Strategic Alliances - Fiat_Chrysler Alliance_Pranav Sharma

November 7, 2017 | Author: Trihandoyo Budi Cahyanto | Category: Strategic Management, Supply Chain, Competition, Swot Analysis, Competitiveness
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SUMMARY

Organisations are increasingly forming strategic alliances with other firms in order to improve their competitiveness. This dissertation provides an insight into strategic alliances, examining the motives behind alliances and highlights the beneficial opportunities offered by an alliance.

The recent Fiat-Chrysler alliance has been investigated to provide a better understanding of strategic alliances and a case study analysis of Fiat has been conducted to provide recommendations for its future strategy. The effect of the global financial crisis on the automotive industry and its role in instigating alliances between companies has also been studied. The analysis illustrated that Fiat is a strong performer having a good product offering. It is operating within a highly competitive industry and is affected by various external factors such as legislation, environmental concerns and global economic condition.

It is concluded that a strategic alliance offers a number of advantages to companies provided that right partners are selected. It is important to work cohesively to achieve mutual objectives. The Fiat-Chrysler alliance has the potential to offer several benefits to both parties. It provides the critical mass required to reap benefits of economies of scale within the industry. It also reduces product development cycles, makes available ready to use distribution channels and increases product portfolio. Fiat can accomplish its potential by having an efficient alliance with Chrysler and develop to be a market leader in its industry.

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ACKNOWLEDGEMENTS

I would like to thank my project supervisor, Professor David Walker for the support and guidance imparted throughout the course of this dissertation. Especially for being flexible with the project meeting schedules and patiently answering all my e-mails and telephone calls. Your knowledge and advice has been invaluable.

I am also thankful to Dr. Andrew Tobias for his constant support and advice throughout the MSc course – always encouraging us to think from a new perspective and to perform to the best of our ability. Many thanks to Janet Morris for patiently and efficiently answering numerous queries and concerns.

I am grateful to David Nuttall, my former head of department at LDV Group Ltd, for endorsing my application for this course and also for being an excellent mentor. I am also grateful to Ian Bugby and Mark Hopkins, former project managers at LDV, for assisting me with my workload whenever I was away from work for course lectures and exams - it really did make life a lot easier.

I would like to thank my family for their constant affection, advice and motivation.

Thanks to all my friends and classmates for their help, support (and much needed distraction!) – You all have really made this course a truly enjoyable and memorable experience.

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CONTENTS

CHAPTER 1: INTRODUCTION ..................................................................... 1 1.1 INTRODUCTION ........................................................................................... 1 1.2 PROBLEM SETTING ...................................................................................... 2 1.3 AIM AND OBJECTIVES ................................................................................. 3 1.4 LIMITATIONS / CONSTRAINTS ...................................................................... 4 1.5 ASSUMPTIONS ............................................................................................. 5 1.6 DISSERTATION STRUCTURE ......................................................................... 5 CHAPTER 2: LITERATURE REVIEW.......................................................... 7 2.1 STRATEGIC ALLIANCE ................................................................................. 7 2.1.1 Motives for Strategic Alliances .......................................................... 10 2.1.2 Types of Strategic Alliances............................................................... 12 2.1.3 Main Challenges faced by companies ................................................ 14 2.2 ANALYSING THE EXTERNAL AND INTERNAL ENVIRONMENT ....................... 15 2.2.1 PESTLE Analysis .............................................................................. 16 2.2.2 Porter’s Five Forces ......................................................................... 18 2.2.3 SWOT Analysis.................................................................................. 23 CHAPTER 3: METHODOLOGY .................................................................. 25 3.1 CASE STUDY ............................................................................................. 25 3.2 DATA COLLECTION ................................................................................... 25 3.3 RESEARCH PROCEDURE ............................................................................. 26 CHAPTER 4: COMPANY DESCRIPTION- FIAT ...................................... 28

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4.1 HISTORY ................................................................................................... 28 4.2 CURRENT STATUS ..................................................................................... 29 4.3 BRANDS AND PRODUCTS ........................................................................... 31 4.3 GLOBAL AUTOMOTIVE MARKET ................................................................ 34 4.3.1 Fiat Automobiles Performance .......................................................... 35 4.4 FIAT GROUP 2009 PERFORMANCE AND FINANCIAL ANALYSIS .................... 38 CHAPTER 5: ALLIANCE .............................................................................. 42 5.1 EFFECT OF THE FINANCIAL CRISIS ON THE AUTOMOTIVE INDUSTRY ........... 42 5.1.1 Effect of the Recession on Fiat........................................................... 44 5.2 ALLIANCES WITHIN THE INDUSTRY ............................................................ 45 5.3 FIAT – CHRYSLER STRATEGIC ALLIANCE ................................................... 45 5.3.1 Fiat –Chrysler Alliance ..................................................................... 46 5.3.2 Motives for the Alliance..................................................................... 47 5.3.3 Advantages to Chrysler ..................................................................... 49 5.3.4 Advantages to Fiat ............................................................................ 50 5.4 SIMILAR ALLIANCES WITHIN THE INDUSTRY .............................................. 52 CHAPTER 6: ANALYSIS AND DISCUSSION ............................................. 58 6.1 PESTEL ANALYSIS .................................................................................. 58 6.2 PORTER’S 5 FORCES ANALYSIS .................................................................. 65 6.3 SWOT ANALYSIS ..................................................................................... 69 CHAPTER 7: CONCLUSION & RECOMMENDATIONS .......................... 75 7.1 CONCLUSION ............................................................................................ 75 7.2 RECOMMENDATIONS ................................................................................. 78 REFERENCES ................................................................................................ 80

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APPENDIX 1 ................................................................................................... 84 APPENDIX 2 ................................................................................................... 88

Table of Figures FIGURE 1: MOTIVES FOR STRATEGIC ALLIANCES ................................................. 12 FIGURE 2: PORTER’S FIVE FORCES ...................................................................... 18 FIGURE 3: SWOT ANALYSIS ............................................................................... 23 FIGURE 4: GROUP STRUCTURE ............................................................................ 30 FIGURE 5: FIAT GROUP CURRENT PRODUCT MIX VS MARKET .............................. 33 FIGURE 6: GLOBAL AUTOMOTIVE INDUSTRY VALUE 2005-2009 .......................... 34 FIGURE 7: FIAT 2009 SALES PERFORMANCE ........................................................ 35 FIGURE 8: 2009 SALES SPLIT BY BRAND.............................................................. 35 FIGURE 9: FIAT – CHRYSLER COMBINED MARKET SHARE .................................... 36 FIGURE 10: FIAT GROUP PERFORMANCE SNAPSHOT ........................................... 38 FIGURE 11:FIAT AUTOMOBILES PERFORMANCE (INCL. MASERATI AND FERRARI) . 40 FIGURE 12: TRADING PROFIT MARGIN ................................................................ 40 FIGURE 13: GLOBAL SALES DECLINED IN THE RECESSION.................................... 42 FIGURE 14: SALES DECLINED IN USA ................................................................. 43 FIGURE 15:SALES DECLINED IN WESTERN EUROPE.............................................. 43 FIGURE 16: FIAT 1ST QTR 2009 NET REVENUES .................................................. 44 FIGURE 17: EXAMPLE OF TECHNOLOGICAL BENEFITS TO CHRYSLER ..................... 49 FIGURE 18: FORECAST OF FIAT-CHRYSLER SYNERGIES ........................................ 50 FIGURE 19: VEHICLE ARCHITECTURE SHARING OPPORTUNITIES WITH CHRYSLER . 51 FIGURE 20: GLOBAL INDUSTRY VALUE FORECAST 2009-2014 ............................. 56 FIGURE 21: GLOBAL LIGHT VEHICLE SALES BY VOLUME ..................................... 57 FIGURE 22: GLOBAL OEM SALES FORECAST 2008-2015 ..................................... 57 FIGURE 23: ECONOMY AND AUTO INDUSTRY ....................................................... 62 FIGURE 24: NUMBER OF CARS PER 1000 PEOPLE IN 2008 ..................................... 62 FIGURE 25: IMPORTANCE OF ISSUES RATED BY AUTOMOTIVE EXECUTIVES ........... 64 FIGURE 26: PORTER'S FIVE FORCES ANALYSIS..................................................... 65

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CHAPTER 1: INTRODUCTION

1.1 Introduction Globalisation, competitive market pressures and increasing customer demands has lead Companies to constantly evaluate the business environment and implement strategies in order to remain commercially competitive and successful. One of the available strategic options to a Company is forming a strategic alliance with another firm to join forces and work together in order to address concerns such as resource shortages, reduce product development cycles, adding additional production facilities and distribution channels.

Fiat is one of the largest automotive manufacturers in the world, catering to major segments of the passenger and commercial vehicle market. The automotive industry is considered highly competitive due to the maturity of the market, similar products and number of manufacturers. The buyer is mainly influenced by price and product performance. Manufacturers are highly concerned with product cost which is influenced by many external factors such as legislations, raw material costs, currency exchange rates, energy costs and taxes as this affects the final product pricing.

The aim is to attain competitiveness while sustaining

profitability.

The recent global financial crisis has added to the woes of the industry and vehicle manufacturers are taking a number of strategic decisions in order to remain competitive. In the past year the automotive industry has seen a number of

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bankruptcies, restructuring efforts and consolidations. The business environment is constantly changing and it is essential that an organisation continuously evaluates its position within the market and plans effectively for the future. The strategy of a business is developed to achieve the organisational goals and is shaped by the strengths and weaknesses of an organisation and also the macroenvironment that it survives in which highlights the threats and opportunities.

