In
the middle of March, Mary T. Barra, the chief executive of General
Motors, received a lengthy and unusual email from one of her direct
competitors, Sergio Marchionne.
Ms.
Barra had never met Mr. Marchionne, the C.E.O. of Fiat Chrysler
Automobiles. And she was in no way expecting their first contact to be
an offer to discuss a potential blockbuster of a merger.
The
email, according to two people with knowledge of it and reported for
the first time here, laid out in detail how global carmakers needed to
consolidate to save money and suggested that a combination of G.M. and
Fiat Chrysler could cut billions of dollars in costs and create an
automotive superpower.
This
analysis did not interest Ms. Barra or other G.M. executives and board
members. Instead, Mr. Marchionne’s request for a meeting on the subject
was flatly turned down, according to people with knowledge of the
situation who spoke on the condition of anonymity.
Mr.
Marchionne, however, is not one to be put off by rejection. So a month
later, on April 29, in a routine analyst conference call, he doubled
down. Instead of following the usual script, in which chief executives
discuss the current state of their operations, Mr. Marchionne stunned
the Wall Street analysts by devoting the entire call to his sudden and
intense appeal to automakers to merge.
“I
think it is absolutely clear that the amount of capital waste that’s
going on in this industry is something that certainly requires remedy,”
he said. “A remedy in our view is through consolidation.”
It’s
not often that a chief executive announces to the world that his
company is eager to find a merger partner. Some might even consider it a
sign of weakness and, in fact, F.C.A.’s stock dropped about 10 percent
over the next two days. Rather than rally support, Mr. Marchionne’s
passionate appeal only highlighted the difficulties that lie ahead for
Fiat Chrysler.
Mr.
Marchionne has had remarkable success in blending two struggling car
companies into the world’s seventh-largest automaker. F.C.A.’s sales in
the United States have doubled since 2009. But it still sold only 4.6
million cars and trucks worldwide in 2014, about half as many as
competitors like G.M. and Volkswagen. Its valuable brands, like Jeep
sport utility vehicles and Ram pickups, don’t compensate for the fact
that it makes less money than its rivals, lags in China — the world’s
biggest car market — and barely invests in alternative-fuel vehicles
that are critical to meeting the coming tougher federal rules on fuel
economy.
Mr.
Marchionne says he has a detailed plan to improve F.C.A.’s performance,
but his current obsession seems to be playing the automotive Cassandra,
warning of disastrous consequences if companies continue spending
unabated. He has no patience for subtlety or delicate phrasing.
The
bigger the issue, in fact, the louder he becomes. He irritated the
National Highway Traffic Safety Administration by defiantly defending
F.C.A.’s response to safety issues with older Jeep models. N.H.T.S.A.
just last week scheduled a hearing to examine the company’s
follow-through on recalls, something it rarely does. Mr. Marchionne also
appears headed for a confrontation with union leaders in this summer’s
contract negotiations because of F.C.A.’s rampant hiring of lower-paid
workers. Alone among auto chiefs, he wants to end the current two-tier
wage system by phasing out the top wage rate as veteran employees
retire.
Detroit
hasn’t seen a C.E.O. as provocative and unpredictable since Lee A.
Iacocca, Chrysler’s previous savior, in the 1980s. And as with Mr.
Iacocca, confidence is never a problem for Mr. Marchionne.
Not From the Ranks
When
in the United States, Mr. Marchionne, 62, works out of a tiny office in
a wing of the sprawling Chrysler Technical Center in the Detroit suburb
of Auburn Hills. He prefers to spend time among engineers and product
planners rather than in the lavish suite of executive offices in the
nearby headquarters tower. In March, as he settled in for an interview
at a small table, a window giving a view over a service drive, he downed
the first of several espressos and silenced his four cellphones. Though
smoking is forbidden elsewhere in the building, in this sanctuary he
lit up one Marlboro after another.
Mr.
