Int. J. Automotive Technology and Management, Vol. 2, Nos. 3/4, 2002
Partnering in the global auto industry: the Fiat-GM
strategic alliance
Arnaldo Camuffo and Giuseppe Volpato*
Department of Business Economics and Management,
Ca’ Foscari University of Venice, San Trovaso,
1075 – Venice, Italy 30123
E-mail: [email protected]
E-mail: [email protected]
* Corresponding author
Abstract: GM and Fiat have formed a strategic industrial alliance, creating an
important partnership for the companies in two of the world’s largest
automotive markets: Europe and Latin America.
Observers think the alliance promises opportunities to create value for both Fiat
and GM shareholders through significant synergies in such areas as parts cost
reduction, optimisation of activities regarding powertrain modules, efficiency
in financial service operations, cross-sharing of automotive technologies,
common platforms and architectures.
From the financial standpoint, GM and Fiat remain independent from one
another and will continue to compete in markets around the world, even if GM
has acquired a 20% stake in Fiat in exchange for, approximately, a 5% share of
GM outstanding stocks.
This article analyses the details of this operation, describes what has been done
to date in terms of streamlining and synergies seeking in the two major areas of
the alliance (powertrain and purchasing) and evaluates its impact, from the
strategic and organisational perspectives, on the two partners. The article also
focuses on the possible future evolution of the alliance, and tries to assess if
shared ownership of assets fosters or hinders organisational learning and
performance improvement processes.
Keywords: Automotive industry; globalisation; joint venture.
Reference to this paper should be made as follows: Camuffo, A. and
Volpato, G. (2002) ‘Partnering in the global auto industry: the Fiat-GM
strategic alliance’, Int. J. Automotive Technology and Management, Vol. 2,
Nos. 3/4, pp.335-352.
Biographical notes: Arnaldo Camuffo is Professor of Management at the
Ca’ Foscari University of Venice, Italy. He holds a PhD in management from
the Ca’ Foscari University of Venice and a Master of Science in Management
from the Sloan School of Management of MIT. He is Principal Investigator
within the MIT International Motor Vehicle Program and Research Affiliate of
the GERPISA, Groupe d’Études et de Recherche Permanent sur l’Industrie et
les Salariés de l’Automobile, Université d’Evry-Val d’Essonne. He has
published books (the most recent is Automation in Automotive Industries, 1999,
Berlin, Germany, Springer Verlag, with A. Comacchio and G. Volpato) essays
and articles in such journals as the MIT Sloan Management Review, Industrial
and Corporate Change, The Journal of Management and Governance, and The
International Journal of Human Resource Management.
Copyright © 2002 Inderscience Enterprises Ltd.
335
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A. Camuffo and G.Volpato
Giuseppe Volpato is Professor of Business Strategy and Dean of the Faculty of
Economics at the Ca’ Foscari University of Venice. He is research Director of
the International Car Distribution Programme (ICDP), Principal Investigator of
the MIT International Motor Vehicle Program of MIT, and Member of the
Steering Committee of the GERPISA, Groupe d’Études et de Recherche
Permanent sur l’Industrie et les Salariés de l’Automobile, Université d’EvryVal d’Essonne. He has published books (the most recent are Automation in
Automotive Industries, 1999, Berlin, Germany, Springer Verlag, with
A. Comacchio and A. Camuffo and One best Way? Trajectories and Industrial
Models of the World’s Automobile Producers, 1998, Oxford, Oxford University
Press, with M. Freyssenet, A. Mair and K.Shimizu), essays and articles in such
journals as Industrial and Corporate Change and the International Journal of
Human Resource Management.
1
The reasons for ‘partnering’
1.1 The development of global competition through mergers and alliances
During the last decade the auto industry became global [1–3]. Globalisation has
sharpened competition and shaped a new international division of labour between OEMs
and suppliers. Assemblers have responded to the challenges of globalisation by:
•
pursuing a ‘produce-where-you-sell’ strategy, i.e. developing a direct industrial base
at least in all the main (emerging and mature) markets
•
widening their product range and line ups in order to satisfy a highly fragmented and
differentiated demand and to take advantage of niche market opportunities
•
achieving cost savings in design (platforms), purchasing (modules and component
sharing) and manufacturing (modularity and outsourcing)
•
reducing the risk associated with the enormous organisational and financial effort
required by international strategies, by transferring design and manufacturing
responsibility to suppliers.