Lately a number of organisations have entered into strategic alliances with one or more partners. This dissertation studies the reasons and motives behind such alliances and the opportunities an alliance provides to the companies. The recent alliance between Fiat Group and Chrysler has been investigated to obtain a better understanding of strategic alliances. The recent financial crisis has also been studied with regards to its effect of acting as a catalyst for alliances within the automotive industry. This external environment analysis coupled with analysing Fiat’s current market positioning has resulted in a number of recommendations for the future direction of Fiat’s strategy.

1.2 Problem setting “Cars are expensively priced items, which makes them peculiarly vulnerable to any downturn in confidence, GDP, wealth and income.” (Warren - The Telegraph, 2009)

The automotive industry is a highly competitive industry and has been greatly affected by the recent financial crisis. The lack of availability of finance and a

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hampered consumer confidence has lead to a decline in demand and a substantial amount of overcapacity within the industry. This lead vehicle manufacturers to reconsider their strategies in order to sustain themselves in the recession and remain competitive for the future.

In 2009, Fiat Group formed a Global strategic alliance with Chrysler. Fiat’s decision to form an alliance with Chrysler needs to be studied and the current industry scenario needs to be analysed in order to provide recommendations for Fiat to remain competitive. Therefore the problems that arise from this event are:

1. What are the motives behind the Fiat-Chrysler alliance? 2. What Benefit would the alliance provide to both Fiat and Chrysler? 3. How the recent recession and other external factors affect the automotive industry? 4. What is the current position of Fiat in the automotive industry and what steps should it take to remain competitive in the future?

1.3 Aim and Objectives The aim of this dissertation is to examine the need for the Fiat-Chrysler alliance and weigh the opportunities offered by the alliance. Consideration will be also given to the macro and micro environment in order to provide recommendations for a sustainable future for Fiat.

The objectives of this Dissertation are: 1. To analyse the need for the Fiat-Chrysler Alliance. 2. To analyse Fiat’s current position in the Global Automotive Marketplace Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance

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3. To analyse the external and industry environment that might affect Fiat 4. To provide recommendation for Fiat to remain competitive in the future.

The dissertation will also provide a background into the theory of strategic alliances as a strategic option. It will also provide information about: 1. What is a strategic alliance and why companies form strategic alliances. 2. The opportunities an alliance provides to a company. 3. The effects of the External factors and Business environment on the strategy of a firm and how to consider these factors when making strategic recommendations and decisions.

1.4 Limitations / Constraints The scope of the dissertation is limited to Fiat Group’s automotive business and the Fiat-Chrysler Alliance that was formed in 2009. Also, in July 2010, Fiat Group’s board approved the plan to separate its industrial and automotive businesses into two separate companies in order to create to a global automotive company in collaboration with Chrysler (Fiat Group, 2010). The issues discussed and recommendations outlined in this dissertation revolve around Fiat’s automotive business only and author is aware that Fiat Group’s future strategic decisions may be affected by the state of other businesses and activities of the conglomerate.

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1.5 Assumptions • The automotive market is still recovering from the recession. • The alliance will be a long term partnership. • Fiat will remain in a stable financial condition.

1.6 Dissertation Structure The dissertation comprises of 7 Chapters:

Chapter 1 Introduction This chapter explains the background to the project and introduces the problem, aims and objectives.

Chapter 2 Literature review This chapter discusses the theory of strategic alliances, the motives for alliances and the benefits provided by an alliance. It also discusses the importance of considering the external and internal environment during strategy formulation.

Chapter 3 Methodology This chapter explains the research method followed in this dissertation.

Chapter 4 Company Description This chapter provides information about Fiat Group, Its history, current status, products, sales and financial performance are discussed.

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Chapter 5 Alliance This chapter provides background on the effect of the recession on the automotive industry and how it lead to an increase in restructuring and alliances within the industry. The Fiat-Chrysler alliance is explained and the benefits and opportunities to both firms are highlighted.

Chapter 6 Analysis and Discussion In this chapter, a PESTEL Analysis, Porter’s Five forces Analysis and a SWOT analysis is conducted to assess the external and internal factors that would shape Fiat’s future strategy.

Chapter 7 Conclusion and Recommendation In this chapter, the results of this dissertation are concluded and recommendations have been made for Fiat’s future strategy.

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CHAPTER 2: LITERATURE REVIEW

2.1 Strategic Alliance A Strategic Alliance can be defined as an agreement between organisations in which each entrusts certain amount of resources to achieve a set of objectives. Alliances can be formed with a wide variety of Partners depending on the objectives of the partnership. The partnership may include organisations in the supply chain such as customers and suppliers. It may even include competitors or Organisations external to the business such as Universities or Government bodies. Strategic Alliances provide Organisations with the opportunity to improve their competitive positioning, enter new markets, build on core competencies, risk sharing and research and development costs sharing .(Bain & Co, n.d.)

Hooley et al. (2007) emphasise that building relationships with other companies is essential to compete effectively as Organisations face an extraordinary set of challenges due to constantly changing markets, rapidly evolving technologies, shortage of resources and skills and increasingly demanding customers.

Alternatively Thompson (2001) classifies as alliance as a defensive move rather than as a growth opportunity with the intention to increase competitive advantage without having a merger or an acquisition.

Regardless of the reasons for the alliance, it is essential that all parties work together cohesively. Lorange and Roos (1993) state that the alliance should be

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structured so that it is the strategic goal of both parties for it to succeed. On the other hand, Ohmae (1989) argued that the alliance is beneficial when each partner has a different strategic intent. For example, one partner can pursue a strategy of globalisation while the other partner can take a more passive role as a technology supplier (Lorange and Roos, 1993). In summary, the goals and objectives of each partner can be different but they should compliment each other and work towards achieving their objectives with a successful alliance.

The need for strategic alliances The rise International business and increasing competitive pressures on firms has lead firms to a need to collaborate with partners in order to address concerns such as resource shortages, reduce product development cycles and additional distribution channels. Each international market needs a region specific strategy and this need encourages firms to form alliances with local partners that understand the market well. The recent rapid developments in technology pressurises firms to constantly adjust to customer demands and respond with shorter product life cycles. This requires a competent and flexible resource base and has lead firms to jointly pursue Research and Development activities that provide a flexible and sufficient resource base. This also brings together several different competencies to ensure a commercially successful strategy. In summary, each partner puts forward its best in order to result in a successful product. (Lorange and Roos, 1993)

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Companies are in a very dynamic business environment and need to respond quickly to any opportunities or threats. Alliances provide flexibility in operations and the ability to change quickly in terms of product innovation (Connell, 1988).

Thompson (2001) further summarises the reasons for companies to form alliances:



Cost of Joint Venture / Acquisition: The cost of joint ventures or taking over another business may unaffordable for a company and therefore it may be feasible to form an alliance in order to work towards mutual goals.



Legal Constraints: Certain legislation may prevent a company from acquisitions but still the larger size is required to sustain in the industry. This forces companies to work together as part of alliances keeping separate businesses at the same time.



Political or cultural differences: These differences prevent mergers and acquisitions and therefore an alliance is used as a better alternative to assist in integration of separate businesses.



Customer Demands: The increasing popularity of a total customer support packages indicates that a business’s associations with other firms can help secure inventory, mould distribution channels and control costs. This also provides organisations with the opportunity to specialise in those areas where they are more competent.

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Protectionism: International Government protectionist policies may make it mandatory for foreign companies to form an alliance or joint ventures with a local partner.

2.1.1 Motives for Strategic Alliances

The motives for Companies to enter strategic alliances would depend on the strategic position and goals of each partner. Lorange and Roos (1998) explain that the strategic positions of each partner will define the motives of the alliance:

Market Leader A Market leader would be having major market share, leading technology or better quality.



Defensive: When the strategy of the strategic alliance in line with the core strategy of the Parent firm’s overall portfolio and the firm enjoys a relative leadership in the industry. The aim of the organisation may be access to new markets or technology or even secure additional resources to maintain and defend its lead.



Remain: A firm may form a strategic alliance with another firm that plays a relatively peripheral role in its overall portfolio in order to maintain its competitive position.

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Follower A follower that is aspiring to increase its market share:



Catch up: This strategy is used when the firm is more of a follower in the industry. The firm may form a strategic alliance with another firm in order to improve its product offering and competitive positioning in the market.



Restructure: If a firm is more of a follower in the market than a leader, it may form a strategic alliance in order to restructure to secure its business and perform better.

Apart from the strategic positioning motives, the alliance will also have certain operational motives and objectives that assist the company in achieving the strategic goals. Zajac (1990) conducted a study on the motives of alliances and summarised four objectives (show in figure 1) that most companies have for strategic alliances that would lead to a better competitive position.

