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Sergio Marchionne was group-interviewed (with a webcast) at the Detroit Auto Show in January 2015. We have edited some questions for length and coherence. Any transcription errors are the fault of allpar, not FCA.
I’m wondering if you have another product planned for the Windsor Assembly Plant, and if so if that’s going to be a crossover vehicle.
If there is going to be one, it is going to be a crossover.
Can you tell us if there is?
I don’t know yet. We’re working our way through the economics of that case right now. So the car is designed. We know what it looks like. We’re just trying to find out whether we can sell enough. But obviously it shares the architecture with the minivan. We’ll let you know as soon as we find out. We’re still busy trying to launch the minivan. Let’s not worry about a second car.
Are there circumstances under which the next generation Wrangler will be built in Toledo?
Could be. Could be built in Toledo. The short answer to your question is if the economic differences that we’re facing between the alternative production location and Toledo were to go away, then I think we would find no reason not to continue to produce the Wrangler in Toledo. But there are significant differences in the capital costs required by the Toledo location of the car, which is really the fundamental reason. I made the comment earlier with the press. There was someone from Toledo who asked me how I viewed this issue. I think last year we sold 1,017,019 Jeeps. Over half of them were produced by the workforce in Toledo, and they have consistently overperformed. There’s not been a single instance where we have made demands for additional production out of Toledo that went unmet.
They’ve twisted into a pretzel, working holidays, working shutdown periods to try to get us there and I think this organization owes them a lot. I understand this issue. That’s why even in the event that the Wrangler were not to go to Toledo, we would find alternative products for them to produce. So it’s not an issue that will impact that town for the future livelihood of our people.
But the Wrangler issue is a very painful issue because of the amount of money involved here. The differences are large. And it doesn’t matter what I do, it’s almost impossible. I know it’s impossible for me alone to make it go away. And they’re large. They cannot be ignored. So we’d have to find a solution that somehow alleviates the cost burden of that plant in some fashion going forward, and certainly it cannot – and I can tell you that now – it cannot come out of the rate structure of our people in Toledo. I would never ask for a concession from them on this issue, ever. I think it’s unfair.
So it has to come from other parts of the infrastructure, whether it’s the city or the state. We have to find ways in which we could make up the difference. It may take a long time to make up the difference, but we would have to have the confirmation of the fact that for a long period of time the cost structure of Toledo will be substantially lower than it will be anywhere else.
If it can’t come out of labor and it can’t come out of the car because the car is what it is, then it has to come from the surroundings, whatever that may be, whether it’s the city or state. We’d have to find concessions. We’d have to find the package of economic incentives that would make the issue go away. And I’m not trying to throw the ball into somebody else’s yard here and say “Look, it’s your problem. You need to come up with the answer.” I’ve been as open as I can possibly be with both the mayor and the governor on this issue, and I’m going to meet them again in hopefully the next 30 days. I’ll make the point known to them.
I think it is important that we recognize that there is a limit to the amount of economic inefficiency that the FCA or Fiat Chrysler can endure. The investment, it’s not a reflection on Toledo; it’s just it’s a consequence of a set of choices that were made a long time ago in production with the Wrangler. There is a supplier part that operates around the plant. There were technical choices that were made in connection with that architecture. The way in which the car is assembled and painted.
And so we’re wearing the results of those choices. To make those choices irrelevant going forward, it’s going to require money, and so we’re really at the end of an economic discussion. We need to make that problem go away. If we can’t, I think we need to look at a world outside of Wrangler, whatever that is. But having said this, I have every intention of turning myself into a pretzel to try to make the problem go away. But as I get older, I get less capable of turning myself into a pretzel. I suffer the pain a lot more than I would’ve when I was 30.
More on the minivan plant. We understand that you’re about to embark on the transition of the plant, and the current generation will be still manufactured after that’s completed for some time. How long?
Where is Reid? If it was up to Reid, we’d be manufacturing up until 2250. There are technical reasons why that car cannot be sold for a much longer period of time than the current time. There are regulations that are coming into effect in 2017 that are going to restrict or are going to require a substantial amount of investment into the old architecture to make the problem go away. Or they’re just not assailable. That plus the combination of some of the inherent inefficiency of the architecture and the powertrain will make the car just not square, to square the numbers. We’ll try to keep it alive as long as we can.
Do you have a final design for the next generation?
