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Marchionne’s High Noon

by Bill Cawthon on

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Fiat Chrysler CEO Sergio Marchionne is facing what may be some of the most serious challenges of his automotive career.

With Italy slipping back into recession and the entire European Union looking a bit shaky, Marchionne has to look to Chrysler and the NAFTA market for profits. And that means facing down some tough opposition.

Growth is increasingly hard to come by. U.S. market growth rates are declining back to more normal levels (over the past 50 years, the average annual change in the U.S. light vehicle market is about 1.5%).

Chrysler, like most other automakers, is relying on profit-sapping incentives and sub-prime financing to spur sales. This means Marchionne has to look to supply and labor costs to bring more dollars to the bottom line.

In telephone remarks made during the Center for Automotive Research’s Management Briefing Seminars earlier this month, Marchionne said, “I, Richard (Palmer, FCA’s CFO) and the whole management team are grossly dissatisfied with the margin performance of the business today, notwithstanding all of the significant gains that we’ve made in terms of product placement and volume. We’re still far behind where we need to be on margin performance. I think we need to go back to all sources of margin enhancement to try and get this thing leveled off.”

His comments were directed at suppliers, many of whom had reported significantly improved profits.

Despite assurances that he wasn’t looking to take the Cerberus approach, which ruined Chrysler’s supplier relationships, he left no doubt that FCA would be looking to, as he put it, “…participate in their well-being, and perhaps allow them to rub off some of their newfound wealth onto us.”

Not surprisingly, suppliers failed to warm to Marchionne’s plan and have already started to circle the wagons.

While it’s likely that Marchionne will be able to get some concessions, it remains to be seen how much Chrysler can actually save. Suppliers went through the lean times and the survivors are going to be wary of anything that hurts their own recovery.

The larger part of the challenge comes next year when the UAW contracts with the Detroit automakers expire.

Marchionne and the UAW despise the two-tier wage structure currently in place, but for two different reasons.

Marchionne has said he is okay with senior union members remaining at their current scale but wants the lower-tier workers to have a new rate, lower than the $28/hour wage that is the current standard, but higher then the $15-$19 they receive now.

The UAW wants to eliminate the lower-tier scale entirely and bring everybody up to the full union wage plus it wants that wage to increase. UAW members have not had a raise since 2003 and that $28/hour is worth just $21.62 today. Simply adjusting the rate to equivalent purchasing power in current dollars means a raise to $36.27/hour.

In addition, the new union leadership is already under pressure from its membership to get better pay and it needs to be able to come out of the negotiations with a win if it hopes to retain any vestige of its former power.

To say the two sides are miles apart would be an understatement: light years might be a closer approximation to the truth.

The 2015 contract negotiations are complicated for Marchionne by the facts that the “no-strike” clause in the current contract expires next year and that Chrysler is not the likely first target for the union. Both Ford and GM have reported higher profits and Ford’s lavish compensation of Alan Mulally could make it a tantalizing target to set the pattern for negotiations with other automakers.

Marchionne is also missing the ammunition he had in Italy when he got the unions to accept new contracts or see Fiat move production to plants in Poland and elsewhere.

Sergio Marchionne is arguably one of the most capable CEOs in the world and he has overcome tough opposition before. It’s going to be interesting to watch him take on the all the showdowns he has in his future.

Bill Cawthon grew up in the auto industry in the 1950s. His Dad worked for Chrysler and Bill spent a number of Saturdays down on the plant floor at Dodge Main in Hamtramck. Bill is also the U.S. market correspondent for just-auto.com, a British auto industry publication, and a member of the Texas Auto Writers Association, which has named the Jeep Grand Cherokee the “SUV of Texas” several times and named the Ram 1500 as the “Truck of Texas” two years running.

Bill has owned five Plymouths (including the only 1962 “Texan”), one Dodge and one Chrysler and is still trying to figure out how to justify a Wrangler. He also has owned at least one of every 1:87 scale model of a Chrysler product. You can reach him directly at (206) 888-7324 or by using the form.


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