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Figure 1: Motives for Strategic Alliances Motives for Strategic Alliances (Zajac, 1990) Overcome legal and regulatory barriers, 20% Acquiring means of distribution and preempting competition, 35%

Obtain economies of scale, 20%

Gain acces to new technology & diversify portfolio, 25%

Source: Zajac, 1990

2.1.2 Types of Strategic Alliances

Ad-Hoc Pool: In this type of a strategic alliance, the partners invest minimal resources typically on a provisional basis in order to compliment and support each other. These resources are then drawn back by the parent company at the end of the project or alliance. An example of this may be agreements between airlines to share aircraft and staff for a certain period. (Lorange and Roos, 1993)

Consortium: In this type of an arrangement, the amount of resources invested by partners is more than that in the Ad-Hoc relationship. Whatever value is created by this strategic alliance is then distributed back to all the partners. This type of an

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alliance is usually seen during joint Research and Development activities. (Lorange and Roos, 1993 )

Project Based Joint Venture: In a project based joint venture, the partners create a common organisation by investing minimum resources in order to jointly work towards their strategic goals. The resources generated are not distributed back to the partners. The financial results such as dividends and payments are distributed. An example of this would be a country specific alliance between firms. (Lorange and Roos, 1993 )

Full Blown Joint Venture: In this type of an alliance, the partners invest large quantities of resources in order to achieve their goals. The alliance’s resources are retained in the alliance itself. (Lorange and Roos, 1993 )

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2.1.3 Main Challenges faced by companies

Companies need to ensure that they choose their alliance partners carefully. (Houghton, 1990) has summarised some of the main challenges faced by companies when forming strategic alliances:



Compatibile strategy and Culture: It is essential for the firms to have a strategy that compliments one another and helps in achieving the end objectives. To have a successful alliance it is also important for the firms to understand and respect each partner’s working culture and modify their own culture to suit the alliance.



Comparable contribution: The amount of resources invested by each partner needs to be agreed at the start of the agreement and the partners should be equally committed in ensuring the planned demands and targets are met.



Compatible strengths: To form a successful alliance, a company should ensure that the chosen partner’s competitive strengths compliment its own. This way both companies can overcome their own resource and skill shortages.



No conflict of interest: There should not be any conflict of interest. This ensures that all firms are working towards a successful alliance.

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Climate of trust and mutual understanding: It is essential to have trust and understanding and open communication between the partners in an alliance. This leads to better working relationships and smoother operational performance between the companies.

2.2 Analysing the External and Internal Environment In the words of the Greek philosopher Heraclitus “The only constant is change”. Thompson (2001) states that success can be short-term for some organisations as the speed of change in most industries and markets has increased. This change has also resulted in shorter product lifecycles.

There is also interdependency between different products, services and businesses. The organisation is dependent on its suppliers and customers. Competition also plays a major role in shaping the impact on company. These industry players are also affected by wider macro environmental forces such as Political, Environmental, Social, Legal and technological (Thompson, 2001). This means that an organisation that enters alliances based on a set strategy and objectives also needs to continuously monitor and respond to the ever changing external environment. Its strategies, plans and values need to continuously adapt to the changing environment and manage its resources to take advantage of opportunities and counter threats. (Thompson, 2001)

This dissertation undertakes two external (PESTLE Analysis and Porter’s Five Forces) and one internal analysis (SWOT Analysis).

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2.2.1 PESTLE Analysis

This analyses the external factors affecting the industry and organisation. PESTLE stands for - Political, Economic, Sociological, Technological, Legal, Environmental (CIPD, 2008).

A PESTLE analysis is a useful tool for understanding the external environment in which an organisation operates. It helps in understanding risks associated with the operations

and highlights the position, opportunities and direction for an

organisation.

The PESTLE model urges companies to understand and consider the following factors:



Political and Legal: These are the political and legal factors that affect the

environment in which a firm operates. This includes areas such as tax policy, employment laws, legislation, environmental regulations, trade restrictions and reform, tariffs and political stability. These political and legal influences have a direct impact on the day to day running of a company and therefore play an important role in shaping its strategy. (CIPD, 2008) •

Economic: These are the factors affecting the global and national

economies that have a direct or indirect impact on an organisation. The degree of the impact will vary depending on the business. Considerations include health of the global economy, level of interest rates, exchange rates

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inflation, labour rates, availability of credit, cost of living, etc. (CIPD, 2008) •

Social: These are the factors related to changing social trends that would

affect an organisation. It is important to take into account the currently occurring social changes in the markets in which a firm operates. This includes factors like cultural norms and expectations, population growth rate, age distribution, attitudes, importance of safety, global warming etc that would affect customer behaviour and attitudes towards a product or a service. (CIPD, 2008) •

Technological: Technological changes can affect a firms business and

competitive position. New technologies are continually being developed and the rate of change itself is increasing and this impacts a Company’s product or service offering. Technological changes also bring up barriers to market entry. Companies need to closely follow these changes in order to ensure that their offerings remain competitive. (CIPD, 2008) •

Environmental: This covers the ecological and environmental aspects that

impact the operations of an organisation. Many of these factors will be intertwined with the economic or social factors. (CIPD, 2008)

These various external factors will have a major impact on business operations.

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2.2.2 Porter’s Five Forces

Michael Porter put forward five forces that shape competition at the business unit level within the industry. Firms need to understand their industry environment and forecast the results of certain strategies in order to thoroughly to plan future strategies. A methodical analysis of these forces helps organisations highlight keys to competitiveness in their particular industry (Hooley et al., 2007).

Figure 2: Porter’s Five Forces

Source: www.vectorstudy.com

The bargaining power of suppliers

The balance of power between suppliers and industry members can greatly affect the level of competition within the industry. The level of competitiveness increases when suppliers or customers exert greater power on the organisations in their industry (Hooley et al., 2007).

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Hooley et al. (2007) and Thompson (2001) state that the bargaining power of Suppliers depends on:

Supplier concentration: A fewer number of suppliers means that buyers have less choice and therefore less bargaining power. Suppliers would also be having more power in the industry when the buyers are fragmented and have low or irregular order sizes.

Switching costs: If a supplier is delivering certain key components to a customer which cannot be sourced easily from an alternative supplier without incurring of high initial costs (e.g. tooling costs) then the power of the customer decreases and supplier power will increase.

Differentiation of supplier offerings: A supplier having a distinct product or service which cannot be purchased from elsewhere can have considerable bargaining power over a customer.

Bargaining Power of Buyers The bargaining power of buyers also affects the degree of competition within an industry. Hooley et al. (2007) state that higher buyer power increases competition within the industry. Buyer power depends on the following:

Concentration of buyers: A smaller number of buyers than sellers results in buyers having a higher bargaining power.

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Alternative sources of supplies: Buyers can easily threaten to switch suppliers and therefore the supplier needs to be competitive in order maintain demand for its products.

Switching costs: Buyers have greater power when the switching costs are low as they can obtain goods from alternative suppliers to get better deals without incurring high initial costs.

Threat of substitutes

Successful products may be copied or substituted. New entrants may use existing technology available in the industry or they may try to transform the industry through innovative solutions (Hooley et al., 2007). Substitutes increase competition in the industry by:

Making existing technologies obsolete: In today’s world of rapid change, there is immense competition between firms to develop new products and differentiate offerings in order to remain market leaders or enter new markets.

Product Improvements: Improvements in technologies also lead to an increase in industry competitiveness.

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Businesses need to continuously improve their products in order to make them competitive and protect their technologies in the form of patents and copyrights to ensure products are not substituted easily.

Threat of new entrants:

Organisation must also consider the potential threat of new entrants joining the industry. New entrants increase the number of products on offer to customers and reduce market share of existing industry leaders thus increasing the competition within the industry. Hooley et al. (2007) states the following conditions that make it easier for newcomers to enter markets:



Low costs / ease of entry



Existing or new distribution channels are open to use



Less Retaliation by competitors



Low product differentiation



Gaps within the market

Competitive rivalry within the industry

This involves assessing the rivalry between the existing players of the industry. This is dependent on a number of conditions. Hooley et al. (2007) and Thompson (2001) state the following factors:

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Size and market share: Competitors who have a similar market share compete fiercely to increase their share. This is normally seen by increased advertising, promotion and technological innovation to attract the customer.

Market growth rate: At the maturity and decline stages of the product life cycle, the market size for a product starts to contract and sales growth is attained at the expense of competitors. This results in increase in rivalry.

High exit barriers: If an industry has high exit barriers, firm compete hard to maintain their positions and remain successful.

Low product differentiation: Low differentiation in product or service offering leads to increased competition over factors such as service and price. This is also due to low switching costs for customers.

High fixed costs: When fixed costs are higher in relation to variable costs, companies require to continuously increase sales in order to cover the investment. This boosts rivalry within the industry.

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2.2.3 SWOT Analysis

SWOT stands for Strengths, Weaknesses, Opportunities and Threats. The analysis focuses on the organisation in question and shows where its internal strengths can be matched to make the most of the available opportunities and combat any potential threats. Figure 3: SWOT Analysis

Source: www.exelsia.ch

It helps in identifying the most important factors (both internal and external) that affect the Company and its markets. This information is then used in strategy formulation in which Strengths and Weaknesses are aligned with opportunities and threats to ensure that its strengths are deployed in order to gain most from opportunities, at the same time reducing any risks and working on eliminating weaknesses.

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Strengths: This involves identifying what the firm is good at relative to its competitors.

Opportunities: The ever changing business environment creates new opportunities for a firm. To capitalise on these opportunities, the firm needs to identify them well in advance.

Weaknesses: This involves identifying what a company is bad at compared to its competitors.

Threats: The changing business environment also presents an organisation with threats and risks that need to be monitored and removed or reduced effectively. These existing strengths need to be exploited in areas of opportunity and used to counter threats. Weaknesses should be worked upon and new strengths should be built to take advantage of new opportunities and prepare for threats. (Thompson, 2001; Hooley et al., 2007)

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CHAPTER 3: METHODOLOGY

3.1 Case Study A case study analysis presents an account of past events in a business or industry and highlights the conditions that a business had to deal with over a period of time. It also includes studying factors such as the changing external environment, the company’s internal strengths and weaknesses and the nature competitiveness in the industry in order to map out a future strategy for the firm. (Davies, n.d.)