Some OEMs tried to carry out such strategies on their own: an example was the Fiat
‘Palio’ world car project [4]. However, it soon became clear that, notwithstanding the
increasing transfer of design and manufacturing activities to suppliers, these expansion
processes were too ambitious. Investment requirements were enormous, as well as risks,
particularly in a time of tightened competition and declining profit margins. Hence,
almost all the industry key global players have striven to share efforts, investments and
risks, taking the opportunities offered by ‘partnering’ [5,6], i.e. that set of operations
which includes acquisitions, mergers and various forms of alliances. In the automotive
industry, typically oligopolistic, M&As between competitors are a recurrent fact. One can
think of Volkswagen buying Seat in 1986, Ford buying Jaguar in 1989, GM entering into
an alliance with Saab in 1990. However, the most recent mergers and agreements feature
a new quality of mergers and alliances. While in the past the initiatives implied almost
exclusively a large manufacturer buying out a relatively smaller one, with a relevant,
albeit non critical impact on the industry, today industry consolidation inevitably takes
place among ‘giants’, with capacity spread all over the world and production of millions
Partnering in the global auto industry: the Fiat-GM strategic alliance
337
of vehicles. Indeed, mergers and alliances have entered a qualitatively new stage,
strategically much more relevant than those observed in the past [7].
In a sense the recent initiatives, such as the merger between Daimler Benz and
Chrysler, the acquisition by Renault of a considerable share of Nissan, and the alliance
between General Motors and Fiat, represent important events, potentially capable of
affecting the competitive dynamics of the industry if they result in striking successes as
well as, even more so, if they are not able to achieve their ambitious goals. In this respect,
it is worth pointing out that the above mentioned operations are different and specific,
both from the financial and industrial standpoint. Among them, the alliance between Fiat
and GM appears the least ‘invasive’, hence less risky for the partners, but also the newest
and the most interesting to examine.
1.2 The perspective of General Motors
General Motors is the world largest automaker, with an annual production (as of 2000) of
over 8.5 million vehicles, equal to 15% of world production, with total employment of
386,000 units and turnover in excess of $184 billion, 87% of which was achieved in
vehicle sales. Hence, it stands out as the best positioned automaker from an international
competitive perspective, since its commercial presence is significant in all the main
commercial areas, with market shares equal to: 26.7% in North America, 9.3% in Europe,
16.3% in the whole of Latin America, Africa and the Middle East, and 3.7% in the
Asia-Pacific zone.
However, the General Motors giant seems to have lost part of its past dynamic lustre
and is experiencing some areas in which financial and economic results are not as
brilliant as one would expect from such an automaker (for example, in the USA). In some
cases, they even record some losses (such as Opel operating in Europe).
General Motors had, and certainly has, the resources to carry out acquisitions.
However, for top management, an initiative based upon an alliance features a set of
advantages which are believed to be essential for the new competitive climate, as the
company recently underlined:
“Alliances are sometimes the only option that available companies will
consider. Quite simply, we are not in the business of acquiring a company we
cannot work with on a partnership basis, because the auto business is just too
hard for us to be fighting with our own partners. With an alliance we enter the
relationship knowing that our partner also wants to enter the relationship. With
some of our current partners we chose an alliance because that’s the way our
partners wanted to go.
Alliances ensure that everyone, including management talent, stays actively
engaged. And we need good management around the globe, especially in places
like Japan, where GM’s presence has been limited since World War II. We are
pleased and enthused to have the leadership of Fiat Auto, for example, in
control of their brand and driving for mutual synergies just as hard as we are.
Alliances sidestep much of the cultural and market place trauma that come with
a full merger. We avoid the typical concerns that arise about who is taking over
whom, or who is winning, and instead can focus on getting business results.
That’s constructive and important, because cultural disconnects can destroy
morale and ultimately cost you in the marketplace.
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A. Camuffo and G.Volpato
Finally alliances are capital efficient. They provide many of the benefits of
mergers and acquisitions without the capital commitment from one side or the
other. This allows us to focus more of our financial resources on the biggest
benefit of alliances: innovative products and services.” [8]
Finally, one is reminded that in the current oligopolistic configuration of the automobile
industry, an agreement with a relevant partner has the advantage (which is not negligible)
of preventing agreements of the partner with other competitors. From this standpoint, any
form of alliance has a ‘defence’ value compared to antagonist agreements, which nobody
can afford to ignore.
1.3 The perspective of Fiat Auto
The Fiat Group has undoubtedly even more important reasons to pursue an agreement
capable of strengthening its competitive opportunities without resorting to more radical
moves. On the one hand, the Italian automaker could have some difficulties in finding the
financial resources to acquire a major partner. From this standpoint, Fiat had already
shown a preference for moves which were financially less burdensome, but significant
under the competitive profile in other industries of interest for the Group, such as that of
commercial vehicles, of tractors and earth-moving equipment, and of automated
production systems. But, at the same time, an acquisition or a merger with other partners,
such as the hypothesis brought forward by the specialised press over an agreement with
Daimler-Chrysler, would have been quite a shock for Italian public opinion.