Oh it’s done, yes. We’re tuning up now. It’s just the horse left the barn. The car is . . . there are bodies that are meandering around Auburn Hills out of the pilot plant. The parts are visible....You’ll see it at the show on January ’16.
It doesn’t seem very reassuring to the people of Windsor. How important is this plant going forward for FCA?
Two billion dollars worth of irrelevance. I don’t know, maybe it’s inconsequential money to you but we have put in two billion dollars between engineering and development and plant infrastructure to build this van. I think it’s the single largest Canadian investment that has been made in the auto sector in the last ten years. Is it reassuring now?
Obviously you said a lot has to happen before a final decision is made on the production of the next-generation Wrangler. Do you have any kind of a timetable yet? Obviously time does come into play. You also spoke about the workforce. How much of a role will their productivity and their dedication play into this decision, if any?
The car is due out in ’17. So if you work your dates back from that date, you’re going to have to call the marker within the second quarter of this year. You can’t wait any longer. I said this before, I think we owe a lot to the workforce in Toledo. I’ve been public on this before. I reiterate the point. I know that they have done exceptional things to make that car what it is today. Yeah, it’s going to play a role. Sure it is. But the number is so large. Unaided, unsupported, there’s just no way that it could ever happen. So there has to be something that comes to the table.
Is there a possibility of something being on the table with the city or the state at this point?
I don’t know. Let me have the meetings. It’s a tall order.
The US economy almost took down Chrysler. It’s been five years since the bailout. Could you talk about that? And then how much of a worry is the European economy to FCA, and how do you mitigate those hazards?
I’m not sure I understand the first question.
I’m just wondering what you’re thinking five years after the bailout.
It’s almost six years. June 10th this year will be the sixth year. Look, a lot has happened. I think all the prognostications that people had in place back in ’09 about the recovery of the auto industry have proved right. It was an intervention that has a good outcome. I mean people can spend time to determine how much the bailout ultimately cost taxpayers. The reality is that when you come into the show today and you compare what you saw in January of ’09 or even January of ’10 you are looking at two completely different worlds. You’ve got an industry which is in relatively decent shape. All of us are making some money making cars. The question is whether we’re making enough. But nobody is talking about restructuring of the industry. Nobody is talking about taking capacity down.
I think we have seen incredibly disciplined behavior in the marketplace by all the players, not just the Detroit Three. And I think we have seen both bailout candidates and the one that wasn’t bailed out performing incredibly well out of the city.
So if I had to sort of assign it a grade for the way in which we’ve performed, I think we deserve some level of A. Whether that’s an A-, an A, or an A+, I’m not sure. I’ll leave it to you to decide whether we need to qualify the A. But I think we’ve done well. I think we’ve – talking about Chrysler at least – we took our obligation that we had with taxpayers pretty seriously. We extinguished that liability back in May of 2011, less than two years after the money was lent. So there’s been incredibly rapid progress to come out of the doghouse and I think we are out of the doghouse. Whether we’re absolutely free of fleas or not is something that I still think we have some work.
The amount of restructuring that went on was pretty severe. We’ll still have some areas of massive intervention. We need to do a lot more work on powertrains and get this industry moving in the right direction, but I think the fundamentals are solid and I’m actually incredibly optimistic about what the next few years will bring. We are much better competitors than we have ever been, and that’s a great sign.
Two questions. Which manufacturing plants currently make aluminum vehicles, and even if the city of Toledo bought up all the land around your plant and made another plant would you not consider making it there?
If you offered a lot. If you bought all the land and you built the plant. If you did that, that will make the problem go away. A big chunk of it. You’d have to buy all the land and build the plant.
And the first question? The aluminum?
Inside NAFTA, no one. Outside of NAFTA there are at least three plants in Europe that are manufacturing aluminum bodies. Not of the mass production kind that you talked about, but certainly that have experience in aluminum.
Since you’ve taken over, there’s been a careful calibration of control on your company expanding Chrysler’s portfolio and getting things in better financial shape since the inception. What work still needs to be done by you and your team going forward? We have the expansion of the Alfa Romeo here in North America. Can you kind of share with us your thoughts on what your plans are going forward?
We laid out a plan back in May that takes this company from where we’re just about ready to report, from almost 4.7 million cars in 2014, to 7 million cars. That’s a huge shift in volume. The target for this year is in excess of 5 million.
