April 2015 FCA Investors’ Report and Sergio Marchionne on Component and Car Consolidation

On Wednesday, April 29, Fiat Chrysler Automobiles presented its first-quarter 2015 results and its outlook on the future. CEO Sergio Marchionne added, as a sort of appendix, his feelings on mergers, sharing, and consolidation in the auto industry.

FCA US, née Chrysler Corporation

us fleet mixWorldwide shipments were up 8% (over the first quarter of 2014), led by Chrysler 200 and Jeep Cherokee; net revenues were $21 billion, up 10%; the modified operation profit was 16% higher than Q1 2014, despite recall costs; the margin was up.

Net income was $2.6 billion, versus a net loss of $690 million last year, but there were two huge caveats: the final buyout took place last year, and there have been accounting changes. Loans are being repaid, and the division now has $15.1 billion in liquidity and $1.2 billion in cash.

Higher shipments were offset by unfavorable trading in pesos and Canadian dollars, Windsor renovation costs, a less favorable vehicle mix, and marketing support for the new Charger, Renegade, and 200; in addition, $1.3 billion was paid as a ”special distribution” to the parent company, Fiat Chrysler Automobiles.  The company still owes $12.6 billion but intends to keep paying down debt as quickly as possible (while still supporting its parent).

Worldwide, Jeep rose 46%, with all models rising;  Chrysler rose by 8% and Ram by 13%. Dodge fell by 26% and Fiat by 1%. US sales remained flat at 12.5% and fell slightly in Canada, now at 16.4% despite being the market sales leader in the first quarter.

In the US, retail market share was up to 12.1% from 12.0%.  The fleet mix has fallen rather dramatically from 31% in the first quarter of 2012 and 28% in the first quarter of 2013, and was 23% in the first quarter of 2014 and 2015.

Consolidation: Sergio Marchionne’s attempt to clarify his position

sergio marchionneAfter Fiat Chrysler Automobiles presented their financial reports and prognostications yesterday, CEO Sergio Marchionne explained why he desires more consolidation, implying that Chrysler (and Fiat) may lose some of their unique engines and transmissions. In essence, Mr. Marchionne said:
  • His past statements do not mean that FCA will die without merging, that he wants a big deal before he retires, etc

    , but are general comments on the auto industry
  • Automakers have terrible returns on capital (several slides showed this; FCA shares after his speech)
  • One reason for these poor returns is duplication of effort

success of deals

Mr. Marchionne showed numerous types of alliances, from simple single-product cooperation to all-out mergers,  with successes and failures marked in red and green (above). He said that the smaller the effort, the more likely success seemed to be. This argues against FCA merging with a major automaker, though combining with a minor one, such as Suzuki, may be safer.

He said that nearly half of the investment in a new car (industry-wide) was based on things that were not major differentiators — most engines, transmissions, etc. Chrysler, for example, uses the same transmissions as other companies through nearly its entire line:

  • ZF automatics used by BMW, Range Rover, etc., in Cherokee, ProMaster City, Charger, Challenger, 300, and Ram
  • Hyundai automatics in Dart
  • Tremec manuals in Viper and Challenger
  • Mercedes automatics in Wrangler
Meanwhile, FCA sells its own diesels to Suzuki; they are very popular in India, where Fiat barely sells any cars at all.

splitAccording to Mr, Marchionne, across the industry, vehicle R&D is 40% of development cost; powertrain R&D is 15%; vehicle tooling is 35%; and powertrain tooling is 5%. (The rest is around 5%.)

Mr. Marchionne’s discussion is almost certain to be misinterpreted by analysts and pundits. That said, it is probably a sign of things to come: Chrysler may not be developing its own new transmissions for some time. If this is true, the expertise required will disappear in time.

Turin is still likely to keep working on their own “automated manual” style transmissions, though these can also be licensed, while Auburn Hills will keep working on hybrid and electric solutions.

Even as he made this speech, FCA’s actions ran counter to his statements. Turin uses Microsoft for telematics software, while Chrysler uses QNX; while there’s a need for different hardware, there’s no need for different firmware. Likewise, rather than using Maserati’s version of the Chrysler V6, Alfa Romeo will be using “a Ferrari V6,”  even as Ferrari is being spun off.

Fiat also has its own lines of transmissions, including dual-clutch automatics, manuals, and reportedly a new conventional eight to ten speed being developed to fit into the new Alfa Romeos, which rumor claims will be mid-engined designs that do not have the space for the ZF.

Mr. Marchionne has said that he wants to avoid duplication of effort and to have few platforms supporting many cars, but he has also allowed deviations to meet brand needs. Most of the brands under his care have far different audiences and needs, giving him a much tougher nut to crack than Toyota or Volkswagen-Audi Group.

engine overlap

It still seems that Chrysler will not be working on its own transmission to replace the ZF any time soon, if at all, and that the company is probably willing to jettison other Chrysler components if they can find a collaborator. In the meantime, one or two new four cylinder families are in the works — and no matter who actually creates them, credit will no doubt go to Alfa Romeo and Ferrari.

In the long term, it appears from this chart that Mr. Marchionne thinks that FCA should be sharing out engines and transmissions with another automaker, or using those of another automaker, or both. There seems to be the most overlap in three and four cylinder mainstream engines, but FCA is still working on a new generation of their own powerplants rather than borrowing a design.