One must not forget that, differently from many automakers, the Fiat Group is not a
public company. It is owned by the Agnelli family whose presence within the
top management has always played a relevant role since the company’s establishment
in 1899 [9]. The identification between the image of the group and the person of
Gianni Agnelli is so deeply rooted, even internationally, that a sale, and even a merger
among equals with other makes, would have appeared as a sort of ‘treason’ with respect
to a family tradition founded over a century before.
However, that Fiat had to take some important initiative was a true fact. On the one
hand, the entire divisions controlled by the Fiat Group – Fiat, Alfa Romeo and Lancia
(the Fiat Group controls also the Ferrari and Maserati makes, which, however, do not fall
within the GM agreement and which anyway enjoy, given their specific traits, ample
managerial autonomy) – had suffered some competitive weakening in recent years,
mainly in Italy but also in Western Europe, decreasing from a share of 42.6% and 11.73%
respectively in 1997 to 35.4% and 9.5% in 2000. On the other hand, in South America the
brilliant trend in sales of models derived by the Palio project had suffered a marked delay
due to the economic crisis which affected those countries starting in 1998.
Certainly the Fiat Group could have kept on going on its own, but it would have been
a highly risky move. A negative trend in the domestic market or in Europe, or the
unsuccessful launch of a new model which was important to the sales volumes of the
Turin company, would have been enough for the top management to face a situation hard
to manage. Hence, the need to study an initiative capable of offering new important
opportunities both on the cost reduction side and on the enhancement of product quality
perceived by consumers.
If one accepts the view that ruled out the possibility of carrying out an initiative
which could have reduced the ‘sovereignty’ of the Turin automaker, there is no doubt that
the alliance between Fiat and General Motors appears the best option. On the one hand,
Partnering in the global auto industry: the Fiat-GM strategic alliance
339
there is a partnership with the number one world automaker on initiatives capable of
generating significant cost reductions. On the other hand, the three divisions of the
automaker maintain their individual nature: Fiat, Alfa Romeo and Lancia can be turned
around even in higher segments, in which Fiat suffers a structural weakness derived from
specific traits of the Italian market and from the Italian government’s fiscal policy carried
out for years towards motorisation [10].
2
The structure of the agreement
2.1 Timeline of the agreement
One of the advantages of an alliance which does not entail mergers or company
acquisition, consists of the speed with which one can move from the stage of negotiation
to that of useful initiatives on the competitive side. After a few months of confidential
negotiations, the agreement was made public, but still in the definition stage, on
13 March 2000. The end of the juridical aspects of the agreement took place on 24 July of
the same year and at that time priorities were set at the highest level to proceed with
implementation as soon as the European Union authorised it, which took place on 16th
August. The European Commission Release reported:
“The Commission took the view that although Fiat and General Motors will
coordinate, on an exclusive basis their activities in the production of
powertrains and in the purchasing of components and parts, the alliance should
benefit consumers. The Commission noted components accounted for a large
part of the cost of new cars, so any savings the two firm make should be passed
on to the consumers.”
Therefore, on 13 September, it was possible to name the Board of Directors and the main
Top Executives of two 50/50 joint companies between General Motors Corporation and
Fiat Auto SpA, the parent company that forms the economic galaxy of the
Agnelli Family.
The two joint-venture companies are GM-Fiat Worldwide Purchasing BV, with
operational headquarters in Ruesselsheim, and Fiat-GM Powertrain BV with operational
headquarters in Turin. These two companies mirror the respective structure of the parent
companies and started to officially operate on 1 January 2001. Such JVs play a role of
considerable importance with respect to full manufacturing cost: in fact the weight of
purchasing and manufacturing of the powertrain systems represents about 80% of the
whole vehicle manufacturing cost.
The alliance is geographically limited to South America and Europe. This is due to
the fact that in North America there isn’t presently any ‘strategic room’ for such
initiatives, since GM does not suffer particular competitive pressures. Vice versa,
Latin America represents a market which the industry competitors judge very relevant for
its growth potential, while in Europe competition has become particularly strong and the
alliance aims at achieving a cost leadership.
The establishment of a 50/50 joint-venture to manage purchasing has been made
easier, since the amount of purchasing costs of the two companies was basically the
same.
Alongside the establishment of the two above mentioned JVs, an agreement of
cooperation in financial services was signed, plus common initiatives in many other
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A. Camuffo and G.Volpato
functional areas, such as information technology, logistics, quality, R&D,
engineering, etc.
The main objective of the agreement, as for all the other mergers and acquisitions
carried out in the automobile industry over recent years, is cost reduction: when such
agreement operates at full pace it should allow the two companies to save on the whole
€2 billion. In fact the motto of the agreement is: “Allies in costs, competitors in the
markets”.
With respect to purchasing activities, Fiat Auto has already declared that it achieved,
thanks to this JV, the first positive results by the end of the year 2000.
