alliance

A Strategic Alliance can be defined as an agreement between organisations in which each entrusts

certain amount of resources to achieve a set of objectives. Alliances can be formed with a wide

variety of Partners depending on the objectives of the partnership. The partnership may include

organisations in the supply chain such as customers and suppliers. It may even include competitors or

Organisations external to the business such as Universities or Government bodies. Strategic Alliances

provide Organisations with the opportunity to improve their competitive positioning, enter new

markets, build on core competencies, risk sharing and research and development costs sharing .(Bain

& Co, n.d.)

Hooley et al. (2007) emphasise that building relationships with other companies is essential to

compete effectively as Organisations face an extraordinary set of challenges due to constantly

changing markets, rapidly evolving technologies, shortage of resources and skills and

increasingly demanding customers.

Alternatively Thompson (2001) classifies as alliance as a defensive move rather than as a growth

opportunity with the intention to increase competitive advantage without having a merger or an

acquisition.

Regardless of the reasons for the alliance, it is essential that all parties work together cohesively.

Lorange and Roos (1993) state that the alliance should be structured so that it is the strategic goal

of both parties for it to succeed. On the other hand, Ohmae (1989) argued that the alliance is

beneficial when each partner has a different strategic intent. For example, one partner can pursue

a strategy of globalisation while the other partner can take a more passive role as a technology

supplier (Lorange and Roos, 1993).

In summary, the goals and objectives of each partner can be different but they should compliment

each other and work towards achieving their objectives with a successful alliance.

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The need for strategic alliances

The rise International business and increasing competitive pressures on firms has lead firms to a

need to collaborate with partners in order to address concerns such as resource shortages, reduce

product development cycles and additional distribution channels.

Each international market needs a region specific strategy and this need encourages firms to form

alliances with local partners that understand the market well. The recent rapid developments in

technology pressurises firms to constantly adjust to customer demands and respond with shorter

product life cycles. This requires a competent and flexible resource base and has lead firms to jointly

pursue Research and Development activities that provide a flexible and sufficient resource base. This

also brings together several different competencies to ensure a commercially successful strategy. In

summary, each partner puts forward its best in order to result in a successful product. (Lorange and

Roos, 1993) Companies are in a very dynamic business environment and need to respond quickly

to any opportunities or threats. Alliances provide flexibility in operations and the ability to

change quickly in terms of product innovation (Connell, 1988).

Thompson (2001) further summarises the reasons for companies to form alliances:

• Cost of Joint Venture / Acquisition: The cost of joint ventures or taking over another

business may unaffordable for a company and therefore it may be feasible to form an alliance

in order to work towards mutual goals.

• Legal Constraints: Certain legislation may prevent a company from acquisitions but still

the larger size is required to sustain in the industry. This forces companies to work

together as part of alliances keeping separate businesses at the same time.

• Political or cultural differences: These differences prevent mergers and acquisitions and

therefore an alliance is used as a better alternative to assist in integration of separate

businesses.

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• Customer Demands: The increasing popularity of a total customer support packages

indicates that a business’s associations with other firms can help secure inventory, mould

distribution channels and control costs. This also provides organisations with the

opportunity to specialise in those areas where they are more competent.

• Protectionism: International Government protectionist policies may make it mandatory

for foreign companies to form an alliance or joint ventures with a local partner.

• 2.1.1 Motives for Strategic Alliances

The motives for Companies to enter strategic alliances would depend on the strategic position and

goals of each partner. Lorange and Roos (1998) explain that the strategic positions of each

partner will define the motives of the alliance:

Market Leader

A Market leader would be having major market share, leading technology or better quality.

• Defensive: When the strategy of the strategic alliance in line with the core strategy of the

Parent firm’s overall portfolio and the firm enjoys a relative leadership in the industry.

The aim of the organisation may be access to new markets or technology or even secure

additional resources to maintain and defend its lead.

• Remain: A firm may form a strategic alliance with another firm that plays a relatively

peripheral role in its overall portfolio in order to maintain its competitive position.

Follower

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A follower that is aspiring to increase its market share:

• Catch up: This strategy is used when the firm is more of a follower in the industry. The firm

may form a strategic alliance with another firm in order to improve its product offering and

competitive positioning in the market.

• Restructure: If a firm is more of a follower in the market than a leader, it may form a

strategic alliance in order to restructure to secure its business and perform better.

