Sergio Marchionne does it again

[AdamSmith]

Disclaimer--This is a business story, nothing salacious. Unless you get off reading quarterly reports and 10-Ks.

Sergio Marchionne, the unconventional CEO of Fiat Chrysler Automobiles (FCA), spent much of the company's quarterly earnings call today giving a 25-page PowerPoint presentation explaining why the auto industry spends more money developing and manufacturing its products than it can ever earn back, with its current structure.

Here is that presentation: http://www.fcagroup.com/en-US/investor_relations/events_presentations/quarterly_results_presentations/SM_Fire_investor_presentation.pdf

How it begins:

Confessions of a Capital Junkie

An insider perspective on the cure for the industry's

value-destroying addiction to capital

Goal is to provide clarity on two issues that have been raised publicly by FCA

●Industry has not earned its cost of capital over a cycle

●Consolidation is the key to remedying the problem



What this is not about

●An excuse for FCA’s current ranking in the automotive food chain

●Putting FCA up for sale

●A revision to our 5 year plan (which remains a firm commitment)

●A matter of life or death for FCA

●SM’s final big deal



What this is about

●Dispassionate look at the industry from the outside using insider knowledge

●It is about choosing between mediocrity or fundamentally changing the paradigm for the industry

Fascinating reading. I think he is right. The global auto industry, to remain (become!) viable, must move to a business model more like the high-tech electronics industry -- design and build many differentiated products based on a core of common, very widely used components and subsystems.

Unlike today, when every new platform program re-engineers every subsystem almost from scratch, but with precious little value added or differentiation created, with very few exceptions.

[Suckrates]

Grandma ONLY Reads THIS !

[lookin]

This guy never disappoints. Even when he's talking about industry consolidation, he somehow manages to make it sound fresh.

[AdamSmith]

Marchionne argues if automakers won't consolidate, the market should make them

Automotive News

Sergio Marchionne, CEO of Fiat Chrysler Automobiles, argued today that major automakers need to stop wasting billions developing the same products and start working together.

And if automakers won’t consolidate voluntarily, then the capital markets should force change upon them, the FCA boss said during a marathon conference call with analysts.

“There is a fundamental problem that can’t be ignored,” Marchionne said from Brazil, where FCA just opened a plant to build the Jeep Renegade and up to two other models.

He said the industry -- excluding manufacturers in China -- is burning 2 billion euros a week developing vehicles and components that are largely similar. Those costs could be shared, and the capital saved and returned to shareholders, through consolidation within the industry.

“We need to find a way to abandon this path, and effectively go straight,” Marchionne argued.

Marchionne singled out Toyota Motor Corp. and Volkswagen Group as being the most effective among mass market automakers at returning value to shareholders through effective use of capital. But he said even the performance of those companies pales next to other industries, which is not a long-term trend that the industry can endure.

“The capital consumption rate doesn’t deliver value to the consumer, and in its purest form, is pure economic waste. It’s just bizarre,” Marchionne said.

In an analysis he titled “Confessions of a Capital Junkie,” Marchionne said automakers could potentially share 40 to 50 percent of vehicle development costs, returning 2.5 billion to 4.5 billion euros of capital every year.

To illustrate his point, he noted four-cylinder engine development, which cost each automaker billions with a negligible impact on buying decisions.

“Consumers could not give a flying leap,” about whose four-cylinder engine is in a vehicle, he argued.

Marchionne has been loudly courting potential global partners for FCA for several months, without success. But he ran into a stiff headwind from analysts on the call when he suggested that the capital markets could force automakers to change their ways or consolidate.

“The capital markets are not going to be able to do anything like this,” argued analyst Max Warburton, of Sanford C. Bernstein & Co., a respected industry analyst who issued a report on FCA’s low profit margins last month. “There are probably five or 10 men [in the auto industry] that are able to do this, and you probably have them all on speed dial.”

The extended exchange between Marchionne and Warburton grew testy at times.

Marchionne said: “Don’t shy away from your obligation. Your obligation at the end of the day is to direct the flow of capital. That’s what you do for a living. I make cars, you direct capital. Own the responsibility, Max.

“I think the capital markets need to take responsibility for forcing capital in a responsible way. In the way you wrote it, you’ve relegated us to a valuation that is obscene,” Marchionne added. “How far down the food chain do we need to go to be embarrassed?”

Elsewhere on the call, FCA:

• Acknowledged its pricing action last month that increased the wholesale prices of its vehicles to dealers but didn’t raise the sticker prices.

• Said it is working to “improve the mix” in its pickup offerings to boost profits, and is working to remove what CFO Richard Palmer called “deep bottlenecks” in its supply base that are restricting certain pickup sales. Palmer did not indicate what components he was referring to, but Ram brand head Bob Hegbloom has said the brand plans to expand its profitable light-duty diesel offerings to 20 percent of its half-ton mix.

http://www.autonews.com/article/20150429/OEM01/150429763/marchionne-argues-if-automakers-wont-consolidate-the-market-should

[AdamSmith]

N.B. The Maryann Keller quoted herein accusing Marchionne of 'panic' is a consultant whore who makes her money off his competitors. Her business: http://mkellerco.com/Home_Page.html Disclosure--My business is similar to hers.

Marchionne Talk of Industry Mergers Called Sign of ‘Panic’

Bloomberg Business

Chief Executive Officer Sergio Marchionne has been talking for months about merging Fiat Chrysler Automobiles NV with a giant like General Motors or Ford.