2.2 The legal and financial aspects of the agreement
Taking into account that the agreement between the two partners involves mainly the
manufacturing areas, from a commercial standpoint the various divisions managed by the
two automakers will continue to operate separately in Europe and in Latin America. This
means that, from the perspective of General Motors, the divisions involved are basically
Opel, Vauxhall, Saab and Chevrolet (the latter for Latin America); while for Fiat, the
divisions involved are those directly controlled by Fiat Auto – Fiat, Alfa Romeo and
Lancia. The strategic industrial alliance with General Motors has implied, during the
year 2000, a reorganisation of the company structure in the Fiat Automobile Sector. Since
1 July 2000 Fiat Auto SpA (now Fiat Auto Partecipazioni SpA) has de-merged its
operational activities, which have been conferred to a new head company Fiat Auto
Holdings B.V. At the same time General Motors Corporation has acquired a stake in Fiat
Auto Holdings B.V. of 20% and Fiat has acquired a stake of approximately 6% in
General Motors Corporation itself. The considerable gain generated by the sale of 20% of
Fiat Auto Holdings B.V. equity to General Motors has allowed Fiat to launch many
initiatives of industrial restructuring and capital strengthening of the company, which will
be mostly completed in 2001, for which some non-current costs have been provided.
The equity swap did not take place at market values, but rather on the basis of the
evaluation of the company branches which have been conferred. By considering the
market prices at that time, the operation meant that the whole equity of Fiat Auto was
estimated at about US$12 billion (i.e., about 1.5 times net equity). Such an estimate also
corresponds to the market capitalisation of the whole Fiat group (of which Fiat Auto
represents about half in terms of sales), before the rumours of imminent agreements
triggered upward speculation.
As previously stated, the equity of the two joint-ventures – GM-Fiat Worldwide
Purchasing BV and Fiat-GM Powertrain BV – is divided 50/50 between the two partners.
Additionally, the two companies have, respectively, a Chairman appointed by GM and a
CEO appointed by Fiat Auto and vice versa. Furthermore, the operational headquarters is
located for the first JV at the headquarters of Opel and for the second JV in the Mirafiori
industrial complex in Turin (previously headquarters of mechanical activities), where the
Fiat Auto headquarters is also located.
Such perfect symmetry, which we will discuss further later, underlines the perfect
parity between the two partners. They have deliberately limited the scope of the
agreement so that, even taking into consideration the economic and industrial weight
involved, the two partners were able to overcome the perception of an ‘acquisition
disguised as agreement’ of Fiat Auto by General Motors (see Table 1).
Partnering in the global auto industry: the Fiat-GM strategic alliance
Table 1
341
General profile of Fiat Auto and GME/GM Latin America
Fiat Auto Holdings B.V. – 2000 (1)
GM Europe and Latin America – 2000 (2)
Employment
Unit
74,292
Employment
Unit
105,550
Car Production
Unit
2,324,900
Car Production
Unit
2,273,157
Sales and Revenues
(€ Mn)
25,361
Sales and Revenues
(€ Mn)
33,596
Operating Income
(Loss)
(€ Mn)
44
Operating Income
(Loss)
(€ Mn)
n.a.
(Our conversion: 1 € = 0.97 $)
Source: (1) Fiat Auto, (2) GM Annual Report 2000
In the beginning, when the terms of the agreement were not fully known, the economic
observers, mainly the US media, tended to characterise the alliance in such a way. In
reality the juridical agreement rules out the inevitability of a final acquisition of Fiat Auto
by General Motors. It is provided that Fiat can sell into the market, between
three and a half years and nine years after signing the agreement, the remaining 80% of
Fiat Auto Holdings B.V. It can do so by having its value estimated by three financial
institutions for the definition of a fair market price, and also offering the package to GM,
which has the ability to exercise a priority option only by offering a price which is not
lower than any other competing buyer. Technically it is a ‘put’ clause, while the ‘call’
clause to it, in favour of GM, is not entailed. The right to purchase first will go to GM;
however if the fair market price defined by the two companies is not considered
satisfactory by Fiat Auto, it will be able to sell the package to a third party.
Due to the manner in which the JV has been structured with respect to industrial and
manufacturing considerations, a new competitive entity emerges which can be compared,
albeit virtually, to the aggregation of the activities of General Motors, in Europe and in
Latin America, and Fiat Auto. Such an entity ranks fifth in the international ranking of
vehicle manufacturers, with a production level of approximately five million vehicles and
an international manufacturing potential which offers considerable opportunities
(see Tables 2–6). Hence, it must be underlined that the main consequence of such an
agreement features typically industrial contents, with cooperation limited to the so called
‘up-stream’ activities, while ‘down-stream’ activities (marketing, distribution, etc.) will
remain rigorously separated and autonomous. The only exception is with the Alfa Romeo
brand, which will be considered shortly.