• Apart from the strategic positioning motives, the alliance will also have certain

operational motives and objectives that assist the company in achieving the strategic

goals. Zajac (1990) conducted a study on the motives of alliances and summarised four

objectives (show in figure 1) that most companies have for strategic alliances that would

lead to a better competitive position

Figure 1: Motives for Strategic Alliances

Motives for Strategic Alliances(Zajac, 1990)

Overcome legal and regulatorybarriers, 20%

Acquiring means of distribution and preempting competition, 35%

Obtain economies of scale, 20%

Gain acces to new technology & diversify portfolio, 25%

Source: Zajac, 1990

2.1.2 Types of Strategic Alliances

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Ad-Hoc Pool: In this type of a strategic alliance, the partners invest minimal resources typically

on a provisional basis in order to compliment and support each other. These resources are then

drawn back by the parent company at the end of the project or alliance. An example of this may

be agreements between airlines to share aircraft and staff for a certain period. (Lorange and Roos,

1993)

Consortium: In this type of an arrangement, the amount of resources invested by partners is more than

that in the Ad-Hoc relationship. Whatever value is created by this strategic alliance is then distributed

back to all the partners. This type of an alliance is usually seen during joint Research and

Development activities. (Lorange and Roos, 1993 )

Project Based Joint Venture: In a project based joint venture, the partners create a common

organisation by investing minimum resources in order to jointly work towards their strategic

goals. The resources generated are not distributed back to the partners. The financial results such

as dividends and payments are distributed. An example of this would be a country specific

alliance between firms. (Lorange and Roos, 1993 )

Full Blown Joint Venture: In this type of an alliance, the partners invest large quantities of

resources in order to achieve their goals. The alliance’s resources are retained in the alliance

itself. (Lorange and Roos, 1993 )

2.1.3 Main Challenges faced by companies

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Companies need to ensure that they choose their alliance partners carefully. (Houghton, 1990) has

summarised some of the main challenges faced by companies when forming strategic alliances:

• Compatibile strategy and Culture: It is essential for the firms to have a strategy that

compliments one another and helps in achieving the end objectives. To have a successful

alliance it is also important for the firms to understand and respect each partner’s working

culture and modify their own culture to suit the alliance.

• Comparable contribution: The amount of resources invested by each partner needs to be

agreed at the start of the agreement and the partners should be equally committed in

ensuring the planned demands and targets are met.

• Compatible strengths: To form a successful alliance, a company should ensure that the

chosen partner’s competitive strengths compliment its own. This way both companies can

overcome their own resource and skill shortages.

• No conflict of interest: There should not be any conflict of interest. This ensures that all

firms are working towards a successful alliance.

• Climate of trust and mutual understanding: It is essential to have trust and understanding

and open communication between the partners in an alliance. This leads to better working

relationships and smoother operational performance between the companies.

2.2 Analysing the External and Internal Environment

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In the words of the Greek philosopher Heraclitus “The only constant is change”. Thompson

(2001) states that success can be short-term for some organisations as the speed of change in most

industries and markets has increased. This change has also resulted in shorter product lifecycles.

There is also interdependency between different products, services and businesses. The

organisation is dependent on its suppliers and customers. Competition also plays a major role in

shaping the impact on company. These industry players are also affected by wider macro

environmental forces such as Political, Environmental, Social, Legal and technological

(Thompson, 2001). This means that an organisation that enters alliances based on a set strategy

and objectives also needs to continuously monitor and respond to the ever changing external

environment. Its strategies, plans and values need to continuously adapt to the changing

environment and manage its resources to take advantage of opportunities and counter threats.

(Thompson, 2001)

This dissertation undertakes two external (PESTLE Analysis and Porter’s Five Forces) and one

internal analysis (SWOT Analysis).

2.2.1 PESTLE Analysis

This analyses the external factors affecting the industry and organisation. PESTLE stands for -

Political, Economic, Sociological, Technological, Legal, Environmental (CIPD, 2008).

A PESTLE analysis is a useful tool for understanding the external environment in which an

organisation operates. It helps in understanding risks associated with the operations and

highlights the position, opportunities and direction for an organisation.