3.2 Data Collection The data and information used in this dissertation is secondary data. Secondary data consists of data that has been collected by someone else for another purpose and is readily available. It can be in the form of market research reports, government statistics, Journals etc. The First advantage of using secondary data is that the researcher does not have to devote time and resources to collecting the data as it is readily available. The second advantage of using secondary data is the extent of data available. Few researchers would have the resources to collect data from a large sample size. The third advantage in using secondary data is that frequently the information gathering is conducted by experts and professionals and that expertise may not be available to smaller projects. (Cambridge University Press, n.d.)

The disadvantage to using secondary data is that it does not answer particular questions that a researcher may want to ask. A second major disadvantage of

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using secondary data the methodology may be questionable. (Cambridge University Press, n.d.) The secondary data used in this dissertation are mostly from Fiat’s annual reports, Investor presentations and Independent market research reports. Data has also been taken from Chrysler’s website to obtain Chrysler’s view on the alliance. Additional data has been collected from online journals, news articles, independent insight reports and published articles. Books and academic journals have also been used to provide background theoretical knowledge.

3.3 Research Procedure Subsequent to the Literature Review, the following steps were taken to analyse the Fiat-Chrysler Alliance.

3.3.1 Study the effect of the recession on the Automotive Industry The recession had an adverse impact on the automotive industry and lead to a lot of changes within the sector. It is important to understand how the recession has affected the industry and the factors that vehicle manufacturers are dealing with in order to define their future strategies. This part also studies how the recession acted as a catalyst for consolidation and alliances within the industry.

3.3.2 Study the Fiat-Chrysler Alliance The background and reasons behind the decision for Fiat to form an alliance with Chrysler are analysed. The structure of the alliance is also studied to

Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance

26

form a better understanding of the possible synergies and benefits to both parties.

3.2.3 Analysis of Fiat’s External Environment The Macro environment is analysed by using a PESTEL Analysis and Porter’s Five Forces analysis. These tools provide an overview of the various external factors and industry forces that will affect the company’s day to day operations and eventually its position in the marketplace The factors are then classified into Business threats and opportunities.

3.2.4 Fiat’s Current scenario analysis The current structure, market positioning, products, operations and financial results of Fiat are analysed so as to gauge its strengths and weaknesses. These are then combined in the form of a SWOT analysis with the threats and opportunities that the company is exposed to. This analysis assists in drafting future strategic recommendations for the business.

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CHAPTER 4: COMPANY DESCRIPTION- FIAT

4.1 History Fiat is an acronym for Fabrica Italiana Automobili Torino (Italian Car Factory of Turin). It was established in 1899 by Giovanni Agnelli in Turin, Italy. It is now the largest industrial enterprise in Italy with businesses spanning a number of sectors such as passenger cars, commercial vehicles, agricultural and construction equipment, engines, transmissions and components. (Fiatgroup.com, n.d.)

Key events in Fiat’s History (Fiat.com, n.d.):



1899: Fiat is established in Turin.



1903: Fiat is listed on the stock exchange and manufactures its first truck.



1919: Produces its first tractor.



1936: Launched “Topolino” which is the smallest economy car in the world.



1953: The first diesel powered passenger cars are introduced.



1967: Fiat acquires Magnetti Marelli which is a manufacturer of automotive components and systems.



1975: Fiat established Iveco for commercial vehicles and Ferrari joins the Fiat group.



1978: Lancia automobiles is acquired and Comau and Teksid are setup that specialise in production systems.



1984: Acuisition of Alfa Romeo.

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1993: Maserati is added to the group’s automobile business.



1999: New Holland and Case Corporation merge to form an agricultural giant.



2004: Sergio Marchionne joins as Fiat’s CEO.



2005: Fiat Group back into profit.



2007: Fiat Launches the ‘Fiat 500’ car model and the Abarth brand is revived.



2008: Fiat Group records highest ever trading profit.



2009: Fiat agrees to a global strategic alliance with Chrysler. (Fiatgroup.com, n.d.)

4.2 Current Status The Fiat Group is Italy’s largest industrial venture and one of the founders of the automotive industry. It designs, produces and sells passenger cars, commercial vehicles, agricultural and construction equipment, engines, transmissions and components. It believes in technological innovation and environmentally friendly products. The Group carries out its operations and financial services activities through companies located in approximately 50 countries and is present commercially in about 190 countries. Fiat has a strong research and development capability and conducts its research and innovation activities through the Centro Ricerche Fiat (C.R.F.) which concentrates on technology development and Elasis which concentrates on production and process optimization in collaboration with universities and centers of excellence worldwide. (Fiatgroup.com, n.d.)

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The group operates a number of businesses that are shown in the figure 4 below.

Figure 4: Group Structure

Source: Fiat.com, n.d.

This dissertation focuses on Fiat’s Automobile business which comprises of Fiat Grop Automobiles (FGA), Maserati and Ferrari.

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4.3 Brands and Products

Fiat designs, manufactures and sells automobiles under various brands. Fiat, Alfa Romeo, Lancia and Abarth are the main brands. Commercial vehicles are also manufactured and sold under the Fiat Professional brand. Each brand below has a specific identity and pursues a separate sales and marketing strategy. (Fiatgroup.com)

Fiat The Fiat brand comprises of a number of mid-budget passenger cars. The brand is attributed to be ‘Practical, versatile and responsive’. It is focussed on customers who are increasingly aware of environmental issues and technological innovation. The brand produces Italian styled models that are reasonably priced. (Fiatgroup.com)

Alfa Romeo Alfa Romeo’s product offering comprises of aesthetically pleasing designs with an individualistic focus. The attributes of Sportiness, technology, comfort and elegance are combined to create the distinctive products. (Fiatgroup.com)

Lancia The Lancia brand is focussed on ‘Class and exclusivity’ at a reasonable price. The models are based on Italian styling coupled with innovative technology such as the ECOchic range. (Fiatgroup.com)

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Abarth The Abarth brand was re-launched in 2007. It provides a modern interpretation of all of its traditional products: such as the Grande Punto and the 500 Abarth, which have added gadgets and the performance is inspired by the world of motor racing. (Fiatgroup.com)

Fiat Professional This brand covers a number of light commercial vehicles offering utility and versatility to customers. (Fiatgroup.com)

Maserati Maserati has always produced appealing and technologically advanced saloons derived from the racing world. It a luxury / performance car brand. (Fiatgroup.com)

Ferrari The Ferrari brand produces high performance sports and super cars that are inspired by Formula 1 Racing. Fiat describes the road cars produced by Ferrari as the most prestigious example of Italian technology and craftsmanship: exclusive cars without equal. (Fiatgroup.com)

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Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance

Figure 5: Fiat Group Current Product Mix vs Market

33

our Past, 2010)

(Source: FGA- A review of

Currently, Fiat has a good mix of products to cater to the mini and small car segments. The company needs to focus on introducing new models for the Medium, Large and SUV segments in order to increase their market share and compete with the other players in the industry.

4.3 Global Automotive Market

Following a stable growth period, the automobiles industry fell into decline in 2008, which further worsened in 2009. The industry generated total revenues of $1,469.3 billion in 2009, having a compound annual growth rate (CAGR) of 0.8% for 20052009. (Datamonitor, 2010) Observing closely, the European industry reduced with a compound annual rate of change (CARC) of -1% to reach $514.3 billion in 2009, while the Asia-Pacific industry grew with a CAGR of 3.8% over 2005-2009, to reach $431.6 billion in 2009. (Datamonitor, 2010)

Passenger car sales were the most profitable segment globally, generating total revenues of $1,180 billion in 2009, which is 80.3% of the total industry value. Light truck sales revenues were $201.1 billion in 2009, which is 13.7% of total industry value. (Datamonitor, 2010)

Figure 6: Global Automotive Industry Value 2005-2009

Source: Datamonitor, 2010

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4.3.1 Fiat Automobiles Performance Figure 7: Fiat 2009 Sales Performance

Source: Fiat Annual Report 2009.

The table in Figure 7 above details the Sales performance for the years 2008 & 2009. The total demand for vehicles increased by 2.2% in 2009 but there also have been substantial drops in sales in certain European markets. Analysing this closely, it is seen that the passenger car market performed satisfactorily, mainly due to the government incentives and scrappage schemes in parts of Europe. The commercial vehicle market showed a sharp decline in sales due to decrease in demand from businesses affected by the financial crisis. (Fiat Annual Report, 2009) Figure 8: 2009 Sales Split by Brand

Source: Fiat: A review of our past 2010

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Figure 8 above shows that passenger car sales provided the bulk of the total automotive sales for Fiat. Western Europe and Asia are Fiat’s main markets and demand in these countries was affected greatly by the financial crisis of 2008. The first half of 2009 showed poor performance. Scrapping incentives introduced by various European governments increased sales during the second half of the year leading to a gradual recovery in demand for vehicles. In Germany the demand increased by 23.2% due to the scrappage scheme. Substantial gains were also seen in other European countries. In both the UK and Spain the scrappage incentives were introduced by the second half of the year, and therefore demand declined by 6.4% and 17.9%, respectively. (Fiat Annual Report, 2009)

Figure 9: Fiat – Chrysler combined Market Share

Source: Deloitte, 2009

Fiat has a good mix of environmentally friendly cars. Combined market share with Chrysler is about 6.4%.