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A. Camuffo and G.Volpato
Table 2
Fiat Auto and GM assembly plants in Europe
Fiat (1)
Plant
General Motors (2)
Models
Plant
Models
Arese (Italy)
Fiat Seicento Elettra,
Fiat Multipla Ibrida
Bochum (Germany)
Opel/Vauxall Astra,
Zafire
Cassino (Italy)
Fiat Bravo/a (to be
replaced by Stilo),
Fiat Marea
Eisenach (Germany)
Opel/Vauxall Astra,
Corsa
Melfi (Italy)
Lancia Y, Fiat Punto
Ruesselsheim
(Germany)
Opel/Vauxall Omega,
Vectra, Cadillac
Catera
Termini Imerese
(Italy)
Fiat Punto
Antwerp (Belgium)
Opel/Vauxall Astra
Pomigliano d’ Arco
(Italy)
Alfa Romeo 145, 146,
147, 156 +
Sportwagon
Zaragoza (Spain)
Opel/Vauxall Corsa,
Tigra
Mirafiori (Italy)
Fiat Punto/Van,
Panda/Van, Fiat
Marea, Multipla
Szentgotthard
(Hungary)
Opel/Vauxall Astra
Rivalta (Italy)
Lancia k, Lybra, Alfa
Romeo 166
Warsaw (Poland)
Opel/Vauxall Vectra
Tichy (Poland)
Fiat Seicento/Van
Azambuja (Portugal)
Opel/Vauxall Corsa
van, Combo
Bielsko-Biala
(Poland)
Fiat 126, Uno/Van,
Palio Weekend, Siena,
Punto, Bravo/a (to be
replaced by Stilo)
Torbali (Turkey)
Opel/Vauxall Vectra
Bursa (Turkey)
Fiat Palio/Weekend,
Siena, Doblò, Tipo,
Uno, Bravo/a (to be
replaced by Stilo),
Marea, Ducato
Luton (UK)
Opel/Vauxall Frontera
Ellesmere Port (UK)
Opel/Vauxall Astra
Trolhattan (Sweden)
Saab 9-5, 9-3
Source: (1) Fiat Auto, (2) GM Annual Report 2000
Table 3
Fiat’s joint ventures in Europe
Sevel Nord & Sevel South (1)(Fiat 50% – PSA 50%)
Plant
Plant
Valencienne (France)
Fiat Scudo (van), Ulysse, Lancia Z
Val di Sangro (Italy)
Fiat Ducato
Source: (1) Fiat Auto
Partnering in the global auto industry: the Fiat-GM strategic alliance
Table 4
343
Fiat Auto & GM models produced by other car manufacturers
Plant
Models
Chivasso (Italy), Ownership of Maggiora
Fiat Barchetta
Turin (Italy), Ownership of Bertone
Fiat Punto Cabriolet
Turin (Italy), Ownership of Bertone
Opel (Vauxhall) Astra Cabriolet
Grugliasco (Italy) Ownership of Pininfarina
Alfa Romeo GTV Coupé and Spider
Source: Fiat Auto for Fiat Auto models, GM Annual Report 2000 for GM models
Table 5
Fiat Auto and GM assembly plants in South America
Fiat (1)
Plant
Models
Cordoba (Argentina)
Fiat Siena
Betim (Brasil)
Fiat Bravo/a, Fiorino,
Marea/Weekend,
Palio/Weekend, Siena,
Strada Pick-up,
Uno/Van, Ducato,
Siena
General Motors (2)
Plant
Models
Chevrolet Corsa,
Rosario (Argentina)
Suzuki Vitara
Gravatai (Brasil)
Chevrolet Corsa Wind
Sao Caetano do Sul
(Brasil)
Sao Jose dos campos
(Brasil)
Chevrolet Astra,
Corsa, Vectra
Chevrolet Corsa,
Corsa pick up
Source: (1) Fiat Auto, (2) GM Annual Report 2000
Table 6
Fiat Auto and GM assembly plants in rest of world in partnership with other
car manufacturers
Fiat (1)
Plant
Models
Casablanca (Morocco) Fiat Uno, Siena, Palio
Cairo (Egypt)
Johannesburg (South
Africa)*
Mumbai (India)
Karachi (Pakistan)
HoChiMinh City
(Vietnam)*
Nanjing (China)
Fiat Siena
Fiat Uno, Siena, Palio,
Palio Weekend
Fiat Uno, Siena,
Siena/Weekend, Palio
Rst (Autumn 2001)
Fiat Uno
Fiat Siena
GM (2)
Models
Opel/Vauxall Astra,
Corsa.
Rayong (Thailand)
Opel Zafira
Shangai (Cina)
Buick Sail
Plant
Halot (India)
South Africa
n.a.