The PESTLE model urges companies to understand and consider the following factors:

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• Political and Legal: These are the political and legal factors that affect the environment

in which a firm operates. This includes areas such as tax policy, employment laws,

legislation, environmental regulations, trade restrictions and reform, tariffs and political

stability. These political and legal influences have a direct impact on the day to day running

of a company and therefore play an important role in shaping its strategy. (CIPD, 2008)

• Economic: These are the factors affecting the global and national economies that have a

direct or indirect impact on an organisation. The degree of the impact will vary depending

on the business. Considerations include health of the global economy, level of interest rates,

exchange rates inflation, labour rates, availability of credit, cost of living, etc. (CIPD,

2008)

• Social: These are the factors related to changing social trends that would affect an

organisation. It is important to take into account the currently occurring social changes in

the markets in which a firm operates. This includes factors like cultural norms and

expectations, population growth rate, age distribution, attitudes, importance of safety,

global warming etc that would affect customer behaviour and attitudes towards a product or

a service. (CIPD, 2008)

• Technological: Technological changes can affect a firms business and competitive

position. New technologies are continually being developed and the rate of change itself is

increasing and this impacts a Company’s product or service offering. Technological

changes also bring up barriers to market entry. Companies need to closely follow these

changes in order to ensure that their offerings remain competitive. (CIPD, 2008)

• Environmental: This covers the ecological and environmental aspects that impact the

operations of an organisation. Many of these factors will be intertwined with the economic

or social factors. (CIPD, 2008)

These various external factors will have a major impact on business operations.

2.2.2 Porter’s Five Forces

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Michael Porter put forward five forces that shape competition at the business unit level within the

industry. Firms need to understand their industry environment and forecast the results of certain

strategies in order to thoroughly to plan future strategies. A methodical analysis of these forces helps

organisations highlight keys to competitiveness in their particular industry (Hooley et al., 2007).

Porter’s Five Forces

The bargaining power of suppliers

The balance of power between suppliers and industry members can greatly affect the level of

competition within the industry. The level of competitiveness increases when suppliers or

customers exert greater power on the organisations in their industry (Hooley et al., 2007).

Hooley et al. (2007) and Thompson (2001) state that the bargaining power of Suppliers depends

on:

Supplier concentration: A fewer number of suppliers means that buyers have less choice and

therefore less bargaining power. Suppliers would also be having more power in the industry when

the buyers are fragmented and have low or irregular order sizes.

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Switching costs: If a supplier is delivering certain key components to a customer which cannot be

sourced easily from an alternative supplier without incurring of high initial costs (e.g. tooling

costs) then the power of the customer decreases and supplier power will increase.

Differentiation of supplier offerings: A supplier having a distinct product or service which cannot

be purchased from elsewhere can have considerable bargaining power over a customer.

Bargaining Power of Buyers

The bargaining power of buyers also affects the degree of competition within an industry. Hooley

et al. (2007) state that higher buyer power increases competition within the industry. Buyer power

depends on the following:

Concentration of buyers: A smaller number of buyers than sellers results in buyers having a

higher bargaining power.

Alternative sources of supplies: Buyers can easily threaten to switch suppliers and therefore the

supplier needs to be competitive in order maintain demand for its products.

Switching costs: Buyers have greater power when the switching costs are low as they can obtain

goods from alternative suppliers to get better deals without incurring high initial costs.

Threat of substitutes

Successful products may be copied or substituted. New entrants may use existing technology

available in the industry or they may try to transform the industry through innovative solutions

(Hooley et al., 2007). Substitutes increase competition in the industry by:

Making existing technologies obsolete: In today’s world of rapid change, there is immense

competition between firms to develop new products and differentiate offerings in order to remain

market leaders or enter new markets.

Product Improvements: Improvements in technologies also lead to an increase in industry

competitiveness.

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Businesses need to continuously improve their products in order to make them competitive and

protect their technologies in the form of patents and copyrights to ensure products are not

substituted easily.

2.2.3 SWOT Analysis

SWOT stands for Strengths, Weaknesses, Opportunities and Threats. The analysis focuses on the

organisation in question and shows where its internal strengths can be matched to make the most

of the available opportunities and combat any potential threats.

SWOT Analysis

It helps in identifying the most important factors (both internal and external) that affect the

Company and its markets. This information is then used in strategy formulation in which

Strengths and Weaknesses are aligned with opportunities and threats to ensure that its strengths

are deployed in order to gain most from opportunities, at the same time reducing any risks and

working on eliminating weaknesses.

Strengths: This involves identifying what the firm is good at relative to its competitors.

Opportunities: The ever changing business environment creates new opportunities for a firm. To

capitalise on these opportunities, the firm needs to identify them well in advance.

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Weaknesses: This involves identifying what a company is bad at compared to its competitors.

Threats: The changing business environment also presents an organisation with threats and risks

that need to be monitored and removed or reduced effectively. These existing strengths need to be

exploited in areas of opportunity and used to counter threats. Weaknesses should be worked upon

and new strengths should be built to take advantage of new opportunities and prepare for threats.

