Michael Sheehan's Article

Ferrari enters the Marchionne-era

A case study in Automotive evolution and corporate governance:

As appeared in:

Online Exclusive—July 2015 issue


by Michael Sheehan

Sergio Marchionne
Sergio Marchionne

Enter the man in black:

Sergio Marchionne was born in Italy, but emigrated with his family to Canada at age 14, and became a dual Canadian-Italian citizen fluent in English and Italian. He earned the Canadian equivalent of a CPA, then an MBA and then became a Barrister (a lawyer specializing in advocacy and litigation), making for a formidable negotiator. Moving rapidly up the corporate ladder, in 2002 Marchionne staged a turn-around at SGS, a Swiss quality-assurance service company with 80,000 employees in 1,650 labs and offices world-wide. He tripled its value, coming to the attention of the Agnelli family, SGS’s part-owner. In May, 2003 Marchionne became a member of the Board of Directors of FIAT S.p.A. After the death of FIAT’s chairman, Umberto Agnelli, in 2004 he became CEO (at the same time di Montezemolo became Chairman). According to legend, when he first arrived at FIAT the top executives communicated via their secretaries. Marchionne moved his office to the same floor as the engineering department and the penthouse has reportedly been empty ever since.

As the automotive world’s answer to Steve Jobs, Marchionne wears only his signature outfit—a checked Oxford button-down shirt, baggy black sweater and black slacks—and characterizes himself as a ‘simple, homeless, ever-wandering metal basher.’ As per Alex Taylor III, writing in Fortune Magazine, “The principles of his management style are simple: he values merit over rank, excellence over mediocrity, competition over insularity, and accountability over promises.” With FIAT owning 181 plants in 30 different countries Marchionne truly needed a global perspective.

A dress-up doll parody:

In the Feb., 2010 issue, Car and Driver magazine opined that “about every 17 seconds, (we’re reminded that) Italians are the princes of fashion and the rest of us live in the style equivalent of Winnipeg.” They parodied Marchionne’s simplistic signature style, showing a spoof Marchionne doll that could be dressed up in a variety of outfits of which all were identical copies of the same outfit. It’s worth a google search.

Saving FIAT:

By 2004 FIAT needed €5 billion to survive. Its parent companies, Giovanni Agnelli & Co., a private company that controls two other listed vehicles, Ifi and Ifil, which together own about a third of FIAT’s shares, invested €3 billion and FIAT turned to GM for the rest. GM refused and its stake was subsequently reduced to 10%. FIAT called the ‘put option’ which would have forced GM to buy FIAT, but GM rendered it void because FIAT had sold Fidis, its financing arm and had recapitalized. In Dec., 2004 Sergio Marchionne flew to Zurich for a showdown with Rick Wagoner, then the boss of General Motors, and John Devine, GM’s chief financial officer. Wagoner blinked. In Feb., 2005 GM agreed to pay 2 billion USD to terminate the five-year-old put option. FIAT was saved!

At FIAT his open-office management style “where everyone is expected to lead” and removal of layers of bureaucracy, combined with negotiating far-more-efficient work conditions and regulations with Italy’s Communist unions returned FIAT to profitability in 2006, only two years after Marchionne took control. FIAT had new life!

Only a year later, in July, 2007, Marchionne’s team re-introduced the FIAT 500, described by Time magazine as “a tiny, very cool 21st century version of a 52-year-old Italian icon once driven by movie stars” which Marchionne called “our iPod”. FIAT found new market share in auto markets once lost, such as Mexico and Australia, entered into a joint venture in China and returned to the Canadian and American markets with the 500 in 2011. In Nov., 2012 the one-millionth FIAT 500 rolled off the production line. FIAT was on a roll.

Saving Maserati:

Under Marchionne, Maserati was split off from Ferrari in 2005 and was profitable by 2007, for the first time in decades. In 2012 Marchionne committed to a €1,2 billion production upgrade with the goal to take worldwide Maserati sales from 6,300 units to 50,000 units per year by 2015, a massively optimistic and ambitious plan. Maserati sold 15,400 cars globally in 2013, 38,000 in 2014 and expect to reach 50,000 in 2015 and 75,000 by 2018. Very impressive when one considers that Bentley (owned and well financed by VW) sold only 10,120 cars in 2013 and 11,020 cars in 2014 in the global market.

The Man in Black saves Chrysler:

In June, 2009 Marchionne again proved his global perspective and negotiating skills when FIAT Group was given (at no cost) a 20% stake in Chrysler Group as Chrysler emerged from Chapter 11 bankruptcy protection. The U.A.W. (auto unions) retirement trust was given a 55% ownership with the Canadian and American governments left with small shares. FIAT also gained access to Chrysler’s North American dealer network in return for FIAT giving Chrysler the platform to build smaller, more fuel-efficient vehicles in the U.S. and access to FIAT’s global distribution network.