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Where commercial vehicles are concerned, the 2009 LCV market in Western Europe declined by 27.4% compared to 2008. Demand fell in all major markets such as France declined by18.8%, Italy by 21.4%, Germany by 24.8% and the UK by 35.5%. Fiat Professional’s market share for light commercial vehicles in Italy was 39.9%, a reduction of 3.4% compared to 2008.

In Brazil Fiat achieved an overall share of 24.5% in 2009 which was similar to 2008. This comprised of a share for passenger cars of 24.6% and light commercial vehicle market share of 24.1%.

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4.4 Fiat Group 2009 Performance and Financial Analysis This part of the report analysis Fiat’s performance based on the 2009 Annual Report. The report had balance sheets for the whole Industrial Group and therefore this section compares the entire Fiat Group’s performance with that of the industry.

Figure 10: FIAT Group Performance Snapshot

Source: Fiat Annual Report, 2009

2009 Fiat Group revenues totalled €50,102 million. This was a decrease of 15.9% compared to 2008 and the decline was credited to the financial crisis. Fiat’s automobile business is the main contributor to the Industrial Group’s revenues. In 2009 automotive revenue was 56.2% of the total revenue. The majority of business is coming from Western Europe. South America is another upcoming and promising

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market for Fiat. The company has limited market share in North America which is a weakness as USA is a major automotive market.

Table 1 below shows a summary of the main financial ratios from the 2009 annual report compared to that of the industry. Table 1: Financial Ratios

Financial Condition

Industry

Investment Returns %

Fiat

Debt/Equity Ratio

2.83

Fiat

Industry

2.28

Return On Equity

-1.8

1.4

Current Ratio Quick Ratio

2.2 1.7

1.3 1

Return On Assets Return On Capital

-0.2 -0.4

0.3 0.1

Management Efficiency

Fiat

Industry

Income/Employee

-874

2617

Profit Margins %

Fiat

Industry

14.6

17.5

1 -0.3

1.8 0.3

Revenue/Employee

281101

380337

Gross Margin

Inventory Turnover Asset Turnover

4.6 0.8

5.4 0.6

Pre-Tax Margin Net Profit Margin

Source: Fiat Annual Report 2009, Reuters, MSN Money)

The tables above show that Fiat’s 2009 performance was satisfactory compared to industry average. The Group’s investment returns for 2009 are below average such as the return on capital is negative at -0.4% and so is the return on assets at -0.2%. However the current ratio and quick ratio are better than the industry average and this indicates that the company has adequate assets to pay back liabilities if required. The quick ratio of 1.7 is much lower than the current ratio of 2.2. This means that Fiat holds a substantial amount of inventory. Overall the group performance is reasonable compared to the industry and it needs to work on improving its revenue and efficiency in order to improve its profit margins.

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Automobiles Business Financial Performance Figure 11: Fiat Automobiles Performance (Including Maserati and Ferrari)

€ 719

Trading profit/(loss)

2009 € 28,351

Year

Net revenues

€ 1,102

2008 € 29,380

€0

€ 10,000

€ 20,000

€ 30,000

€ 40,000

Euro Mn

Source: Fiat Annual Report, 2009

The Automobiles businesses reported trading profit of €719 million for 2009, down €383 million over the €1,102 million figure for 2008. All Sectors contributed positively, although profit levels were lower than 2008. Trading margin was 2.4% compared with 3.8% for 2008 and 1.5% for 2006. (Fiat Annual Report, 2009) Figure 12 below shows that trading profit margin was good compared to competitors (Toy=Toyota, PSA = Peugeot, Dai=Daimler, Nis=Nissan, VW=Volkswagen). Figure 12: Trading Profit Margin

Source: Fiat Group: And the Journey goes on, 2010

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Fiat Group Automobiles trading profit for 2009 was €470 million with a trading margin of 1.8%, compared to the €691 million figure for 2008 (2.6% margin). The decrease was mostly due to reduced demand for light commercial vehicles in the global markets. Maserati had a 2009 trading profit of €11 million compared to €72 million for 2008. Ferrari’s 2009 trading profit was €238 million, compared to €339 million for 2008. The year-on-year decrease was attributed to adverse currency fluctuations and also the impact of declining sales volumes due to the recession. (Fiat Annual Report, 2009)

2010 1st Quarter Performance Update



Automobiles revenues increased by 20% to €7.3bn. Demand was maintained due to the remainder of the scrappage schemes in several Western Europe markets. (Fiat Group Investor Reports, 2010)



Automobiles Trading profit was €196mn with FGA at €153mn , Ferrari at €39mn and Maserati at €4mn. Please refer to Appendix 2 for more details. (Fiat Group Investor Reports, 2010)

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CHAPTER 5: ALLIANCE 5.1 Effect of the Financial Crisis on the Automotive Industry The financial crisis of 2008 greatly affected the global automotive industry. The lack of availability of cheap financing and reduced consumer confidence resulted in a global reduction in vehicle sales. Figure 13 below shows how global vehicle sales dropped in August 2008. For the U.S. and Western European markets, the decline in sales was quite swift compared to the emerging markets of Asia and South America. This decline in sales lead to large amounts of overcapacity within the industry. (KPMG, 2008)

Figure 13: Global Sales Declined in the Recession

Source: KPMG International, 2008

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United States of America & Western Europe

Car sales in the US showed a decline of 27% Year on Year in September 2008.

Figure 14: Sales Declined in USA

Source: KPMG International, 2008

Figure 15:Sales Declined in Western Europe

Source: KPMG International, 2008

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5.1.1 Effect of the Recession on Fiat Figure 16: Fiat 1st Qtr 2009 Net Revenues

Source: Fiat 1St Quarter Report, 2009

Fiat sales were also affected by the financial crisis and this continued to show even in the revenues for the first quarter 2009 were €5.6 billion, a year-on-year decline of 18%. For Q1 2009, Fiat sales of passenger cars and light commercial vehicles combined showed a decline of 17.7% compared to 2008. In Western Europe, which is Fiat’s main market, deliveries fell 17.5% to with decreases in Italy by 25.1%, France by 8.2%, UK by 30.1%.

However, Fiat managed to make gains in Market Share. In 1st Quarter 2009, the Fiat brand achieved a 7.4% share for Western Europe which was 0.5% higher than 1st quarter 2008. A total of 65,800 light commercial vehicles were delivered during the first quarter, representing a year-over-year decrease of 37.5%. For Western Europe, deliveries were down 50.3% to 32,500 units. Fiat Group Automobiles reported a trading loss of €30 million in 1st quarter 2009 compared with a €193 million trading profit for the first quarter of 2008. (Fiat 1st Quarter Report, 2009)

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5.2 Alliances within the Industry This decline in sales affected the financial health and cash flow of companies and many manufacturers turned towards the government for financial aid. This also resulted in some companies selling off their businesses and increased mergers and acquisitions. Fiat group CEO, Sergio Marchionne, told Automotive News Europe that only five or six global carmakers might be left by the end of 2010. The overcapacity in the industry can be tackled by sharing facilities to improve utilisation and Fiat’s alliance with Chrysler reflects this. In a recent KPMG survey of automotive executives, 71% of the respondents think that Mergers, acquisitions and alliances will increase within the industry. (KPMG International, 2009)

5.3 Fiat – Chrysler Strategic Alliance Subsequent to the recent recession, Chrysler became the first major car manufacturer to file for bankruptcy in early 2009.

At the same time, Chrysler agreed to enter into a strategic alliance with Fiat Group. This was to protect its future as a car manufacturer and gain access to Fiat’s fuelefficient power trains and smaller car expertise which it lacks. The alliance also saved thousands of jobs at Chrysler, its suppliers and dealers. (The Telegraph, 2009)

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Chrysler Background



In 2008 it posted an $8bn loss, when US sales fell 30% to 1.45m vehicles as its dependence on high-powered, high fuel consuming cars, trucks and SUVs left it unable to face increase in oil prices and environmental concerns. (The Telegraph, 2009)



Key brands: Chrysler, Dodge, Jeep.



Key vehicles: Dodge Ram pickup truck, Dodge Charger, Jeep Wrangler, Dodge Caravan minivan, Chrysler Town & Country minivan.



North American plants: Chrysler has 30, including 12 assembly plants and 18 facilities for engines, transmissions, stamping and casting. (The Telegraph, 2009 ; Chrysler, n.d.)

5.3.1 Fiat –Chrysler Alliance

The decision to file for bankruptcy also gave Chrysler access $3.3bn of financing from the US government, which was provided to maintain cash flow and let Chrysler operate as normal till it came out of bankruptcy. A further $4.7bn in US loans was also promised once Chrysler exits bankruptcy. The Canadian and Ontario governments will provide a further $2.42bn. (Quinn, 2009)

The US government will also control 8% of Chrysler while Canadian will have a 2% of the shares. The strategic alliance provided Fiat with a 20% stake in the new company with a possibility of that increasing to 35% once all the Government loans have been paid back. (Quinn, 2009)

Sergio Marchionne, Fiat’s CEO has long stated that Fiat needs to build at least 5 Million vehicles per year to benefit from economies of scale remain competitive

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within the industry. Fiat makes about 2 million cars annually, while Chrysler manufactured 1.3 million last year. This alliance will further help Fiat achieving its plans. (Forden, 2010)

5.3.2 Motives for the Alliance

As discussed in the Literature Review section of this dissertation, the motives for a company to enter into a strategic alliance depends on its position within the industry.

