Fiat and GM:The Troubled Alliance

Critique:Sarah James & Nicole King

Case Study Analysis:John Sallee & Ramiro Sanchez

GM Background

• General Motors (GM) has led global automotive sales since 1931

• Operates under various brands in the U.S., Canada, Latin America, & Europe

• Provides a range of financial services

• European and Latin market ventures were struggling

Fiat Background

• Fiat was founded in 1899 by Giovanni Agnelli• Introduced its first automobile in 1904• In 1910, Fiat employed 50,000 workers and

became a driving force in Italy’s economy• Ventured into U.S. market in 1970s but pulled

out a few years later• Acquired several other Italian car companies

during the 1980s

Fiat Background

• Experienced declining market share and revenues in European and Latin markets in 1990s

• Agnelli family continues to be the controlling shareholder of the company

Fiat Background

• Declining market share and increased competition forced Fiat to search for a partner

• Tried to merge with both BMW and Volvo but unsuccessful

• Daimler-Chrysler attempted to buy Fiat

• GM intervened, offering an alliance

GM-Fiat Alliance

• As a result of the alliance:– Both companies obtained synergies

• Purchasing advantages• Cost advantages• “Powertrain”

– GM obtained a 20% stake in Fiat for $2.4 billion

– Fiat received 32 million shares of GM– Put option for Fiat– “Allies in cost, competitors in markets.”

Central Issue

• Primary Issue– Find an alternative to

the put option between Fiat and GM without hurting either company or resorting to litigation

• Contributing Factors– Fiat diluted GM’s stake

to 10% by selling-off portions of the company after the alliance

– Fiat continued to increase its debt

– GM wanted no part of Fiat’s billion dollar debt

– GM believed the put option was invalid

Vision & Goals

• GM Vision– To be the world leader

in transportation products and services through:

• Continuous Improvement

• Customer Enthusiasm• Innovation• Integrity• Teamwork• Individual Respect &

Responsibility

• Fiat Vision– “An Italian Company that

builds cars with original styling and a wealth of intelligent solutions that are therefore capable of guaranteeing a better quality of everyday life” through:

• Balance of value and good performance

• Safety• Continuous Innovation

Constraints to the Situation

• Primary Constraint– GM wants no connection to Fiat

• Other Constraints– Fiat has continues to lose revenue &

accumulate debt– Fiat diluted GM stake through sell-offs– Put option would only hurt GM and provide

marginal help to Fiat

Functional Area Problems

• Management

• Finance

• Sales

• Marketing

Management

• No one at the top seems to be in agreement

• No real direction

• Family vs. Creditors

Finance

• Finances are an issue for both companies– GM faces the payment of billions of dollars for

retiree health and pension plans– Fiat in continuous battle with creditors

• Neither company has a firm financial footing

Sales & Marketing

• Problems in these areas can be attributed to management problems

• Management lacks clear direction, therefore:– Sales will continue to lag– Marketing will be inefficient

SWOT Analysis – GM

• Strengths– Size– Industry sales leader for 76

years– Diversified– Improved market share in

Europe

• Weaknesses– Long-term financial strains– Losses from prior alliances– Put option obligation

• Opportunities– Alternative out of put option

obligation– Join with other automaker

• Threats– Losing money in avoidable

situations– Massive layoffs if forced to

comply with put option– Introducing non-fuel

efficient vehicles

SWOT Analysis - Fiat

• Strengths– Strong customer

relations– Has held on through

two decades of financial strife

• Weaknesses– Huge debt totaling $6

billion in 2002– Family owned

• Opportunities– Revamp company – Put option with GM

• Threats– Failure to pay down

loans– Creditor threats to

dissolve company– Loss of put option– Loss of customer

loyalty

Porter’s Five Forces of Competition

• Threat of New Entrants– Low for start-up companies

• Industry categorized as oligopolistic

– Buyouts or partnerships more of a threat but still unlikely

• Rivalry Among Competitors– Very high – Few players create tougher competition– Alliances and JVs intensify rivalry

Porter’s Five Forces of Competition

• Bargaining Power of Suppliers– Moderate bargaining power– Auto giants can easily establish relationships with

other suppliers if agreements are unattractive

• Bargaining Power of Customers– Very high level of bargaining power– Key players now face competition from used cars – Shorter terms of ownership are on the rise– Customer needs must be met or sales will be lost to

competitors

Porter’s Five Forces of Competition

• Threat of Substitute Products– Fairly low– Possible substitutes include:

• Public transportation• Bicycles• Walking

– Most people enjoy the freedom of their own vehicle

Relevant Alternatives

• Alternative #1- Honor the Put Option– GM could honor the put option and invest

more than $2 billion in Fiat– Already invested around $2 billion when

alliance was formed– Total of $5 billion invested in a non-profitable

venture– This option helps Fiat but damages GM

Relevant Alternatives

• Alternative #2 – Invalidate the Put Option– Based on the sell-offs and their now diluted

stake, GM could attempt to negate the put option

– Lengthy and costly litigation may result if this option is pursued

Relevant Alternatives

• Alternative #3 – Avoid GM-Fiat Merger– Large initial costs for GM– Long-term benefits for GM– Same financial outcome for Fiat– Family retains ownership of Fiat

Best Alternative

• Alternative #3 – Avoid GM-Fiat Merger– GM no longer faces the potential of being

saddled with a declining company– GM learns a lesson for the future– Fiat still receives its $2 billion with the

possibility of more due to penalty payments– Family retains ownership and customer

loyalty

Implementation Plan

• If put option is invalidated:– Continue alliance to

take advantage of synergies

– GM should refrain from investing additional money in Fiat

• If put option remains:– GM should hope Fiat

sees a turnaround finding it unnecessary to exercise the put option

– Or, GM should hope Fiat can hold on until the put option expires in 2010

Additional Information

• February 14, 2005– GM paid $2 billion to avoid being forced to

acquire Fiat– Fiat Auto had little market value and had $10

billion in debt– GM & Fiat continue to cooperate in certain

areas, especially in diesel-engines– Since 2000, GM-Fiat have generated $2

billion in savings – Not enough for GM Europe or Fiat to rebound

Additional Information

• July 25, 2006– In first half of 2006 Fiat revenues jumped 21% – Positive operating profits for 3rd consecutive

quarter– What would GM’s original stake be worth

today?– Did GM make a mistake by bailing out?

Points to Consider• "GM has no choice but to

settle," said Ferdinand Dudenhoeffer, director of the Center of Automotive Research at Gelsenkirchen University in Germany.

• "They made a mistake when they agreed to the put option, and this mistake will cost money. They will try to get out of it as best they can with negotiations and a legal challenge."  (CNN, 2005)

• “With some fine new cars and financial figures to match, Fiat has staged an astonishing recovery.” (Economist, 2008)

ResourcesItalian Car Makers,(2008) www.autozine.org/Manufacturer/Italv/htm

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CNN, (2005). GM Fiat still in Standoff. Retrieved April 26, 2008 from:http://money.cnn.com/2005/02/02/news/international/gm_fiat/index.htm

The Economist. (2008). Fiat rebirth of a car maker. Retrieved April 26, 2008 from:http://www.economist.com/displaystory.cfm?story_id=11090197

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