Egypt
n.a.
Fiat Palio Rst
(Autumn 2001)
* = licensees
Source: (1) Fiat Auto, (2) GM Annual Report 2000
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3
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The objectives of the agreement
3.1 Short-term objectives
As previously highlighted, the objectives of the agreement are based upon industrial
considerations and will focus mainly on cost reduction and product quality enhancement,
an objective which can be achieved very rapidly through a centralised reorganisation of
parts and component purchasing activities. In fact purchasing can be rationalised further,
thanks to common design of powertrains used in different models and to a reduction in
their number, and to the usage of common parts and systems (common ‘architectures’ –
see definition in 3.2). Already in the purchasing of parts and materials for manufactured
models it will be possible to obtain some economies, thanks to greater bargaining power
with suppliers (in fact purchasing volumes are doubled). It is an aspect which cannot be
undervalued, even under the psychological profile. In fact, the integration of procedures
of different companies always poses a range of difficulties, hence it is very important that
the agreement rapidly generates positive results in order to reinforce commitment by the
two parties and to demonstrate the validity of the initiative as a whole. A considerable
share of the difficulties encountered by many ambitious mergers between different
companies is that they clash with the fact that expected results from such initiatives
follow long and delicate processes of integration. It is not unusual that the difficulties
which arise at the beginning of such integration processes are so relevant as to stop or
diminish the realisation of the project as initially defined.
Among the short-term objectives which can be mentioned are those aimed at the
commercial relaunch of the Alfa Romeo in the North American market. The commercial
opportunities, witnessing the intrinsic value of the Alfa Romeo brand, could multiply. In
May 2001 an agreement has been sealed for the General Motors plant in Rayong, which
assembles the ‘Zafira’ model, will also assemble the ‘156’ Alfa Romeo model “to serve
the Asia-Pacific markets. The deal gives Fiat relatively easy access to local production
facilities for the many markets in the region, still protected by various measures, to
encourage local assembly”.
3.2 Medium and long-term objectives
Obviously the long-term objectives appear even more stimulating and potentially
important on the competitive side. The match is played in the hard ground of managing to
mediate two apparently contrasting needs.
On the one hand is the need to adjust to the commercial and marketing traits of the
individual ‘brands’, for example by providing different contents to the models marketed
under the Pontiac brand from those marketed under the Chevrolet brand for General
Motors, or to models marketed under the Lancia and Alfa Romeo brand by Fiat Auto.
This example could also apply to different national markets which, notwithstanding the
globalisation process, require products expressly suitable to local specificities. In this
respect one should consider for example that, given the different ratio between the cost of
automobiles and the cost of labour among countries with a high rate of industrialisation
and emerging countries, a small vehicle, which in a high-motorisation country would be
typically used as a second car for individual use, must be configured as a family car (and
perhaps even be driven by a chauffeur) in a low-motorisation country.
Partnering in the global auto industry: the Fiat-GM strategic alliance
345
On the other hand is the need to exploit, as much as possible, the scale and scope of
economies through the integrated development of new technologies and the extended
commonality (even for different models) of materials and components ‘under the skin’,
which do not affect the traits of the brand in the eyes of consumers.
Such integration of opposite needs has already been attempted in many instances by
automakers. But, until now, the results did not appear fully satisfactory, particularly when
the markets feature marked differences such as, for example, the North American and the
Western European market. Instead the commonality of parts appears much more suitable
for integration if the specific traits to be maintained mainly relate to differences between
models of different brands, but to be marketed in the same markets. Fiat Auto, for
instance, managed to achieve one of the most successful cooperative development
initiatives in 1984, with Alfa Romeo (which did not belong to the Fiat Group at that time)
and Saab. The project, named ‘Tipo 4’ (Type 4), benefited from the common design
elements of four models with significant part commonality. However, each model was
capable of maintaining the necessary individuality to market successfully in the superior
saloon segment, belonging to four different brands. The initiative involved the ‘Thema’
model for Lancia, the ‘9000’ model for Saab, the ‘164’ model for Alfa Romeo, and the
‘Croma’ model for Fiat. All models individually obtained commercial success and
provided a sensible contribution to the profitability of each automaker [10].
It is hoped then that such precedents can inspire the two partner automakers in the
study and development of common parts and systems (‘architectures’). Towards this end,
one should note that General Motors and Fiat Auto made the prudent choice to assign
integration objectives not to all brands and all markets, but to only the main divisions and
markets in Europe and in Latin America. It is a wise limit which might allow the partners,
jointly or individually, to accumulate experience for any later and more ambitious goals.