Allpar still has no reliable information on whether Chrysler is creating a new V8 to replace the Hemi, and the overlap charts may explain why.  The transmissions overlap chart included the notation: “Potential elimination of up to one billion euros in duplicated engines and transmissions spending per year.”

Market Share

Total FCA share in the United States — dominated heavily by Chrysler — stayed constant from the first quarter of 2014 at 12.5%, while Canadian share fell from 16.6% to 16.4% — possibly due to the temporary shutdown of the Windsor, Ontario minivan plant, which is being renovated.

Overall, FCA’s market share in Latin America fell from 22.7% to 19.7%. In Europe, it rose from 6.0 to 6.2%. In these regions, Chrysler brands, including Jeep, play a small role.

200CThe company recently launched the new Chrysler 200 in South Korea, where FCA has a total market share of 0.5% (up slightly from 0.4%). In the major Asia-Pacific nations, Fiat Chrysler’s only serious market share is in Australia, where it stands at 4.0%, up from 3.8%; other shares are 0.8% in China (steady), 0.3% in India (down from 0.6%), and 0.3% in Japan (steady). Literally half of FCA sales in the Asia-Pacific region are from Jeep now; while Fiat sales are driven by the Dart-based Viaggio and the Grande Punto. The Dodge brand is driven by the Journey.

The Fleet Mix: FCA vs Ford and General Motors

Chrysler has, in an unusual move, presented its full fleet mix — including a comparison with GM and Ford — as part of today’s investor presentation.

fleet mixWhile Chrysler (Maserati and Ferrari are insignificant factors) had a higher percentage of retail sales than Ford or GM, its fleet sales were lower quality, with most fleet sales were to rental agencies. Ford is the king of both commercial and government sales in the United States, as shown in the supplied chart.

Overall, FCA (mostly Chrysler) sold 79% of its vehicles to retail buyers, and just 21% to fleet buyers — a far cry from its sales under Daimler, in the later years, and under Cerberus. GM sells 77% of its cars to retail buyers, and Ford sells just 72% to retail buyers.

FCA has been attempting to increase its share of the commercial vehicle market by splitting off Ram and adding two vans, along with improving the dealer experience. Ford’s advantages include a longer history of having a full range of vehicles, a still-more-complete range, and earlier introduction of modern vans.

The share of sales to the government by General Motors and Ford which conflicts with some pundits’ claims of government favoritism towards GM. (When comparing these numbers, one should consider that GM and Ford have a higher percentage of US fleet sales than FCA.)

FCA: The Financials

Jeep’s 1.1 million worldwide shipments headlined the executive summary. This is an 11% volume increase in shipments, and a 22% year-over-year sales increase.

Overall, FCA saw shipments fall 2%, with the greatest deficit in Latin America (down 34%). North America was the exception, with shipments growing by 8% and gross earnings growing by a stunning 38%. Gross earnings also grew in Asia-Pacific (by 1%) and Europe/Middle East/Africa (EMEA) by 8%, as FCA’s “premium strategy” takes hold and high sales of cheap but unprofitable cars yield to somewhat lower sales of moderately or premium priced and profitable cars. The decline in South America appears to have been largely due to a general sales drop.

Shipments Adjusted EBIT (M)
North America 633,000 +8% €601 n/a
South America 135,000 -34% -€65 -4.2%
Asia-Pacific 47,000 -13% €65 +4.3%
Europe/Africa 271,000 +5% €25 +0.5%

Despite losses in sales, only one region — South America — failed to show a profit (before interest and taxes). North America’s EBIT clearly dominated the company.

This chart does not include Ferrari, which sold 1,635 cars (down 6%), or Maserati, which sold 7,306 (down 9%). Maserati had a banner year in 2014, so the drop is not as bad as it seems at first glance. It also does not include the components and robotics business.

Financially, Ferrari had a good quarter, with a $110 million EBIT; Maserati had a comfortable if small $40 million EBIT, even as the division continued to invest in a new lineup; and the components/robots business brought in a $75 million EBIT. The result was a total EBIT of $876 million vs $299 million in the first quarter of 2014. This came, though, with an increase in debt due to hefty investments such as the renovation of Windsor and the new plant in Brazil, along with major product layouts.

FCA had net revenues of $29 billion, with an adjusted earnings before interest and taxes of $884 million and final net profit of $102 million. The company has a comfortable $28 billion in available cash, including lines of credit, but its net industrial debt stands at a hefty $9.5 billion. (Numbers were reported in euros and converted to dollars based on today’s rates.)

In the first quarter of 2014, FCA reported a net loss of $191 million, largely due to one-off charges, including a payment to the North American pension plan operated by the UAW.

The company noted that the Fiat 500X has been launched in Europe, the Jeep Renegade in North America, and the Ram ProMaster City in North America, while, as noted earlier, the new Pernambuco (Brazil) plant has started production of Jeep Renegades for South America. They also pointed out that North American sales rose despite scheduled downtime for the Windsor minivan plant.

For the full year 2015, FCA expects to ship 4.8-5.0 million vehicles, earn gross revenues of $119 billion with a net profit of $1.1-$1.3 billion, and end up with a net industrial debt of $8.3-$8.9 billion.

Also see:Plan by Region • 2009 Plan • 2014 Plan Upcoming Chrysler vehicles • 2015 • 2016

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