Both Fiat and Chrysler are still lagging behind the market leaders. Therefore they can be classed as a ‘Follower’ with two motives where strategic market positioning is concerned:

Strategic Position



Catch-up: Fiat is in a better state than Chrysler and is trying its best to catch-up and compete with its main rivals such as Toyota, Ford and Volkswagen.



Restructure: As explained in chapter 3, when a firm is more of a follower in the market than a leader, it may form a strategic alliance in order to restructure to secure its business and perform better. Chrysler’s main motive is to use Fiat to restructure its operations for survival within the industry.

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Operational Benefits



Acquiring Distribution channels: The alliance provides both companies valuable readily available distribution channels. Fiat has a poor network in the US and Chrysler’s distribution network will be useful for the company.



Gain access to new technology: Both Fiat and Chrysler’s product portfolio compliments each other. Fiat is strong is fuel efficient small cars while Chrysler has a good line-up of heavier pickup trucks and large sedans. This offers both the opportunity to diversify their portfolio without incurring large costs of development.



Obtain economies of scale: The alliance provides the companies with joint sourcing and development opportunities which would provide both with the much needed power of economies of scale. (Camuffo and Volpato, 2002)



Manufacturing Sharing: There can be higher plant capacity utilisation by sharing manufacturing facilities worldwide. (Camuffo and Volpato, 2002)



Achieve cost savings in design, purchasing and manufacturing by sharing vehicle platforms. (Camuffo and Volpato, 2002)



Reducing the risk associated with the enormous resource and financial input required by international strategies, by sharing costs and resources. (Camuffo and Volpato, 2002)

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5.3.3 Advantages to Chrysler



Access to Fiat's environmentally friendly vehicle technologies and components. (BBC News, 2009)



Substantial

cost

savings

opportunities

through

vehicle

architecture,

distribution, product development sharing. •

Access to Fiat's distribution network in Europe and growing markets outside the US and its global supplier base (BBC News, 2009).



Chrysler will also benefit from Fiat's management expertise in business revival and access to Fiat's international distribution network with focussing on Latin America and Russia. (BBC News, 2009 : Chrysler.com, 2009)

Figure 17: Example of technological benefits to Chrysler

Source: www.trucktrend.com

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5.3.4 Advantages to Fiat •

Access to Chrysler's extensive USA distribution network and suppliers.



A 20% equity stake in Chrysler with potential of increasing it to 35%.



The agreement does not commit Fiat to funding Chrysler in future and Chrysler now has a much stronger balance sheet after applying for bankruptcy.



Cost and Negotiation advantages of Economies of scale by sharing product sourcing. (BBC News, 2009)



Sharing of vehicle architectures, components and subsystems.



Common technology development programmes especially in the area of alternative propulsion systems.



Best practice and process sharing.



Obtain valuable brands such as Jeep and Dodge.



The economic synergies due to the alliance are detailed in the table below. Fiat forecasts an economic benefit of 1.5Bn Euros as a result of the Fiat-Chrysler Alliance (Fiat Group, 2010).

Figure 18: Forecast of Fiat-Chrysler Synergies

Source: Fiat Group, 2010

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Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance

51

Both companies will benefit from sharing vehicle platforms and save on Engineering, procurement and Research and Development costs.

(Source Fiat Group, 2010)

Figure 19: Vehicle Architecture sharing opportunities with Chrysler

5.4 Similar Alliances within the Industry Competitive pressures are leading more companies to cooperate and form similar strategic alliances and collaborations (Frost & Sullivan, 2010):

Daimler-Nissan-Renault



Daimler is competitive in trucks and commercial vehicles and is weak where smaller cars are concerned.



Nissan and Renault are strong in the small car segment but are not competent in the commercial vehicle / trucks segment.



The goal of this alliance is to join hands for Product Development. (Frost & Sullivan, 2010)

Tata-Fiat



Tata has the opportunity to source Fiats coveted diesel engines and transmissions.



Fiat will use Tata’s extensive distribution network in India to channel its own products. (Frost & Sullivan, 2010)

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Suzuki – Nissan



Suzuki has well established operation in India and will assemble diesel engines for Nissan.



Suzuki will also build Nissan vehicles in India.



This would result in better capacity utilisation by Suzuki and provide Nissan ease of entry into the Asian markets with lower entry costs. (Frost & Sullivan, 2010)

Renault-Nissan



Renault to provide diesel engines.



Nissan to provide electric propulsion technology.



Shared research and development costs.



Opportunity for vehicle architecture, supplier and platform sharing to reduce costs. (Frost & Sullivan, 2010)

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Ford – Mazda



Platform and component sharing to reduce costs.



Joint sourcing of components.



Improved

capacity

utilisation

by

sharing

assembly

plants

(Frost & Sullivan, 2010)

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Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance

5.5 Future Market Forecast

55

volume

levels

(Frost & Sullivan, 2010)

2012.

2006

by

the market to reach year

and Sullivan (2010) expect

expected to be slow. Frost

downturn and growth is

still recovering from the

The automotive market is

By 2014, the global automobiles industry is forecast to have a value of $2,526.6 billion, an increase of 72% since 2009. The compound annual growth rate of the industry in the period 2009–14 is predicted to be 11.5 %.(Datamonitor, 2010) Table 2: Global Industry value Forecast 2009-2014

Source: Datamonitor, 2010 Figure 20: Global Industry Value Forecast 2009-2014

Source: Datamonitor, 2010

The performance of the industry is predicted to improve, with an anticipated CAGR of 11.5% for the period of 2009-2014, which is expected to steer the industry to a value of $2,526.6 billion by the end of 2014. The European and Asia-Pacific industries are forecasted tp grow with CAGRs of 6.6% and 5.8% respectively, over the same period, to reach respective values of $706.8 billion and $573.1 billion in 2014. (Datamonitor, 2010)

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In 2014, the global automobiles industry is forecast to have a volume of 96.5 million vehicles, an increase of 48.5% since 2009. The compound annual growth rate of the industry in the period 2009–14 is predicted to be 8.2%.(Datamonitor, 2010) Figure 21: Global light Vehicle Sales by Volume

Source: Datamonitor, 2010

Frost and Sullivan (2010) predicts that Fiat-Chrysler would have one of the highest CAGR of 12.2% between 2008-2015 period reaching sales in excess of 5 Million vehicles by 2015. Figure 22: Global OEM Sales Forecast 2008-2015

Source: Frost & Sullivan 2010

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CHAPTER 6: ANALYSIS AND DISCUSSION

6.1 PESTEL Analysis



Political & Legislative Factors:

The government has a major impact on the industry. First of all, the government provides the framework for the industry to function. The Governments also establish the accessibility of public transport and reduce or increase dependence on cars. It also has the authority to decrease or increase duties and taxes, which directly impacts the distribution and manufacturing costs of the vehicle. For example, the recent Government driven car scrappage schemes in Europe lead to a boost in sales for the vehicle manufacturers. In the UK, the government offered consumers a £2,000 discount on a new car in return for trading in one that is at least 10 years old (Armitstead, 2009). Many new innovations and product developments are driven by a need to meet government legislation. (Investopedia, n.d.)



Environmental Factors.

Environmental factors affect both, the customers and the operations of a company. For example, the emphasis on the Corporate Social responsibility of a company and its impact on the environment has lead manufacturers to consider how its manufacturing waste is treated and has affected operational costs (Fiat, 2009). Concerns about vehicle emissions has lead to an increase in demand for fuel efficient and environmentally friendly cars and this means that technology is

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constantly under review and there is therefore a need for constant research and development to provide greener vehicles.



Social

The average age of the populations in Western Europe, USA, Japan and Russia is increasing and car makers will need to address the changing demands of older drivers in order to remain competitive. Older customers will value quality, price, and safety above fuel economy, styling or brand. OEMs will need to focus on the development of cheaper and user-friendly cars. Vehicles targeted for the older drivers will need to be designed with human factors in mind: Easier vehicle entrance and exit, larger displays etc. (Deloitte, 2009).

Urbanisation too is another important demographic trend. Population in cities is growing globally. For example in developed countries population living in cities is currently 75%, while in the developing world city residents signify 45% of the population. However, by 2020, those statistics are expected to increase to 78% and 55%, respectively. There will also be 24 mega cities with populations of at least 10 million each by 2020. (Deloitte, 2009). This means roads will be more congested and people may prefer smaller vehicles. This shows that social and demographic factors play a key role in determining the final product offering in the industry



Technological Factors

Technological advances are generally driven by changes in legislation related to the environment, safety etc social factors such as luxury, image, sophistication or

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competition between manufacturers to be technologically superior. Frost and Sullivan (2010) states that whilst much of the attention has focused on reducing emissions and hence advancements will be made in powertrain technology, an increasing area of focus in the future will be environmentally friendly materials for cars. Technological factors also offer a means of differentiation to manufacturers.

Source: Frost and Sullivan, 2010

A report by Deloitte (2009) lists the main technological trends affecting the industry include 1. Powertrain technology and the move to electric: Greener and more fuel efficient powertrains such as hybrids, alternative fuels and electric cars.

2. The shift from mechanics to electronics: Cars are increasingly becoming electronic. The German market provides a good example: In 2007, electronic content in passenger cars was estimated at 20 to 30 percent of

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production costs. By 2010, the proportion is expected to rise to 40 percent and by 2020, the number will likely reach 50 percent.