As a matter of fact the technological advances obtained both on the Information &
Communication Technology (ICT) and on the integration of mechanic and electronic
technologies used in parts is opening up new and important possibilities [11–13]. On the
one hand ICT is considerably easing co-design activities among partners interested in
developing common activities, accelerating the forms of data transfer and the testing of
different solutions for experimentation. On the other hand there is progress on a daily
basis of the possibilities of making the behaviours of vehicle systems adaptive. As an
example, one should look at engine variable phasing, gearshifts which can operate both
automatically and manually-sequentially, and variable suspensions, to realise that the
possibility of offering customised solutions is growing considerably albeit using the same
design framework.
Initially the two partner Groups thought in terms of common platforms which are
meant as standardisation of road handling and performance, with limited room for brand
characterisation. Later on they realised that following the path of common platforms did
not allow the required flexibility towards brands. Hence, they decided to pursue a
strategy defined as common ‘architectures’: this means that the two Groups will work on
a highly modular underbody, capable of absorbing length and width variation and
different front-ends and rear structures, in order to achieve differentiation on vehicles to
the full satisfaction of the need to customise brands.
This facilitates the definition of common parts because they work on sub-systems
rather than on highly complex and very rigid systems such as the platform itself. The two
Groups will work on all vehicle segments, seeking the highest possible unification on all
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architectures, but developing specific solutions for the individual brands, aimed at
obtaining the desired performance in each brand, in full consistency with the strategy of
the Fiat-GM alliance which states: the two automakers are allied in costs but remain
strong competitors in the marketplace.
Although trying to identify important synergies in components and systems, common
initiatives will be carried out by maintaining and enhancing the specific traits of each
brand. For example, by adopting a suspension system quite specific for each brand, if
required by a partner.
A common architecture enables the development of a knowledge base for the more
complex parts of a vehicle. This knowledge can be applied to future vehicles. The
carrying out of such activities fosters the attainment of important advantages with respect
to costs, achieving at the same time excellent technical results. Within these common
architectures there will be many areas of differentiation. This will lead to the
development of specific elements (systems/subsystems) aimed at obtaining different
performance levels and enhancing the points of excellence featured by each brand.
Examples of hard differentiation will stem from the use of:
•
different types of suspensions, and within the same suspension from the different
tuning of some elements or from the presence of non common subsystems studied to
allow different performances
•
different engine ranges and different coupling with gearboxes and transmissions will
allow them to guarantee in some cases the features of sportiness and in other cases
those of comfort
•
different types of transmission (front or four wheel drive)
•
different sizes in terms of length and width.
With such logic the assembly plants of both partners will not be modified. The scale
economies will in turn be ensured by the manufacturing of parts and common systems in
large quantities, which will be the higher, the stronger the synergies identified across the
two partner Groups.
3.3 Synergy savings
According to calculations proposed by the partners themselves, the economies deriving
from the integration process should begin to materialise in 2001 and continue to 2005, for
an expected total saving of €2 billion (Figure 1). This is based on the economies enabled
by the plan of convergence in engines and transmissions and then by common
architectures. This saving, if related to the sum of revenues highlighted by consolidated
balance sheets of Fiat Auto and GME in 2000 (equal to about €53 billion), would be
about 3% (if one also includes GM in Latin America). It is a significant value, equal to
the rate of profitability of an automaker which financial analysts would certainly define
as ‘in good health’.
Partnering in the global auto industry: the Fiat-GM strategic alliance
Figure 1
347
Synergy savings (euro billion)
Source: Fiat
To put these savings in perspective, consider the following. In 2000, the entire
automotive division of General Motors (with production of 8.5 million units) realised a
profit of $2.3 billion (approximately €2.4 billion) on sales of $148.1 billion
(approximately €150 billion). As one can see, a total saving for Fiat Auto and GME of €2
billion would represent a considerable amount and would facilitate strategies for price
reductions, increased market share, and overall increased profitability. In turn, improved
profitability for each partner would result in investment in quality enhancement programs
and strengthening weak segments in the product offerings of Fiat Auto and GME.
With respect to the break-down of cost economies, the data provided by the two
partners highlight significant savings derived from the synergies in purchasing (in the
calculation of savings the category ‘Purchasing’ does not include the purchasing of parts
and components linked to the development of ‘Powertrains’ and of ‘Architectures’),
which will materialise in the early stages of the cooperation. Later on, albeit representing
the largest source of savings in the timeframe considered, even the remaining savings
should become considerable, mainly due to the plan of convergence of engines and
transmissions and the sharing of architectures. It is significant that by adding purchasing
activities to Powertrain manufacturing one obtains on average 80% of the total
manufacturing cost of a vehicle, while the remaining 20% corresponds to the activities of
final assembly of the product (Figure 2).
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A. Camuffo and G.Volpato
Figure 2
Purchasing and powertrain impact on costs
OEM V.A.