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CHAPTER 3: METHODOLOGY

3.1 Case Study

A case study analysis presents an account of past events in a business or industry and highlights the

conditions that a business had to deal with over a period of time. It also includes studying factors such

as the changing external environment, the company’s internal strengths and weaknesses and the

nature competitiveness in the industry in order to map out a future strategy for the firm. (Davies, n.d.)

3.2 Data Collection

The data and information used in this dissertation is secondary data. Secondary data consists of

data that has been collected by someone else for another purpose and is readily available. It can

be in the form of market research reports, government statistics, Journals etc.

The First advantage of using secondary data is that the researcher does not have to devote time

and resources to collecting the data as it is readily available. The second advantage of using

secondary data is the extent of data available. Few researchers would have the resources to collect

data from a large sample size. The third advantage in using secondary data is that frequently the

information gathering is conducted by experts and professionals and that expertise may not be

available to smaller projects. (Cambridge University Press, n.d.)

The disadvantage to using secondary data is that it does not answer particular questions that a

researcher may want to ask. A second major disadvantage of using secondary data the

methodology may be questionable. (Cambridge University Press, n.d.)

The secondary data used in this dissertation are mostly from Fiat’s annual reports, Investor

presentations and Independent market research reports. Data has also been taken from Chrysler’s

website to obtain Chrysler’s view on the alliance. Additional data has been collected from online

journals, news articles, independent insight reports and published articles. Books and academic

journals have also been used to provide background theoretical knowledge.

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3.3 Research Procedure

Subsequent to the Literature Review, the following steps were taken to analyse the Fiat-

Chrysler Alliance.

3.3.1 Study the effect of the recession on the Automotive Industry

The recession had an adverse impact on the automotive industry and lead to a lot of changes

within the sector. It is important to understand how the recession has affected the industry

and the factors that vehicle manufacturers are dealing with in order to define their future

strategies. This part also studies how the recession acted as a catalyst for consolidation and

alliances within the industry.

3.3.2 Study the Fiat-Chrysler Alliance

The background and reasons behind the decision for Fiat to form an alliance with Chrysler are

analysed. The structure of the alliance is also studied to form a better understanding of the

possible synergies and benefits to both parties.

3.2.3 Analysis of Fiat’s External Environment

The Macro environment is analysed by using a PESTEL Analysis and Porter’s Five Forces

analysis. These tools provide an overview of the various external factors and industry forces that

will affect the company’s day to day operations and eventually its position in the marketplace The

factors are then classified into Business threats and opportunities.

3.2.4 Fiat’s Current scenario analysis

The current structure, market positioning, products, operations and financial results of Fiat are

analysed so as to gauge its strengths and weaknesses. These are then combined in the form of a

SWOT analysis with the threats and opportunities that the company is exposed to. This analysis

assists in drafting future strategic recommendations for the business.

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CHAPTER 4: COMPANY DESCRIPTION- FIAT

4.1 History

Fiat is an acronym for Fabrica Italiana Automobili Torino (Italian Car Factory of Turin). It was

established in 1899 by Giovanni Agnelli in Turin, Italy. It is now the largest industrial enterprise in

Italy with businesses spanning a number of sectors such as passenger cars, commercial vehicles,

agricultural and construction equipment, engines, transmissions and components. (Fiatgroup.com,

n.d.)

Key events in Fiat’s History (Fiat.com, n.d.):

• 1899: Fiat is established in Turin.

• 1903: Fiat is listed on the stock exchange and manufactures its first truck.

• 1919: Produces its first tractor.

• 1936: Launched “Topolino” which is the smallest economy car in the world.

• 1953: The first diesel powered passenger cars are introduced.

• 1967: Fiat acquires Magnetti Marelli which is a manufacturer of automotive components

and systems.

• 1975: Fiat established Iveco for commercial vehicles and Ferrari joins the Fiat group.

• 1978: Lancia automobiles is acquired and Comau and Teksid are setup that specialise in

production systems.

• 1984: Acuisition of Alfa Romeo.

• 1999: New Holland and Case Corporation merge to form an agricultural giant.

• 2004: Sergio Marchionne joins as Fiat’s CEO.

• 2005: Fiat Group back into profit.

• 2007: Fiat Launches the ‘Fiat 500’ car model and the Abarth brand is revived.

• 2008: Fiat Group records highest ever trading profit.

• 2009: Fiat agrees to a global strategic alliance with Chrysler. (Fiatgroup.com, n.d.)

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4.2 Current Status

The Fiat Group is Italy’s largest industrial venture and one of the founders of the automotive industry.