3. Cheap and basic mobility: In emerging markets, while personal income levels are rising, disposable income remains low. Most of the population will not be able to afford full size or even standard compact passenger cars that are currently offered by OEMs. The cars that will sell best to first-time and lower income buyers in these regions are the lower priced ones. In some cases, this means removing extra features and options from a vehicle.



Economic

Various economic factors such as interest rates, minimum wage, state of the economy etc affect the car industry. The recent recession affected the interest rates and economies all over the world and increased the cost of borrowing money. This made it more difficult for manufacturers to raise capital. The reduced availability of credit also affected car sales adversely as the spending power of consumers was affected. (Fiat Annual Report 2009: KPMG, 2009)

In 2009, the more than 85% of automotive executives rated the Global Economy as a key factor affecting the Automotive Industry.

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Figure 23: Economy and Auto industry

Source: KPMG Global Automotive Executives Survey 2009

An increase in economic strength also increases the spending power of consumers. The demand for vehicles will mainly come from the emerging markets. Figure 24 below shows the number of cars per 1000 people in 2008 and highlights the potential of the markets of the BRIC nations.

Figure 24: Number of Cars per 1000 People in 2008

Deloitte, 2009

The Economist Intelligence Unit forecasts an increase in car ownership in the developing world and states that by 2020, the main segment will be of first time consumers who will be value conscious (Economist Intelligence Unit, 2009). The growth of wealth in emerging markets will also mean an increase in the number of high-net-worth individuals which will create a demand for luxury brands. A recent

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Deloitte Consulting LLP survey indicated that individuals with high levels of disposable income, will seek luxury brands with performance features as well as additional luxury options, such as heated leather seats, sunroofs etc. (Deloitte, 2009)

This PESTEL analysis indicates how each of these factors influences the industry and market. Furthermore, figure 25 shows how executives from the automotive industry have rated the factors as being relevant in shaping the industry.

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• •

Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance

Companies are shifting from quality improvements to new products Total affordability and price seen as less important than innovation (KPMG, 2010)

Source: KPMG Automotive Executives Survey 2010.

Figure 25: Importance of issues rated by Automotive Executives

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How important are the following issues to the global auto industry? – Percentage of companies rating issues as important

6.2 Porter’s 5 Forces Analysis Figure 26: Porter's Five Forces Analysis Porter's Five Forces

Power of Suppliers 3 2

Competitive Rivarly

1

Power of Buyers

0

Key 1=Low 2=Medium 3=High

Threat of Substitutes

Threat of New Entrants

Power of Suppliers | Medium

Vehicle manufacturers consume many materials such as steel, aluminium, components, and also incur costs of distribution, shipping and energy usage. Suppliers of raw materials usually provide materials to a range of sectors reducing their dependence on the automotive companies. On the other hand, Component manufacturers and Tier 1 Suppliers are more dependent on vehicle manufacturers for revenue and companies like Fiat can exhibit a considerable amount of negotiating power due to this dependence and the large order sizes. Quality standards demanded by vehicle manufacturers have lead to a select few suppliers that a company like Fiat may source from. Switching over to an alternative supplier might be a problem due to the high switching costs involved in tooling investments and also the difficulties concerned with controlling the quality of the parts. This is a stage where the existing supplier can apply negotiating power. Manufacturers usually have a variety of suppliers for most of their input parts, for example Toyota and Honda guarantee that Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance

65

no single supplier accounts for more than 5% of purchases of major inputs hence reducing the risks and maintaining negotiating power. Therefore the level of supplier power is classed as medium. (Investopedia, n.d.,: Datamonitor , 2010, Fiat, n.d.)

Power of buyers | Medium

The buyers in this industry are the dealers, corporate buyers and the final end customer. The dealers and corporate buyers usually exercise substantial financial strength and buy in large quantities putting pressure on vehicle manufacturers to reduce prices. Car companies also can exercise power as most have strong brands and a loyal customer following. This helps in reducing buyer power.

The recent recession adversely affected consumer confidence and therefore lead to a decline in car sales. This had lead to overcapacity in the industry and manufacturers are competing fiercely to increase sales. The final end customers have been price sensitive and did not have much bargaining power due to the single vehicle purchase from a dealer. The dealers have been attracting customers by offering discounts, loans/credit. This again adds pressure on OEMs to reduce prices. Overall buyer power is classed as Medium.

Threat of substitutes | Low

The car is still a preferred method of transportation and is not subject to direct competition from public transport. The main replacement danger to a new car will be from used cars. The recent economic crisis reduced new cars sales as customers were

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deferring purchases. Governments took action and implemented scrappage schemes, whereby consumers get a substantial discount when buying a new car when they scrap their old one. This was a successful scheme and increased new car sales. Most manufacturers offer similar products and technology and this leads to fierce competition. External factors such as the price of fuel, government tax and duties may lead to high cost of ownership of cars and lead to people using public transport more often. Knowledge of environmental issues could lead more people to use public transport or move towards cycling or walking, though this is not likely to occur on a large extent, and therefore would not affect the whole industry. Most manufacturers are developing environmentally friendly vehicles in order to meet customer requirements. Overall, the threat of substitutes to this industry is classed as Low.

Threat of new entrants | Low

Starting a new car company requires an enormous amount of investment in tooling, production, intellectual property, distribution, research, marketing & brand development and therefore it is highly unlikely for new competition to easily enter the market. Brand reputation and loyalty creates high entry barriers in automobile sector. Existing players have added to their product range and market share by taking over other established brands and infrastructures. However many local manufacturers in Asia are now trying to compete on a Global scale and this will add to the competition within the industry. Overall the threat of new entrants is classed as Low.

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Competitive Rivalry | High

Competition is very high due to the number of vehicle manufacturers offering similar products. A customer can easily migrate to another brand and therefore we tend to see high price / technology based competition.

Due to recession, there has been a reduction in car sales, resulting in overcapacity and a pressure on companies to sell excess stock. This adds to the strong competition. In addition the cost of raw materials has also increased adding to the production costs. OEMs also need to meet global environmental laws, which further increases rivalry, as each company is trying to gain ahead of their rival competitors. Increase in competition from Chinese and Indian manufacturers has added to the rivalry within the industry.

Fiat as a group operates in many sectors which negates its dependence upon revenues from car sales. That is the same case with Honda which caters to many industrial sectors. Declining industry value over recent years also adds to competitive rivalry with each manufacturer trying to increase market share. Overall, rivalry within this industry is high. (Investopedia, n.d. : Datamonitor, 2010: Fiat Annual Report, 2009)

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6.3 SWOT Analysis

Strengths



Diversified Business Portfolio: Fiat has a number of businesses that provide it with a diversified business portfolio. This helps in spreading and hedging the risk across different sectors and product lines and also provides Fiat with valuable resources and skills.



Strong Research and Development capability: Approximately 14,000 people are dedicated to R&D activities at more than 117 research centers worldwide. Fiat conducts its research and innovation activities through the Centro Ricerche Fiat (C.R.F.) and Elasis. In 2009, expenditure on research and development summed up to approximately €1.7 billion which is equivalent to 3.5% of net revenues from industrial activities. (Fiat Annual Report, 2009). Activities involve studying customer needs and developing innovative products, researching on new materials, development of technologies which use conventional and alternative fuels.



Brand and Product Portfolio: Fiat has a strong product and brand portfolio across all segments of the automobile market. It is especially strong in the compact car segment and the performance supercar segment with Ferrari and Maserati. It also is competent in fuel efficient engines and diesel technology.

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Weaknesses



Economies of Scale: Fiat’s CEO Sergio Marchionne stated that no car maker could survive the financial crisis and be profitable without making more than 5 million cars a year (The Telegraph, 2009). Fiat currently produces around 2.1 Million cars and is way behind that target.

Chrysler produces about 1.3

million vehicles so their combined output is about 3.4 Million vehicles. Their competitors already produce more than 5 million vehicles and hence enjoy the benefits of economies of scale.Fiat's main competitors, with superior scale and more financial resources, reduce the group's ability to compete effectively. (Datamonitor, 2010)



Credit Ratings: Investor service ratings such as Moody’s and Standard & Poor’s have rated Fiat with ‘Negative Outlook’. This affects the Group’s ability to access capital markets or other forms of financing. If the rating is reduced further, the Group’s ability to access capital markets will be reduced and hence its cost of funding will increase having damaging effects on its financial position and earnings. (Fiat Annual Report, 2009)



Struggling Global Sales and Market share: Fiat’s global market share and sales is much less than that of its competitors. Its combined global market share with Chrysler is about 6.4% (Deloitte, 2009). The automobiles division’s revenues declined 2.4% in 2009 compared to FY2008. The decrease was due to reduced market demand. The revenues of the Ferrari division also declined

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5.2% in FY2009, recording E1,732 million (approximately $2,415.5 million). A total of 6,235 vehicles were delivered to the network during the year, a decrease of 4.5% against an approximate 35% drop for Ferrari's reference segment globally. The Maserati division’s revenues also declined by 44.1% compared to FY2008. A total of 4,489 Maserati cars were delivered to the network during the year, representing a 48.7% year-on-year decrease attributable to the significant decline in demand in the company's main markets. (Fiat Annual Report, 2009)

Opportunities

Growth through strategic alliances and joint ventures:



Fiat has the opportunity to grow its business by setting up various joint ventures across the globe. Fiat and Guangzhou Automobile Group (GAC Group) of China signed a framework agreement to establish a 50/50 joint venture for the production of cars and engines for the Chinese market. (Economist Intelligence Unit, 2010)



In February 2010, Fiat announced a joint venture with another Russian company, Sollers, which will develop new models specially for the Russian market (as well as SUVs under the name Jeep, Chrysler’s SUV brand). A new plant opens in 2011 with the capacity to produce 500,000 cars per year. That would make Fiat the second biggest car maker in the country. (Economist Intelligence Unit, 2010)

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These types of Joint Ventures provide valuable opportunities to reduce manufacturing cost, promote distribution and uptake of existing products and provide access to new markets and technologies.

