An auto giant in distress

Published : Jan 03, 2003 00:00 IST

The financial crisis that has gripped the car-maker Fiat Auto and the countermeasures the company has planned, which involve over 8,000 job losses, have created a grave situation in Italy.

FOR Fiat, the manufacturer of cars that have made Italy known far and wide, 2002 was the year it faced the great unknown. For the first time in Fiat's century-old, eventful history, there are fears that it may abandon car production altogether. With the year coming to an end, the company has begun laying off thousands of workers as part of a restructuring plan, which involves cutting over 8,000 jobs.

Fiat is Italy's largest private employer, and the Centre-Right coalition of Prime Minister Silvio Berlusconi has been keen to avoid the consequences of job losses, particularly in the economically weak south of the country. In Sicily, a region with 20 per cent unemployment, 1,800 jobs are at stake in the Fiat factory in Termini Imerese. Government efforts at mediation, with an offer to fund a part of the job cuts through the national compensation fund, Cassa Integrazione, were not enough, considering the scale of the crisis. The fund provides up to 80 per cent of the salaries of workers made temporarily redundant. However, talks between the Fiat management, the government and the unions failed to produce a compromise.

The three major unions of metal workers called for strikes in Fiat factories and companies. A series of strikes in various cities have already followed Fiat's announcement in October of plans to cut about 20 per cent of its workforce. The company asked the government to grant "crisis status" to its struggling car business, and proposed the closure of its factory in Sicily.

Fiat launched its restructuring programme at the outset of the year as an attempt to emerge out of the crisis caused by rising losses and falling sales, and debts that were spiralling out of control. The group has a net debt of nearly $6 billion, while its financial liabilities as a whole amounted to a massive $31 billion. Once the biggest car manufacturer in Europe with a predominant share of the Italian market, Fiat's market share has collapsed - it touched an all-time low of 28 per cent this year. Its share of the European market has also declined sharply - from 14 per cent at the beginning of the 1990s down to 7 per cent for this year. While the company has incurred losses of nearly 1 billion euros since the start of the year, its share value has come down by 50 per cent in this period.

Fiat is Italy's largest industrial group. It has interests in a vast range of businesses - from motor vehicles to agricultural machines, from newspapers to telecommunications, from insurance and investment banking to tourism. It is the auto division (the original Fiat business started in 1899, even before Henry Ford had launched his auto company in the United States), that is losing money at a rate that its other profit-making assets find difficult to compensate.

This time the crisis is fuelling fears whether Fiat will close down its auto operations, although the company has come out of crises in the past. The company hopes to reverse the losses of the auto division by 2004, thanks to the restructuring plan - the cost cut from lay-offs is expected to make some impact next year - and by relaunching investment in research and development (R&D) to roll out new models.

FIAT'S call for "crisis status" has naturally been among the urgent concerns of the government. The Governor of the Bank of Italy described Fiat as a part of the national heritage and called for financial support to help in its recovery. European Commission President Romano Prodi, who was earlier Prime Minister of Italy, called Fiat an "extraordinary manufacturing resource, which was built up over decades." "Everything must be done to make sure it does not disappear," he said. Prime Minister Berlusconi publicly criticised the Fiat management for the plight of the auto division. Press reports said that the government was considering aid to Fiat Auto through the purchase of a stake in the company. The government cannot give aid without the approval of the European Union, as per the law on fair competition among member-states.

A major factor in Fiat's future are its creditors - private banks, which are not in favour of government intervention to rescue the company. The financial crisis forced Fiat to negotiate a loan in May with a group of private banks in lieu of a tightly drawn contract that leaves the car-maker with limited room for manoeuvre. The banks provided 3 billion euros; in return for the promise of a further 3 billion euros rights issue, Fiat is required either to sell or to turn around the fortunes of the auto division. In order to continue in the auto business, it has to sell other assets to reduce the massive debt. Fiat also agreed to transfer the major share of the financial services in its auto operations to the banks, which are naturally in favour of a market-guided rescue of the industrial giant.

In its drive to achieve greater competitiveness, Fiat Auto sold a 20 per cent stake in the company to the U.S. auto giant General Motors two years ago. The agreement also gives Fiat the option to sell the remaining 80 per cent to the U.S. company any time after the end of 2003. Stemming the losses at Fiat Auto will be a crucial element in exercising the option of transferring full ownership to General Motors. The situation has deteriorated for both companies since the agreement in 2000. The car industry in Europe presents a difficult prospect for recovery. The European car market has already been burdened for some time, with high levels of overcapacity. Uneven productivity between units has added to the load. Ford and General Motors have closed their factories in Europe. The French manufacturer Renault ceased operating a large plant in Belgium in the late 1990s. The losses of General Motors in Europe this year have gone upwards of $500 million.

THE general nervousness about the fate of Fiat derives from the sheer weight of its role in the development of the Italian economy. For instance, the group's turnover contributed to 5.6 percent of the country's gross domestic product (GDP) last year. The current crisis is expected to affect the GDP for 2002 by at least half a per cent. The expected downturn takes into account the effect on thousands of jobs in secondary industries that supply to Fiat factories. The Industries Ministry has hinted that the Fiat job cutback may lead to a revision of the growth targets for the coming year.

Fiat played a defining role in Italy's economic `miracle' that began in the late 1950s - the boom in industry that provided the base for Italy's emergence into the top rank of industrialised nations. Car production, led by Fiat, was the propulsive sector of the economy. By the mid-1960s, around 20 per cent of the total investments in Italy were based on the production choices made by Fiat and their impact on not only the smaller firms that supplied parts, but also other areas such as steel, road-building, petroleum and electrical goods.

In the process, Fiat became the symbol of Italy's post-War economic revival and the most powerful force in the nation's economy. By the mid-1980s, the group controlled nearly a quarter of the stock exchange. Fiat's control was exercised through more than 500 subsidiaries and 190 associated companies. It operated in 50 countries.

FIAT'S is also the remarkable story of the Agnelli family, and of the founder's grandson, Gianni Agnelli, described by the daily La Republica as "our bourgeois royal". The Agnelli family still has a controlling interest of 30 per cent in the Fiat group, and the family's story testifies to the way in which Italian capitalism has remained for long in the control of a small elite group.

The state has played a crucial role in Fiat's phenomenal growth. For instance, during an earlier and crucial period of restructuring for Fiat in the 1980s, it received hefty government grants towards R&D, energy, saving and investments in the economically backward southern areas. It was estimated that the government aid amounted to over half a billion dollars and was critical for the company at a very difficult period.

A report in La Republica described the current Fiat crisis as a disaster for the country. "The financial ruin, in itself, is very serious," said the report, "given that there does not exist a similar situation anywhere else in Europe, of a single large enterprise so strongly conditioning the country's economic development." The report adds: "The role of Fiat in our recent history has been so pervasive, and at times improper, that the search for a way out (of the crisis) has been rendered difficult and complex. Turin (the home of Fiat) has conditioned politics, information and finance and, through the way of Rome and Brussels, has succeeded in manipulating market mechanisms in its favour."

The depth of the current crisis, however, provokes the serious question whether state intervention will be enough this time for Fiat to pull through. There is a growing body of opinion that the best way of saving Fiat Auto would be to strengthen it for sale to General Motors under the most favourable terms possible.

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