It designs, produces and sells passenger cars, commercial vehicles, agricultural and construction

equipment, engines, transmissions and components. It believes in technological innovation and

environmentally friendly products. The Group carries out its operations and financial services

activities through companies located in approximately 50 countries and is present commercially in

about 190 countries. Fiat has a strong research and development capability and conducts its research

and innovation activities through the Centro Ricerche Fiat (C.R.F.) which concentrates on technology

development and Elasis which concentrates on production and process optimization in collaboration

with universities and centers of excellence worldwide. (Fiatgroup.com, n.d.)

The group operates a number of businesses that are shown in the figure 4 below.

Group Structure

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4.3 Brands and Products

Fiat designs, manufactures and sells automobiles under various brands. Fiat, Alfa

Romeo, Lancia and Abarth are the main brands. Commercial vehicles are also

manufactured and sold under the Fiat Professional brand. Each brand below has a

specific identity and pursues a separate sales and marketing strategy.

(Fiatgroup.com)

Fiat

The Fiat brand comprises of a number of mid-budget passenger cars. The brand is

attributed to be ‘Practical, versatile and responsive’. It is focussed on customers

who are increasingly aware of environmental issues and technological innovation.

The brand produces Italian styled models that are reasonably priced.

(Fiatgroup.com)

Alfa Romeo

Alfa Romeo’s product offering comprises of aesthetically pleasing designs with an

individualistic focus. The attributes of Sportiness, technology, comfort and

elegance are combined to create the distinctive products. (Fiatgroup.com)

Lancia

The Lancia brand is focussed on ‘Class and exclusivity’ at a reasonable price. The

models are based on Italian styling coupled with innovative technology such as the

ECOchic range. (Fiatgroup.com)

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Abarth

The Abarth brand was re-launched in 2007. It provides a modern interpretation of

all of its traditional products: such as the Grande Punto and the 500 Abarth, which

have added gadgets and the performance is inspired by the world of motor racing.

(Fiatgroup.com)

Fiat Professional

This brand covers a number of light commercial vehicles offering utility and

versatility to customers. (Fiatgroup.com)

Maserati

Maserati has always produced appealing and technologically advanced saloons

derived from the racing world. It a luxury / performance car brand.

(Fiatgroup.com)

Ferrari

The Ferrari brand produces high performance sports and super cars that are

inspired by Formula 1 Racing. Fiat describes the road cars produced by Ferrari as

the most prestigious example of Italian technology and craftsmanship: exclusive

cars without equal. (Fiatgroup.com)

Fiat Group Current Product Mix vs MarketCurrently, Fiat has a good mix of products to cater to the mini and small car segments. The company needs to focus on introducing new models for the Medium, Large and SUV segments in order to increase their market share and compete with the other players in the industry.

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4.3 Global Automotive Market

Following a stable growth period, the automobiles industry fell into decline in 2008, which

further worsened in 2009. The industry generated total revenues of $1,469.3 billion in 2009,

having a compound annual growth rate (CAGR) of 0.8% for 2005-2009. (Datamonitor, 2010)

Observing closely, the European industry reduced with a compound annual rate of change

(CARC) of -1% to reach $514.3 billion in 2009, while the Asia-Pacific industry grew with a

CAGR of 3.8% over 2005-2009, to reach $431.6 billion in 2009. (Datamonitor, 2010)

Passenger car sales were the most profitable segment globally, generating total revenues of

$1,180 billion in 2009, which is 80.3% of the total industry value. Light truck sales revenues

were $201.1 billion in 2009, which is 13.7% of total industry value. (Datamonitor, 2010)

Global Automotive Industry Value 2005-2009

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CHAPTER 5: ALLIANCE

5.1 Effect of the Financial Crisis on the Automotive Industry

The financial crisis of 2008 greatly affected the global automotive industry. The lack of

availability of cheap financing and reduced consumer confidence resulted in a global reduction in

vehicle sales. Figure 13 below shows how global vehicle sales dropped in August 2008. For the

U.S. and Western European markets, the decline in sales was quite swift compared to the

emerging markets of Asia and South America. This decline in sales lead to large amounts of

overcapacity within the industry. (KPMG, 2008)

Global Sales Declined in the Recession

5.1.1 Effect of the Recession on FiatFiat 1st Qtr 2009 Net Revenues

Fiat sales were also affected by the financial crisis and this continued to show even in the

revenues for the first quarter 2009 were €5.6 billion, a year-on-year decline of 18%. For Q1 2009,

Fiat sales of passenger cars and light commercial vehicles combined showed a decline of 17.7%

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compared to 2008. In Western Europe, which is Fiat’s main market, deliveries fell 17.5% to with

decreases in Italy by 25.1%, France by 8.2%, UK by 30.1%.