Fiat Chrysler sales are growing quickly and the U.S. division has been gaining market share faster than rivals. So why does Marchionne want a partner?

For starters, the company is boosting discounts on many models and selling unpopular sedans and compacts to rental-car companies and corporate fleets. That’s depressing profit margins, meaning Marchionne will generate less cash to develop the next generation of vehicles and technologies on his own.

“What Sergio is panicked about is how much sales are growing while profit margins are falling,” said Maryann Keller, an independent consultant in Greenwich, Connecticut. “He should be making piles of money right now.”

Marchionne floated the idea of creating a new global auto behemoth last year. He has repeatedly complained about steep development costs for new cars. In an earnings call today with analysts, he said weak profits across the industry argued for consolidation. This isn’t about putting FCA up for sale, a matter of “life and death” for the company, or Marchionne’s “final big deal,” he said.

Sanford C. Bernstein analyst Max Warburton wasn’t buying it. In a note after the presentation, he said: “In reality, it is all of those things.”

Fiat Chrysler shares fell 4.9 percent, the steepest intraday drop this year, to $15.47 at 3:11 p.m. New York time.

Cutting Costs

Marchionne said he wants consolidation that helps cover development costs for costly things like engines, advanced technologies and more mundane things like parts. If companies can merge and defray those costs over more sales volume, they can boost returns, Marchionne said.

Warburton said on the call that he and other analysts largely agree with Marchionne’s premise that the industry’s high capital costs make for low returns, but he added that CEOs at other car companies don’t seem to be heeding the call for a more mergers: “I don’t think your colleagues are as embarrassed as you and that’s the problem, right?”

Marchionne has told Bloomberg that rival CEOs aren’t exactly beating a path to his door. Ford Motor Co. and General Motors Co. have little interest in combining with FCA, said people familiar with the thinking at each company.

If GM, Ford and other automakers don’t want to merge up with FCA, Marchionne told analysts on the earnings call today that he wouldn’t rule out an overture to tech giants Google Inc. or Apple Inc.

Lagging Margins

Other automakers aren’t lining up because Marchionne needs a deal more than his competitors do, Keller said. While first-quarter profit surged 22 percent, margins lagged far behind FCA’s Detroit rivals. Ford made $924 million on $31 billion in revenue in the first quarter, GM $900 million on $35.7 billion in sales. Fiat Chrysler earned $92 million on $26.4 billion.

Last year, Fiat Chrysler’s margin before interest and taxes was 3.3 percent. GM reported a 4.9 percent EBIT margin. Thanks partly to sluggish economic growth, FCA lost $131 million in Europe. That’s far less than in 2013, but it still hurts the bottom line. Ferrari and Maserati are money makers, but Marchionne is spinning off Ferrari to generate cash.

That leaves the U.S. business, which generated more than half of last year’s profit, to carry the load. It’s hard to see how Marchionne can take FCA US, formerly known as Chrysler, to the next level.

Higher Discounts

In the first quarter, the company handed out an average of $3,300 a vehicle in discounts, up 4 percent and the most of any mass-market automaker. Fiat brand discounts have almost doubled from a year ago. GM and Ford are actually pulling back on incentives. As a result, FCA US now spends an average of about $200 a vehicle more than GM and almost $500 more than Ford, according to Autodata Corp. The gap with Toyota Motor Corp. and Honda Motor Co. exceeds $1,400 per vehicle.

FCA US is also offering bonus cash to dealers who manage to sell the company’s slow-selling cars, including the Chrysler 200 family sedan and Dodge Dart compact.

“Jeeps and trucks are selling,” said Mark Snethkamp, who runs a Chrysler-Dodge-Jeep store near Detroit. “I think that’s why they are pushing the 200 and Dart so much.”

Telling Weakness

Boosting sales to car-rental companies and corporate fleets is another telling sign of weakness because such transactions typically command lower margins than sales to regular consumers. While FCA US’s reliance on fleet sales fell last year and has been declining since 2009, more than a third of Chrysler 200 sales are going to fleets, according to a person familiar with the situation, who asked to not to be identified discussing private information.

The company declined to comment on its incentive strategy or which models are ending up in fleets.

After FCA announced earnings, Evercore ISI analyst George Galliers bemoaned in a research note that North American margins remain weak and that the company burned $1.1 billion in cash and ended with $9.2 billion in debt, based on exchange rates at the end of the first quarter. That’s about $1 billion more than it had three months ago.

Despite some weakness in its strongest market, Fiat Chrysler isn’t in serious trouble. Against long odds, Marchionne revived Chrysler and combined it with Fiat to create a global automaker. The redesigned Jeep Grand Cherokee and Cherokee are both hot sellers and now make up about 7 percent of the U.S. market for sport utility vehicles. The Ram lineup, now a separate brand, is growing along with a strong pickup market and is a big moneymaker.

But with profits coming from a relatively small number of vehicles, it’s easy to see why Marchionne may be looking for a partner to help with investment in new technology or to help get more scale in passenger cars, where the company is weak, said Richard Hilgert, a Morningstar Inc. analyst in Chicago.

With no obvious partner, Marchionne took his case to shareholders in hopes they’ll pressure his rivals to cut a deal.

“This state of affairs, it’s almost embarrassing,” he said. “The capital markets need to push for change.”

http://www.bloomberg.com/news/articles/2015-04-29/marchionne-talk-of-industry-consolidation-called-sign-of-panic-