But wait, it gets better! Marchionne was also able to negotiate a $6.6b financing package to rebuild Chrysler’s aging plants at rates of 11 to 12% thanks to loans from the U.S. and Canadian governments. In Jan., 2011 FIAT boosted its ownership in Chrysler to 25% when Chrysler met one of three performance milestones. In May, 2011 Marchionne was able to refinance and payoff $7.6b to the U.S. and Canadian governments thanks to low bank rates of 6 to 8%, raising FIAT’s stake to 46%, making it the largest shareholder. The government’s selloff also cut the UAW’s ownership to 41.5%. Marchionne next used the threat of a planned IPO to negotiate a better price with the UAW and in Jan., 2014 FIAT was able to take 100% control of Chrysler by buying out the U.A.W. for $4.35b and another $700m over 4 years.

In five years Marchionne had transformed two bankrupt car companies into a single viable company. Sales of Chrysler, Dodge, Jeep, Ram, and FIAT vehicles in North America rose from 1.2m in 2009 to 2.1m in 2013 and in 2014 FIAT Chrysler delivered 4.6m cars. A planned investment of $63b in plants and new models is scheduled to increase FIAT Chrysler deliveries to 7m cars by 2018.

The Italian tax exodus:

With FIAT owning 100% of Chrysler, the merged company moved its financial headquarters to the Netherlands and its corporate headquarters to England to benefit from the U.K.’s corporate tax rate of 21% rather than Italy’s 31.4% or the U.S.’s 39.1%, just as FIAT had done in 2013 for their truck and tractor subsidiary CNH Industrial. Choosing London as its corporate headquarters also dodged the politics of choosing either FIAT’s hometown of Turin, Italy, or Chrysler’s in Detroit. Ferrari may follow after their IPO.

The Palace Coup:

Marchionne and Montezemolo had run their shows independently over the years, but clashed over Ferrari not winning an F-1 championship since 2008 and not winning a single race in the 2014 season, despite having two former world champions on the team. Montezemolo had focused on schmoozing the Italian ruling classes and engaging in F1 politicking, threatening withdrawal of Ferrari from F1, so his eyes were firmly off the ball when it came to matters of the FIAT group. Montezemolo’s semi-detached management style, Marchionne’s plans to increase Ferrari’s annual production to 10,000 cars and the stock flotation of both FIAT and Ferrari were the final deal breakers. Montezemolo stepped down from the chairmanship of Ferrari on Oct., 13—tellingly, the same day on which Automobiles (FCA) had originally planned to launch its IPO on the NY Stock Exchange. Montezemolo was given a well-deserved €23m Golden Parachute on the way out the door.

Rebuilding Scuderia Ferrari:

Winning in F1 is not optional at Ferrari, but F1’s new cost cutting, no-testing programs had ended the era of ever increasing budgets and unlimited testing. After a mere two podium finishes in the 2014 F1 season, team manager Stefano Domenicali resigned mid-season to be replaced by Ferrari North America CEO Marco Mattiacci who in turn was replaced by Maurizio Arrivabene, former vice-president of global communications for Ferrari’s main sponsor, tobacco giant Philip Morris. Like Marchionne, Arrivabene understands the importance of outlining a clear battle plan to the troops and rolling heads when neccessary. With Mercedes dominating the 2014 season, Marchionne personally intervened and, when Fernando Alonso left the Scuderia to rejoin Mclaren, Marchionne and Sabine Kehm (Michael Schumacher’s manager), called Sebastian Vettel, the Red Bull driver who had brought Red Bull four Championships, bringing Vettel on board the Scuderia for 2015.

Marchionne also opined that Ferrari’s F1 engine program was the main weakness in the 2014 season and engine development became priority one. Engineering director Pat Fry and chief designer Nikolas Tombazis were shown the door, James Allison became technical chief and Mercedes performance engineer Jock Clear joined the team. F1’s cost-cutting was countered by replacing Ferrari’s 4 year old simulator with a new $6 million state-of-the-art unit, up and running in Jan. of this year. The goal for 2015 was a mere two race wins.

Ferrari's 2015 F-1 cars, SF15-T #280
Ferrari's 2015 F-1 cars, SF15-T #280

If the 2014 season was a dismal failure, 2015 has started well, with a 3rd at Australia for Vettel, a hard fought 1st for Vettel at Malaysia, another 3rd at China for Vettel, a 2nd for Raikkonen at Bahrain, a 3rd for Vettel at Spain and a 2nd for Vettel at Monaco. Montreal and Austria have been the first non-podium races when a spin for Raikkonen and qualifying problems resulted in a 4th and a 5th at Montreal and then a 4th for Vettel and a DNF for Raikkonen at Austria. So far it’s a modest vindication for Marchionne and Arrivabene.

Previous  Next