However, Fiat managed to make gains in Market Share. In 1st Quarter 2009, the Fiat

brand achieved a 7.4% share for Western Europe which was 0.5% higher than 1st quarter 2008. A

total of 65,800 light commercial vehicles were delivered during the first quarter, representing a

year-over-year decrease of 37.5%. For Western Europe, deliveries were down 50.3% to 32,500

units. Fiat Group Automobiles reported a

trading loss of €30 million in 1st quarter 2009 compared with a €193 million trading

profit for the first quarter of 2008. (Fiat 1st Quarter Report, 2009)

5.2 Alliances within the Industry

This decline in sales affected the financial health and cash flow of companies and many

manufacturers turned towards the government for financial aid. This also resulted in some

companies selling off their businesses and increased mergers and acquisitions. Fiat group CEO,

Sergio Marchionne, told Automotive News Europe that only five or six global carmakers might

be left by the end of 2010. The overcapacity in the industry can be tackled by sharing facilities to

improve utilisation and Fiat’s alliance with Chrysler reflects this. In a recent KPMG survey of

automotive executives, 71% of the respondents think that Mergers, acquisitions and alliances will

increase within the industry. (KPMG International, 2009)

5.3 Fiat – Chrysler Strategic Alliance

Subsequent to the recent recession, Chrysler became the first major car manufacturer to file for

bankruptcy in early 2009.

At the same time, Chrysler agreed to enter into a strategic alliance with Fiat Group. This was to

protect its future as a car manufacturer and gain access to Fiat’s fuel-efficient power trains and

smaller car expertise which it lacks. The alliance also saved thousands of jobs at Chrysler, its

suppliers and dealers. (The Telegraph, 2009).

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Chrysler Background

• In 2008 it posted an $8bn loss, when US sales fell 30% to 1.45m vehicles as its

dependence on high-powered, high fuel consuming cars, trucks and SUVs left it unable to

face increase in oil prices and environmental concerns. (The Telegraph, 2009)

• Key brands: Chrysler, Dodge, Jeep.

• Key vehicles: Dodge Ram pickup truck, Dodge Charger, Jeep Wrangler, Dodge Caravan

minivan, Chrysler Town & Country minivan.

• North American plants: Chrysler has 30, including 12 assembly plants and 18 facilities for

engines, transmissions, stamping and casting. (The Telegraph, 2009 ; Chrysler, n.d.)

• 5.3.1 Fiat –Chrysler Alliance

• The decision to file for bankruptcy also gave Chrysler access $3.3bn of financing from

the US government, which was provided to maintain cash flow and let Chrysler operate

as normal till it came out of bankruptcy. A further $4.7bn in US loans was also promised

once Chrysler exits bankruptcy. The Canadian and Ontario governments will provide a

further $2.42bn. (Quinn, 2009)

•• The US government will also control 8% of Chrysler while Canadian will have a 2% of

the shares. The strategic alliance provided Fiat with a 20% stake in the new company with

a possibility of that increasing to 35% once all the Government loans have been paid

back. (Quinn, 2009)

Sergio Marchionne, Fiat’s CEO has long stated that Fiat Million vehicles per year to benefit from

economies of needs to build at least 5 scale remain competitive within the industry. Fiat makes

about 2 million cars annually, while Chrysler manufactured 1.3 million last year. This alliance

will further help Fiat achieving its plans. (Forden, 2010)

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5.3.2 Motives for the Alliance

As discussed in the Literature Review section of this dissertation, the motives for a company to

enter into a strategic alliance depends on its position within the industry.

Both Fiat and Chrysler are still lagging behind the market leaders. Therefore they can be classed

as a ‘Follower’ with two motives where strategic market positioning is concerned:

Strategic Position

• Catch-up: Fiat is in a better state than Chrysler and is trying its best to catch-up and

compete with its main rivals such as Toyota, Ford and Volkswagen.

• Restructure: As explained in chapter 3, when a firm is more of a follower in the market

than a leader, it may form a strategic alliance in order to restructure to secure its business

and perform better. Chrysler’s main motive is to use Fiat to restructure its operations for

survival within the industry.

Operational Benefits

• Acquiring Distribution channels: The alliance provides both companies valuable readily

available distribution channels. Fiat has a poor network in the US and Chrysler’s

distribution network will be useful for the company.