Marchionne doesn’t look like a typical car executive. His uniform is a
black sweater over a button-down shirt with black pants, and you get the
sense he can’t be bothered to find a hairbrush. Unlike Ms. Barra or
Mark Fields of Ford Motor, both of whom rose through the corporate
ranks, Mr. Marchionne never even worked for a car company before taking
the top job at Fiat in 2004.
Born
in Chieti, Italy, a small city on the Adriatic Sea, he moved to Canada
with his family as a teenager. He earned degrees in philosophy, law and
business administration before joining an accounting firm at 30. From
there, he spent most of his career bouncing through executive posts at
unglamorous Canadian and European chemical and industrial companies.
He
was an obscure board member at Fiat when the Agnelli family, which
controlled the Italian automaker, picked him to reverse its long
decline. He moved fast, firing executives, flattening the company’s
bureaucracy, eliminating slow-selling models and paring production to
match market demand. In a warm-up for Chrysler, he also fostered an
entrepreneurial culture in which executives were given wide latitude to
meet internal targets.
Since
he cut the deal with the Obama administration six years ago to take
control of Chrysler, his moves have confounded an industry that tends to
adhere to tried-and-true formulas. When other companies streamlined
their brand lineups, Mr. Marchionne created new ones, such as splitting
off Ram trucks from the larger Dodge division. Rather than glossing over
Chrysler’s battered image, he embraced it with soulful advertising
campaigns that extolled the tenacious spirit behind vehicles that were
“imported from Detroit.”
“I’ve
always had this incredible sense of urgency,” he said. “I’ve always had
this desire not to let things fester and to really seize the moment,
because it’s serendipity.”
He
paused. “You create the conditions for it, and it just keeps producing
outcomes or opportunities for you to pick,” he said. “And if you don’t
pick them, then it’s your own damn fault.”
He
saw that kind of opportunity four years ago when he took advantage of
Chrysler’s precarious financial condition to negotiate a favorable
contract with the United Automobile Workers union. That deal allowed him
unlimited use of workers paid on a lower scale — about $19 an hour
compared with $28 for veteran employees.
The
arrangement opened the door for Fiat Chrysler to go on a hiring spree
of cheaper labor in the United States. Today, more than 40 percent of
the company’s 36,000 American factory workers earn entry-level wages,
compared with about 20 percent at G.M. and 27 percent at Ford.
Before
he could benefit from his lower-wage work force, Mr. Marchionne had to
strip down Chrysler’s production after its 2009 bankruptcy.
He
also retooled Chrysler’s organization by replacing veteran executives
with a cadre of younger, unproven managers. While he set ambitious sales
and financial targets, he gave his new team free rein to achieve them.
“He
creates an environment that I call the pressure cooker approach,” said
Bernardo Bertoldi, a business professor at the University of Torino in
Italy, who helped write a recent Harvard Business School case study on
Mr. Marchionne. “He provides the goals and gives them their freedom, but
the pressure is on getting results.”
And
after years of dysfunction under the ownership of the German automaker
Daimler and then the private equity firm Cerberus Capital Management,
Chrysler took off. Once Chrysler joined with Fiat, the combined company
began posting double-digit annual increases in revenue, reaching $109
billion last year. And after absorbing losses as it paid back more than
$5 billion in loans from American taxpayers, F.C.A. has become solidly
profitable, reporting $717 million in net income in 2014. The bulk of
its income comes from the Chrysler side of the business.
Chrysler’s
revival hinged on streamlining its manufacturing base and pouring
resources into its strongest brands, in particular Jeep, which has a
cultlike status in this country as the most rugged and stylish of
American S.U.V.s and a worldwide appeal dating back to World War II.
“He
saw the future with Jeep,” said Mike Manley, the brand’s chief. “I
remember talking to him early when we were targeting sales of a
half-million, and he said we can do a lot more.”
Fiat
Chrysler has opened new plants in Italy and Brazil to accelerate Jeep
sales in international markets, and a Chinese factory is coming next.