Fiat-Chrysler Alliance: In 2009 Fiat has entered into a global alliance with Chrysler to expand its product portfolio globally and distribution network. In March 2010, Fiat Group Automobiles and Chrysler took an additional step towards the integration of their distribution activities in Europe. Starting from April 2010, Fiat Group Automobiles would commence carrying out the commercial activities supporting the sale and service of Chrysler, Jeep, and Dodge branded products in several countries in Europe. Global alliances such as these would improve the operating efficiencies of Fiat and expand its product line. (Fiat 1st Quarter report, 2010)

Emerging markets: China is now the world’s largest automotive market (Bloomberg, 2010). Brazil is on track to overtake Germany as the world’s fourth-largest vehicle market this year, as demand for cars in the country continues to surge past developed countries, carmakers and industry analysts say (Reed - Financial Times, 2010). New vehicle sales in India is projected a 19% increase from 2009, in Brazil 8% from 2009 and the projected sales increase is 20% growth for China in 2010 (Leggett, 2010). Fiat already has strong performance in Brazil and now is working towards improving sales and distribution in the Chinese and Indian markets.

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Threats

Competitive Pressure affecting earnings potential: Fiat faces strong competition across its product line. The group faces competition globally from other international automotive and commercial vehicle manufacturers, some of which are larger and have larger resource bases. The markets are highly competitive in terms of product quality, performance, innovation, pricing, and customer service. Some of its main competitors are, Ford Motor, General Motors, Volkswagen and Toyota Motor. In recent years, competition, particularly in pricing, has increased considerably. Overcapacity within the industry and this combined with high levels of competition may put additional pressures on pricing strategies. These factors affect the earnings potential of Fiat. (Fiat Annual Report 2009, Datamonitor 2010)

Environmental and Government regulations: Fiat’s business is affected by many national or international laws and regulations. Legislations such as the EU Commission Proposed CO2 emissions Limit and the Kyoto protocol affect product development and lifecycle costs (Frost & Sullivan, 2010: Fiat Annual Report, 2009). Fiat anticipates that it will continue to incur substantial costs in order to meet terms of such polices. In addition, government initiatives to stimulate consumer demand for products sold by the Group, such as incentives or the scrappage scheme, can substantially affect cash flow by influencing the timing and level of revenues. The affect of such government measures is unpredictable and not in Fiat’s control. Any unfavourable change in government policy relating to those measures could have a negative effect on the Fiat’s operations

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and future forecast, as well as its earnings and financial position. (Fiat Annual Report 2009.)

Recession: The recent recession has lead to a decline in sales and hence overcapacity within the industry that needs to be dealt with prudently. The improvement in car sales will greatly depends on the health of the global and regional economies.

New emerging industry players: China overtook the United States to become the world's biggest car and van market in 2009 and has a number of domestic manufacturers(BBC News, 2010). This highlights the rising importance of emerging market companies compared to their mature market competitors. As companies and consumers try to cut costs, vehicle manufacturers in emerging markets can take advantage of their low-cost production models, based on cheaper local labour and lower manufacturing costs. These companies have also the advantage of strong demand from domestic markets, which are still growing. Additionally, the inability of mature market automakers to defend their market share will allow new entrants to gain a foothold in the global market. (KPMG, 2009)

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CHAPTER 7: CONCLUSION & RECOMMENDATIONS

7.1 Conclusion A strategic alliance is a favourable strategic option in which the benefits are dependent on the cooperation between the partners and effectiveness of the alliance. It can be intended as a defensive strategic move or as a growth opportunity. It is essential that all partners have clear objectives for the outcomes of the alliance and have a concrete plan in place to achieve them. These objectives and plans need to be continuously evaluated throughout the lifetime of the alliance. It is also important to choose the right partner. The goals and objectives of each partner can be different but they should complement each other and work towards achieving their mutual objectives. All parties should be equally committed and should ensure that the structure of the alliance is clear with amount of resources to be invested by each agreed at the start of the agreement.

An alliance provides a number of opportunities to all involved parties such as:



Additional Distribution Channels and Manufacturing capability.



Access to new products and portfolio diversification.



Obtain the benefits economies of scale.



Achieving cost savings in design, purchasing and higher facility utilisation by sharing research and development costs along with joint procurement.

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In the past year the automotive industry has seen a number of bankruptcies, restructuring efforts and consolidations due to the recession.

In the case of Fiat’s alliance with Chrysler, the venture is a Global Strategic Alliance based on sharing product development, manufacturing facilities, distribution networks and materials sourcing. Fiat is well established in Europe with core strengths in the small car segment having fuel efficient powertrains. It is weak in the large car segment and has a poor distribution network in USA. On the other hand, Chrysler is competitive in the large vehicle segment with a strong USA distribution network. It is also important to note that Fiat is in a recovering financial condition and that subsequent to filing for bankruptcy, Chrysler has a strong balance sheet. Fiat is not required to invest any capital in Chrysler as the latter has access to Government loans. All these factors make Chrysler a suitable partner for Fiat.

Both Fiat and Chrysler are lagging behind the market leaders such as Toyota, Ford and Volkswagen. Therefore they can be classed as a ‘Follower’. Fiat’s main strategic motive for the alliance would be to ‘Catch-up’ and compete equally with the market leaders while Chrysler’s main motive is to use Fiat to restructure its operations for survival within the industry and to prepare for the future.

The alliance offers the following advantages to Fiat:



Access to Chrysler's extensive USA distribution network, suppliers and valuable brands.



A 20% equity stake in Chrysler with potential of increasing it to 35%.

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The agreement does not commit Fiat to funding Chrysler in future.



Advantages of economies of scale by sharing product development and sourcing.



Fiat forecasts an economic benefit of 1.5Bn Euros as a result of the FiatChrysler Alliance by 2014.

The alliance offers the following advantages to Chrysler:



Access to Fiat's environmentally friendly vehicle technologies and components



Substantial cost savings opportunities through vehicle architecture, distribution and product development sharing.



Access to Fiat's distribution network outside the US and its global supplier base.



Chrysler will also benefit from Fiat's management expertise in business revival and access to Fiat's distribution channels in Latin America and Russia.

The External and Business environmental analysis shows that Fiat is operating in a highly competitive industry that is affected by many external forces such as legislation, environmental concerns and the health of the global economy. These factors affect the strategy of a business and its products. The negotiating power of suppliers and buyers also adds to competitive pressure. The recent economic crisis has reduced demand for new vehicles and resulting in large amounts of overcapacity within the industry. This has further lead to an increase in competition between manufacturers to increase sales and market share. The alliance would allow Fiat-Chrysler to reduce manufacturing costs by sharing production facilities and increase factory utilisation and hence affect final product

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pricing positively. The industry is also highly technology driven and product lifecycles times are decreasing. The alliance offers Fiat-Chrysler the opportunity to share vehicle platforms and reduce product development time, achieving the benefits of economies of scale.

7.2 Recommendations This dissertation makes the following recommendations for Fiat:



Optimise Supply Chain, Procurement & Operations: Supply chain efficiency needs to be optimised to the maximum. Fiat needs to be more efficient in manufacturing and should optimise its supply chain to accommodate peaks and troughs of demand. It should work with suppliers to reduce costs and share risks.



Expand into New Markets: Fiat has been expanding into new markets with recent entry into the Chinese and South American markets. It should continue to expand in the BRIC nations and the rest of Asia to hedge against the weakening US & Western European markets. It can use its strengths in small cars to introduce cheap and reliable products to attract first time buyers.



Product Development: Fiat should continue to develop exciting and distinctive cars that maintain customer interest. It should concentrate on developing products as sales will be expected to pick up after the recession. It also needs to build on its strength in fuel efficient powertrains to guarantee a future portfolio of environmentally friendly vehicles.



Fiat-Chrysler Alliance: Fiat and Chrysler need to work in collaboration ensuring that a culture of mutual trust and understanding is prevalent in order

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to achieve their objectives. The alliance provides an excellent opportunity to address each company’s weaknesses and has the potential to assist each other in developing their product line and distribution networks. The alliance needs to be monitored closely over time. •

Further alliances to increase volumes: Fiat-Chrysler’s combined output volume is less than its competitors. It should consider adding other manufacturers to the alliance in order to increase its mass and grow faster.



Joint Ventures / Cost Sharing: Collaborating with other manufacturers and suppliers for manufacturing and development will help in sharing and reducing costs. Joint ventures and technology sharing would also provide Fiat with the benefits of economies of scale.

Fiat can realise its potential by having a successful alliance with Chrysler and grow to be one of the market leaders in the automotive industry. Together Fiat and Chrysler can grow to become an automotive force that can compete with the likes of Toyota, Volkswagen and Ford.

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Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance

Fiat Group Financial Statements – As taken from the 2009 Annual Report. Consolidated Income Statement

APPENDIX 1

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Fiat 2010 Quarter 1 Results

APPENDIX 2

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