Across all the brands and across all the geographies that FCA is active in, we have a variety of growth initiatives which are designed to strengthen all brands — but two in particular are going to require a huge amount of attention, one of which is really the execution of the globalization exercise on Jeep, because Jeep needs to become certainly the largest brand within FCA, and it needs to become the most global brand within FCA. So we have started manufacturing the smaller segment SUVs for Jeep out of Europe. We will be — and I was just exchanging emails today with our Latin-American friends — we will be in production with the Renegade for Latin-American purposes out of our Brazillian plant within the first quarter of this year and hopefully we’ll open the plant officially within April.
That car together with the Cherokee, which is produced in Toledo, in some expanded form will find its way into China. We need to rejuvenate the offering of the Patriot and the Compass which have been sort of historical mainstays of the brand here in the US.
There’s a huge amount of activity that’s going around Jeep, and that’s both on product and in terms of geographic expansion of activities, to try and get us to this magic number of a million and nine. The number, a couple million Jeeps worldwide, is by far a historical record and would be the largest brand that we have within our fold, and certainly it will be the most successful execution of a growth plan that I have ever witnessed, because when I arrived here I remember having a conversation with Mike Manley, who is not in the room here, about the fact that we were dreaming of selling half a million Jeeps back in 2009. We sold a million last year.
But it’s testimony, I think, of the strength of the brand, or the strength of an American brand, of the caliber of Jeep. That is something that I think we need to fight to preserve. I mean the Wrangler story and its importance as an anchor point to the brand, that is something that has not ever been negotiated. I made the point that it will never be manufactured outside the US, and it won’t. I have issues about the Grand Cherokee being manufactured anywhere else, or even the upper vehicle [Wagoneer] which will be coming out before 2018 to extend the range.
Those are the key objectives. The other one, obviously, which Reid talked about this morning, is the launch of Alfa Romeo. I saw the car, an incredibly sexy animal out there, wonderful. We only make 3,000 a year. That’s not going to move the needle to get to seven million. So there is a whole series of product introductions that have been planned for Alfa over the next four years which will consume both capital and time, but we need to sell about 400,000 cars by the end of 2018. So those remain the key objectives going forward.
Having said this, there is a relatively large work order around every other one of the brands which we don’t talk about because the other ones are sexier.
There is a lot of work that needs to be done in connection with Ram, the universalization of Chrysler as really the mass-market brand here, and the completion of the work that has been started on Dodge to turn it into the sports car end of our offering in the NAFTA market. So these are all the pots that are brewing right now. I think we can’t burn any. A huge amount of attention to detail and to execution. The plan is laid out. We’re not going to change it.
Two questions, if I may. Oil and gasoline prices, do you see this as very temporary or having any lasting impact on strategy at your firm in terms of development? Secondly, Ferrari and the IPO and building that into a bigger brand. There’s been talks of hotels and clubs. I’m just curious what your expections are with that.
On the first issue, I think the relevance of oil . . . I think oil price has become very negative for us when you start talking about insane numbers, like you start talking about $10 to $15 a gallon oil and we start to get very, very concerned and you’ll see incredibly apoplectic reactions by most car makers to a reality like that. I think people have overestimated the impact of cheap oil on the current development of the portfolio because what is really driving portfolio development in the US now is compliance with regulatory standards in terms of CO2 emissions. So as much as I think the public is naturally favoring the larger vehicles because of the fact that gas is cheap or relatively cheap, we have an obligation to try and bring technology to allow that portion of the fleet to continue to comply with EPA requirements.
The consequence of all this is if effectively these oil prices continue at these levels and we continue to favor the larger vehicles in the fleet, we’re going to end up pushing technology into these vehicles to make them compliant at a much faster rate than any of us have thought. If that in fact happens, it will shift the economics of the vehicles because they’ll become more expensive.
Do you think that will happen?
You know, I’ve never been a good forecaster of oil prices and I shouldn’t start now. It’s possible, but I think we’re ready to comply. The only thing we really need to find out is . . . you know, I think if you asked all the other car makers in this venue here, I think they’ll all tell you they’ll be able to play. So whatever happens, we’ll play.
Before I start giving you specifics as we start doing clubs and hotels and stuff, I think that there is a piece of the luxury brand story that needs to be filled out. I caution people from extrapolating too much from this luxury goods story into what I consider to be a very democratic distribution of Ferrari into the markpetlace.
What has made Ferrari unique, apart from its history which is unrivaled in the automotive space, is the fact that it has maintained its emphasis on exclusivity right throughout its life. Certainly since I’ve been involved with the business since 2004 we have – even at the time of the crisis in 2007 and 2008, we have shown incredible restraint in terms of reducing production volumes to ensure that we would not sell one more car than the market demanded.