Last year, F.C.A. sold about one million Jeeps globally. Mr. Marchionne
is shooting for 1.9 million in 2018, and the success of the brand will
be critical to the company’s overall results.
“You
can’t help but be impressed with what Sergio has done so far,” said
David Cole, former chairman of the Center for Automotive Research in Ann
Arbor, Mich. “But the question is whether he can achieve the kind of
scale necessary to keep up with automakers twice his size.”
If
all his growth targets are achieved, Mr. Marchionne expects Fiat
Chrysler to hit seven million in sales in three years. “That plan is
predicated on a whole pile of things I want to execute flawlessly,” he
said. But in the next breath, he admitted that external events such as
fluctuating oil prices and economic downturns could scuttle those
ambitions quickly. “If I look at the history of this thing over the last
10 to 20 years,” he said, “we’ve always had something that came out of
left field and made us very, very uncomfortable.”
A Union Showdown
Mr.
Marchionne might be feeling pretty uncomfortable this summer when
Detroit automakers enter contract talks with the U.A.W. When Chrysler
last negotiated a contract in 2011, the carmakers were able to win
concessions because Detroit’s auto industry was just beginning to
recover from its financial collapse during the last recession. Now,
however, F.C.A. and the other car companies boast of their robust
finances, and the unions are determined to share in the bounty. That
could mean an end to Mr. Marchionne’s unfettered use of lower-tier
workers.
One
of the union’s priorities is to raise wages for new workers and
possibly place a cap on the number of lower-paid employees hired. Ford,
for example, is required under the current contract to bump entry-level
hires to full-wage status when their overall percentage at the company
hits certain thresholds. Fiat Chrysler, however, has no such
restrictions.
Union
workers in its plants say the two-tier system has created rifts on the
factory floor. “You can feel the separation in the plant and the
animosity,” said Scott McGinnis, who is part of a team that trains
workers for the assembly line at a plant in Sterling Heights, Mich. He
says lower-tier hires like him resent that they have no way to reach the
top of the wage scale, as workers do at Ford. “I’m very fortunate to
have a job,” he said. “But with a wage progression system, I would at
least know I’m working up toward something.”
Many
veteran workers earning top wages are just as supportive of scaling
back or eliminating the two-tier system. “It has created an ‘us and
them’ mind-set where there’s some mutual resentment,” said Martha
Grevatt, a skilled-trades worker at a plant in Warren, Mich., who was
hired in the 1980s. “It’s all very detrimental to union solidarity.”
Mr.
Marchionne, who last year earned more than $30 million, is unapologetic
about his voracious hiring of lower-paid workers. “I’ve just responded
to business needs,” he said. “I needed to make cars, and we hired
people.”
He
defends taking advantage of the two-tier system, but Mr. Marchionne
admits that the pay gap among workers creates “seeds of instability.” He
advocates a standard wage throughout the plants. The $28-an-hour wage
that veteran workers now make should be reset at a lower level when they
retire, he proposes. Union workers, however, hate this idea and are
instead arguing for wage increases across the board in the coming
contract.
Mr.
Marchionne’s aggressive use of the two-tier system is characteristic of
his forceful style, which has been known to backfire. Two years ago, he
challenged federal regulators on their intention to seek a broad recall
of older-model Jeeps. Those Jeeps had rear-mounted gas tanks that could
catch fire in high-speed rear-end collisions. In a stunning departure
from the protocol for resolving car safety issues, Mr. Marchionne
requested a private, face-to-face meeting with Ray LaHood, then the
transportation secretary, and managed to limit the number of vehicles
recalled.
Now,
however, N.H.T.S.A.’s new administrator, Mark R. Rosekind, has signaled
that the agency will be much stricter in how it handles recalls. Last
week, N.H.T.S.A. said it would hold a public hearing in July on whether
Fiat Chrysler was doing enough to fix the 10 million vehicles it had
recalled in a variety of safety actions, including the 1.5 million Jeeps
with vulnerable gas tanks.