• Gain access to new technology: Both Fiat and Chrysler’s product portfolio compliments

each other. Fiat is strong is fuel efficient small cars while Chrysler has a good line-up of

heavier pickup trucks and large sedans. This offers both the opportunity to diversify their

portfolio without incurring large costs of development.

• Obtain economies of scale: The alliance provides the companies with joint sourcing and

development opportunities which would provide both with the much needed power of

economies of scale. (Camuffo and Volpato, 2002)

• Manufacturing Sharing: There can be higher plant capacity utilisation by sharing

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manufacturing facilities worldwide. (Camuffo and Volpato, 2002)

• Achieve cost savings in design, purchasing and manufacturing by sharing vehicle

platforms. (Camuffo and Volpato, 2002)

• Reducing the risk associated with the enormous resource and financial input required by

international strategies, by sharing costs and resources. (Camuffo and Volpato, 2002)

5.3.3 Advantages to Chrysler

• Access to Fiat's environmentally friendly vehicle technologies and components. (BBC

News, 2009)

• Substantial cost savings opportunities through vehicle architecture, distribution, product

development sharing.

• Access to Fiat's distribution network in Europe and growing markets outside the US and

its global supplier base (BBC News, 2009).

• Chrysler will also benefit from Fiat's management expertise in business revival and access

to Fiat's international distribution network with focussing on Latin America and Russia.

(BBC News, 2009 : Chrysler.com, 2009)

Example of technological benefits to Chrysler

5.3.4 Advantages to Fiat

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• Access to Chrysler's extensive USA distribution network and suppliers.

• A 20% equity stake in Chrysler with potential of increasing it to 35%.

• The agreement does not commit Fiat to funding Chrysler in future and Chrysler now has a

much stronger balance sheet after applying for bankruptcy.

• Cost and Negotiation advantages of Economies of scale by sharing product sourcing.

(BBC News, 2009)

• Sharing of vehicle architectures, components and subsystems.

• Common technology development programmes especially in the area of alternative

propulsion systems.

• Best practice and process sharing.

• Obtain valuable brands such as Jeep and Dodge.

• The economic synergies due to the alliance are detailed in the table below. Fiat forecasts

an economic benefit of 1.5Bn Euros as a result of the Fiat-Chrysler Alliance (Fiat Group,

2010).

5.4 Similar Alliances within the Industry

Competitive pressures are leading more companies to cooperate and form similar

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strategic alliances and collaborations (Frost & Sullivan, 2010):

Daimler-Nissan-Renault

• Daimler is competitive in trucks and commercial vehicles and is weak where smaller cars

are concerned.

• Nissan and Renault are strong in the small car segment but are not competent in the

commercial vehicle / trucks segment.

• The goal of this alliance is to join hands for Product Development. (Frost & Sullivan,

2010)

Tata-Fiat

• Tata has the opportunity to source Fiats coveted diesel engines and transmissions.

• Fiat will use Tata’s extensive distribution network in India to channel its own products.

(Frost & Sullivan, 2010)

Suzuki – Nissan

• Suzuki has well established operation in India and will assemble diesel engines for

Nissan.

• Suzuki will also build Nissan vehicles in India.

• This would result in better capacity utilisation by Suzuki and provide Nissan ease of entry

into the Asian markets with lower entry costs. (Frost & Sullivan, 2010)

Renault-Nissan

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• Renault to provide diesel engines.

• Nissan to provide electric propulsion technology.

• Shared research and development costs.

• Opportunity for vehicle architecture, supplier and platform sharing to reduce costs. (Frost

& Sullivan, 2010)

Ford – Mazda

• Platform and component sharing to reduce costs. • Joint sourcing of components. • Improved capacity utilisation by sharing assembly plants

(Frost & Sullivan, 2010)

CHAPTER 6: ANALYSIS

6.1 PESTEL Analysis

• Political & Legislative Factors:

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The government has a major impact on the industry. First of all, the government provides the

framework for the industry to function. The Governments also establish the accessibility of public

transport and reduce or increase dependence on cars. It also has the authority to decrease or

increase duties and taxes, which directly impacts the distribution and manufacturing costs of the

vehicle. For example, the recent Government driven car scrappage schemes in Europe lead to a

boost in sales for the vehicle manufacturers. In the UK, the government offered consumers a

£2,000 discount on a new car in return for trading in one that is at least 10 years old (Armitstead,

2009). Many new innovations and product developments are driven by a need to meet

government legislation. (Investopedia, n.d.)

• Environmental Factors.