And so when the US market effectively dried up as a result of the financial crisis, we choked the numbers right back. And we are now obviously at the other end of the spectrum because the markets are coming back and there is additional appetite for that price class of vehicles. But we need to be very careful that we don’t create too much of a democratic view of Ferrari.
Ferrari needs to continue to be an aspirational, exclusive brand and everything that it does – and it will extend beyond cars – needs to be faithful to those areas. So a very careful development of the brand that reflects the exclusive nature of its offerings.
Earlier you said you’re trying to work out the economics on whether or not Windsor will make an CUV. Have you restarted talks with the federal and provincial governments after pulling out last year?
So what will it take for Windsor to make that car? That vehicle.
Favorable economics in terms of demand, which the federal and provincial government cannot help on at all.
My question was along the same lines. Has the relationship improved at all? I know you had called the treatment by the Canadian government – that you felt they were treating the company as a political football leading into the election, but we do now have a liberal majority. Has anything improved?
Well, the fact that I said we had become a political football is true. I thought, and I continue to think, that it was an unfair treatment of Chrysler in the circumstances. I think the Canadians have now resolved their electoral choices and the problem has gone away.
But in the interim we have moved on with the investment. The van is being built. I don’t think there’s anything that can possibly happen now on the Canadian government side, whether it be provincial or federal, that needs to be done other than to maintain civil relationships between an investor and a taxpayer of the caliber of FCA in Canada. And the government agencies ... I don’t need anything right now. But the situation has improved. I had a conversation with the Premier of Ontario. I went to see the Prime Minister a while back. I think the relationship has remained cordial.
A question about the Cherokee. You mentioned it earlier. How satisfied are you with sales? How important is it to your product line? Is there anything new that you’re planning for that product in the future?
I can tell you right now that we already have the next phase – the next evolution of the Cherokee done. We’re working through the details and the last changes, so the car should be coming out within a period of 24 to 30 months. Obviously application of the nine-speed transmission on that vehicle has been a very painful application. It’s something that in hindsight we should’ve probably applied it to a passenger car as opposed to applying it to as sophisticated and complex a vehicle as the Cherokee.
But I’m pleased with what we’ve done. I think it can do more. I think the next phase – the next version or the next MCA of the vehicle will outperform the current one. I think it’s a better-looking, better-performing kind of the current Cherokee. But I think you need to wait two-and-a-half years to get it, so buy one now.
I want to go back to what you said a few moments ago about not being any more optimistic than you’ve ever been and contrast that or put that in context with what you said this morning about the need for consolidation. Is the industry in good shape now and you’re worried about the future? Can you expand on your comments this morning about the need for consolidation, and in terms of that, who needs to consolidate? Where is the over capacity that needs to be taken out that you’re worried about?
You know, the interesting thing is everybody who brings up this issue thinks that there is an over capacity issue to be addressed and therefore consolidation is the instrument whereby you eliminate the overhang. The problem with the car business, and I’ve got to be careful when I say this, especially the year in which we’re entering into labor negotiations, has never structurally been sort of an unrestrained production farm that keeps on spewing off cars a demand that doesn’t exist. It’s been an issue here, we lived through it in 2007 and 2008 when we bought our way into the market by offering a set of incentives, excessive, extraordinary incentives.
The real problem has to do with the capital cost of running this business. If you look at the way in which the financial markets have assigned values to us, us as FCA and to the rest of the players in this industry, we trade at an incredibly – since you come from Bloomberg you’ll have an appreciation of this, but we trade at what I consider to be incredibly poor multiples. And yeah, we’re talking about 2.5 or 3 times. The reason why we trade at this level is because I think the markets are skeptical of our ability to ride our way through a demand drop and to manage this business intelligently, preserving capital where we can.
When somebody asked me whether I was serious about Windsor and I gave you a number of two billion, now that involves obviously some work that is being done on the plant, and the establishment of the paint shop which is a permanent fixed attachment to the plant, but a lot of it has to do with the engineering work required to develop the platform and develop the powertrains associated with this. Roughly half, probably 700 or 800 million.
The problem that you run into is if you make exclusive use of that architecture for your own purposes and you find a way to try and effectively make it available to others on a democratic basis so they can access the same architecture – to not repeat the cost event – you’re going to continue accumulating capital budgets to run this business which on a standalone basis are huge. Just tremendous.