The
Jeep fire issue is clearly a sore point with Mr. Marchionne. He
contends that the S.U.V.s met all federal crash standards when they were
built more than a decade ago and that F.C.A.’s agreement to install
trailer hitches to mitigate the effect of an accident is a fine remedy.
While
safety advocates have criticized the trailer-hitch remedy as
insufficient, N.H.T.S.A. said this week that it would not reopen the
Jeep investigation to explore other possible remedies. Still, F.C.A.
could be facing enormous legal liabilities for gas tank fires. A jury in
Georgia awarded $150 million in damages in April to the family of a
4-year-old boy who was killed in a Jeep fire in 2012. Fiat Chrysler has
asked for a new trial in the case.
Courting Apple and Google
A
few weeks ago, an aide to Mr. Marchionne called and said the C.E.O.
wanted a follow-up discussion for this article. He had already sat for
an extensive interview, but was steaming over the reaction to his
consolidation manifesto in April. And he wanted to vent about it.
He
consistently declined to comment publicly about his overture to G.M. or
Ms. Barra’s unwillingness to meet with him about it. But during the
follow-up interview he became visibly irritated by the suggestion that
he had made Fiat Chrysler available for sale by broaching the topic.
“Look,
if I wanted to sell I would have called a banker,” he said. “I wouldn’t
have done an analysis on return on invested capital and margins that
talk about the fact that we’re all in the same hole.”
As
he did in an earlier interview, he seethed about how the escalating
costs for new technology and products were “driving me nuts.” He
contends that automakers waste billions duplicating efforts in
developing new engines, safety technology and alternative-fuel vehicles.
The conference call outcry was for the good of the entire auto industry
and not because Fiat Chrysler was more vulnerable to rising costs than
its bigger competitors.
Mr.
Marchionne calculates that a combination with a larger automaker, such
as G.M., can save several billion dollars a year by sharing costs for
new vehicle platforms and parts.
“It’s fundamentally immoral to allow for that waste to continue unchecked,” he said.
No other auto executive has seen fit to agree him, publicly at least.
Skeptical
Wall Street analysts are hard-pressed to envision interested suitors.
Ford has stated that it is not looking at mergers. Ms. Barra, in her
only public comments on the topic, said that doing a big deal would be a
“distraction” for G.M. Volkswagen is said to have had interest in the
past in F.C.A., but its management has not addressed the subject
outright.
Adam
Jonas, a Morgan Stanley analyst, wrote in a research note to investors
that auto companies “rarely seek merger partners willingly unless times
are desperate.” Yet he did not discount the possibility that Mr.
Marchionne’s position might encourage activist investors to push another
auto company to consider a merger with F.C.A. “We have no knowledge of
how all this will play out,” Mr. Jonas said.
Since
opening the door for a possible merger with another car company, Mr.
Marchionne has broadened his discussion about the industry’s future to
include tech giants like Apple and Google.
Mr.
Machionne recently made a three-day visit to California to meet with
executives there, including Apple’s C.E.O., Timothy D. Cook. (An Apple
spokesman declined to comment.) The trip underscored the evolving
relationships between technology giants and traditional automakers. Fiat
Chrysler and other car companies are potentially large customers for
advanced communications and navigation equipment. But Google and Apple
are also developing their own cars, and may one day need to team up with
big automakers for manufacturing or marketing. If and when that
happens, Mr. Marchionne will be eager to participate.
For
now, he praises the companies as “disrupters” who will help redefine
how cars are developed and operated, and that includes autonomous
vehicles. “These things are real,” he told reporters after a recent
speech in Toronto. “It’s not science fiction. They’re coming.”
That
Mr. Marchionne expresses enthusiasm for disruption of his industry
should come as no surprise. Few believed that he could marry a bankrupt
Chrysler with broken-down Fiat and create a viable car company. But he
did. Like it or not, the big gesture is the only kind Mr. Marchionne is
willing to make.