Environmental factors affect both, the customers and the operations of a company. For example,

the emphasis on the Corporate Social responsibility of a company and its impact on the

environment has lead manufacturers to consider how its manufacturing waste is treated and has

affected operational costs (Fiat, 2009). Concerns about vehicle emissions has lead to an increase

in demand for fuel efficient and environmentally friendly cars and this means that technology is

constantly under review and there is therefore a need for constant research and development to

provide greener vehicles.

• Social

The average age of the populations in Western Europe, USA, Japan and Russia

is increasing and car makers will need to address the changing demands of older drivers in order

to remain competitive. Older customers will value quality, price, and safety above fuel economy,

styling or brand. OEMs will need to focus on the development of cheaper and user-friendly cars.

Vehicles targeted for the older drivers will need to be designed with human factors in mind:

Easier vehicle entrance and exit, larger displays etc. (Deloitte, 2009).

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Urbanisation too is another important demographic trend. Population in cities is growing

globally. For example in developed countries population living in cities is currently 75%, while in

the developing world city residents signify 45% of the population. However, by 2020, those

statistics are expected to increase to 78% and 55%, respectively. There will also be 24 mega cities

with populations of at least 10 million each by 2020. (Deloitte, 2009). This means roads will be

more congested and people may prefer smaller vehicles. This shows that social and demographic

factors play a key role in determining the final product offering in the industry

• Technological Factors

Technological advances are generally driven by changes in legislation related to the environment,

safety etc social factors such as luxury, image, sophistication or competition between

manufacturers to be technologically superior. Frost and Sullivan (2010) states that whilst much of

the attention has focused on reducing emissions and hence advancements will be made in power

train technology, an increasing area of focus in the future will be environmentally friendly

materials for cars. Technological factors also offer a means of differentiation to manufacturers.

• Economic

Various economic factors such as interest rates, minimum wage, state of the economy etc affect

the car industry. The recent recession affected the interest rates and economies all over the world

and increased the cost of borrowing money. This made it more difficult for manufacturers to raise

capital. The reduced availability of credit also affected car sales adversely as the spending power

of consumers was affected.

CHAPTER 7: CONCLUSION

A strategic alliance is a favourable strategic option in which the benefits are

dependent on the cooperation between the partners and effectiveness of the alliance. It can be

intended as a defensive strategic move or as a growth opportunity. It is essential that all

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partners have clear objectives for the outcomes of the alliance and have a concrete plan in

place to achieve them. These objectives and plans need to be continuously evaluated

throughout the lifetime of the alliance.

It is also important to choose the right partner. The goals and objectives of each partner can

be different but they should complement each other and work towards achieving their mutual

objectives. All parties should be equally committed and should ensure that the structure of

the alliance is clear with amount of resources to be invested by each agreed at the start of the

agreement.

An alliance provides a number of opportunities to all involved parties such as:

• Additional Distribution Channels and Manufacturing capability.

• Access to new products and portfolio diversification.

• Obtain the benefits economies of scale.

• Achieving cost savings in design, purchasing and higher facility utilisation by sharing

research and development costs along with joint procurement.

• In the past year the automotive industry has seen a number of bankruptcies, restructuring

efforts and consolidations due to the recession.

In the case of Fiat’s alliance with Chrysler, the venture is a Global Strategic

Alliance based on sharing product development, manufacturing facilities, distribution networks

and materials sourcing. Fiat is well established in Europe with core strengths in the small car

segment having fuel efficient powertrains. It is weak in the large car segment and has a poor

distribution network in USA. On the other hand, Chrysler is competitive in the large vehicle

segment with a strong USA distribution network. It is also important to note that Fiat is in a

recovering financial condition and that subsequent to filing for bankruptcy, Chrysler has a strong

balance sheet. Fiat is not required to invest any capital in Chrysler as the latter has access to

Government loans. All these factors make Chrysler a suitable partner for Fiat.

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Both Fiat and Chrysler are lagging behind the market leaders such as Toyota, Ford

and Volkswagen. Therefore they can be classed as a ‘Follower’. Fiat’s main strategic motive for the

alliance would be to ‘Catch-up’ and compete equally with the market leaders while Chrysler’s main

motive is to use Fiat to restructure its operations for survival within the industry and to prepare for

the future.

CHAPTER 7: BIBLOGRAPHY

Book reference

Miles, D. and A. Scott (2004), Macroeconomics and the global business

environment

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Johnson ,Mascarenhas, “ Economics Of Global Trade And Finance ”

Webliography:

www.mexico.org.cn

www.fiat.org.co.in

www.vectorstudy.com