We made out a plan to take us until 2018 which foresees a set of investments of 55 billion Euros. I forget about what the exchange rate was. When we did it, I think it was 1.30. We’re talking $75 or $80 billion. That is a lot of money. And we need to find a way – the argument about consolidation is one that is designed at driving down the cost of execution of our activities. We need to bring down the cost of development of architectures and engines. The only way you can do this is by sharing it, and the sharing exercises that have gone on, whether it be projected-related or otherwise, are not enough.
Doing a couple of deals here, we’re doing the Mazda Spider which is coming out as a Fiat. Yes, have I saved money from doing it? Yes. Have I done it on a mass-market vehicle? The answer is no. And there are very few people that have shared mass-market initiatives across platforms, across companies.
Engines. I had the conversation with somebody about an hour ago. Four-cylinder engines. I picked four. I could’ve picked two, three, five, it doesn’t matter. The level of uniqueness of those engines in the marketplace, will there really need to be developed standalone solutions for each carmaker, or whether you can do 85% of the development on a joint basis and take the remainder of the 15 to make them unique by working on particular attributes of the engine family, you’re talking about hundreds of millions of dollars of what I consider to be redundant, duplicated investments which ultimately do not bear any benefit to the consumer. And all of this is based on the fact that these are separate standalone entities.
Now I know we’ve gone through the smorgasbord in the ‘90s of buying companies and doing aggregations and we’ve bought big and we went global and butchered it and then went back and unwound all those things and recreated the beginning of the cycle. But the reality is that one of the reasons the large car companies are successful, and I’m talking about the large, large ones – the VWs of the world and the Toyotas of the world – is because they’ve mastered the concept of growth and standardization in a way which is effective. I think you could even do a better job than they’ve done, and I’m not trying to tell them how to run their business, but I think there are ways in which you could even improve on the uniqueness of the output of the standardization process and allow you to run a multi-brand environment by communizing a large portion of the industrial footprint and the industrial development cost space.
And that needs to continue to be the single largest driver of opportunity for margin improvement and for the potential of these businesses ultimately to look straight at the capital markets in their face and say “I am earning my cost of capital.” I don’t know how many car companies today could actually make the statement with a straight face that we’re earning our cost of capital, even in an environment which is as benign as the interest rate environment we live in. But it needs to be addressed. It needs to be addressed intelligently. It needs to be addressed by people who care ultimately about the stability of the industry in the medium to long-term. My earnings in 2015, I’m not going to suffer because of this issue. They may not suffer in ’16. But if you ask me whether they’re going to impact me in 2020, the answer is yes.
Because people keep on forgetting that while we have expanded this business and gone to China, for example – and we’ve got the first example. There’s a car where one of our partners is being launched today on the stand. While we’ve done this, the Chinese industry has grown to a larger market than the US, and we have created some pretty formidable players as joint-venture partners over there who are going to be looking for space. ... the only way in which you can respond to that kind of competitive pressure is by making sure that you’ve got the least-cost solution to the execution of a plan. We don’t have one today. That’s all I’m saying. I don’t know whether it was a long-winded answer to your question, but it needs to be addressed. And it doesn’t need to be on my watch. We’ll let the [next] guy do it. Somebody needs to do it.
You mentioned it doesn’t have to be on your watch, but there’s an ego thing. For example, the Ford family doesn’t want to give up their ownership of this company, or Piech doesn’t want to give up his ownership and control of that company. So would the Agnelli family be willing to go into a larger entity?
I’m not a Ford, I’m not a Piech, and I’m not an Agnelli. So you’re directing the question at the wrong guy.
You know those guys.
I know them all. The real issue, ... in my view is not them; the real problem is the egos of executives. I made the comment this morning to the press about the fact that I don’t ever remember a turkey inviting himself to a Thanksgiving dinner. Redundancy. Redundancy in situations like this begins with the executive ranks. That’s where it needs to be addressed.
[Brief intermission, audio cuts back in mid-response]
. . . to institute a much more collaborative way of handling the next contract. You know, we’re early enough into the process now where I think we can have an intelligent dialogue with UAW and Dennis and crew to at least set the right pulse in the ground about where we’re going. Rhetoric, you know, sabre rattling and all that kind of stuff, it doesn’t do anything. To be perfectly honest, we’re not doing it; they shouldn’t be doing it either. And knowing Dennis, I don’t think we’re going to see it. But we’ll see. It’s early days.
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