20%
Powertrain
20%
Purchasing
60%
Source: Fiat
4
The joint-venture for purchasing
Purchasing costs represent over 70% of the total manufacturing costs of a vehicle. This
implies that the purchasing function has a strategic relevance in the automobile industry.
In order to face these needs, Fiat Auto and GM have rationalised purchasing activities
through the establishment of a company named GM-Fiat Worldwide Purchasing B.V.,
with headquarters in Ruesselsheim, in Germany. Each partner participates equally in the
company, which has over 2,000 employees. The company operates on a worldwide scale
but with the objective of supplying manufacturing and assembly plants directly managed
by Fiat Auto (this means the plants in South Africa, Morocco, Egypt, India and China)
and by General Motors in Europe and in Latin America. The whole amount equals
€33 billion, of which €17 billion is spent to feed the assembly lines of GM in Europe and
Latin America and €16 billion for those of Fiat Auto. On the whole, the purchasing value
is one of the highest in the auto industry (Table 7) after the global one of General Motors,
which is estimated at US$68 billion (about €70 billion).
Table 7
Cumulate purchasing turnover (2000)
Fiat Auto Worldwide
Purchasing
GME & Latin American –
Worldwide Purchasing
Europe (Bn Euro)
13
14
Latin America (Bn Euro)
3
3
Total (Bn Euro) 33
16
17
Source: Fiat & GM
The adoption of a single organisational structure and of a common purchasing strategy
appears rather simple for the two partners, since they both have developed an approach to
global sourcing which has the same underlying philosophy. Moreover, the total number
of suppliers credited from the beginning by the two industrial groups featured a share of
common suppliers equal to 70%. Clearly this share will grow larger, mainly in terms of
share of value of sales carried out with the two partners.
Further developments are expected, but only in a later stage and from the
development of a marketplace such as the one being established for component
Partnering in the global auto industry: the Fiat-GM strategic alliance
349
purchasing in the North American market through Covisint (this is a B2B company
whose participation, in addition to GM, include Ford, Daimler-Chrysler, PSA and
Renault and which should play a key role in the global rationalisation of procedures of
purchasing management for automakers and their suppliers). GM-Fiat Worldwide
Purchasing B.V. manages the purchasing strategy of the two groups; Fiat Auto conferred
all its purchasing activities to it while GM conferred the purchasing activities relative to
Latin America and Europe, in order to have the maximum degree of market
comparability with Fiat Auto. In these areas the newly established company has been
granted the exclusive right of purchasing. The JV is organised on a regional basis; the
headquarters is in fact is in Germany. The chairman, Robert Socia, comes from GM,
while the CEO, Tommaso Le Pera, comes from Fiat Auto. The JV then has two regional
organisations, one for the Latin American market (whose head comes from GM and was
previously responsible for the whole market for GM), and the other one in Europe (run by
a Fiat manager). Alongside such organisational structure there are staff units, unique for
both branches; they have cost accounting and management, IT and human resources,
legal services and external relations.
The JV is a company which employs about 2,200 people, of which 1,400 come from
GM (GMC, Opel, Vauxhall, Saab) and 800 from Fiat Auto.
Clearly such a complex initiative had to be communicated to the different ‘stakeholders’. Firstly to those directly involved, that is the suppliers. The basic message which
the two partners intended to communicate is that the alliance represents a strategic
opportunity for the suppliers as well, since they will have the chance to considerably
increase their sales without having to bear huge marketing costs. However, such an
alliance will continue to favour those suppliers who already stood out in terms of quality,
timeliness of deliveries, price competitiveness and plans for cost reduction. Such
alliances will also push towards component standardisation, favouring cost reduction and
volume increases. The two partners stress the tight cooperation between the design and
purchasing functions (i.e. between those who must design the solution and those who
must make it available).
Prior to the agreement, the purchasing structure of Fiat Auto was a global
organisation with managers with worldwide responsibility in the Italian headquarters. In
individual countries there was some decisional autonomy, based upon the type of product
and the availability of suppliers.
5
The joint venture for Powertrain
The activities related to the design and manufacturing of powertrains (groups: engine,
transmission) have been mandated to Fiat-GM Powertrain B.V., a company equally
controlled by GM and Fiat Auto. The company is headquartered in Turin (mirroring the
situation for GM-Fiat Worldwide Purchasing, this company has a Chairman from Fiat,
Nunzio Pulvirenti, and a CEO from GM, Daniel Hanckock) with many plants and R&D
centres in Europe, and with an employment of 25,500 people (Table 8). This company
has an important task since everyone recognises that, together with body design, the
powertrain represents the distinctive factor in the personality and the commercial value of
a brand. It is also a delicate task, since the synergies that the two partners aim to achieve
require a significant amount of work and of convergence towards a compact package of
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solutions in respect of: engines (gasoline, diesel and alternative propulsion) and
transmissions (automatic, manual and AWD). Clearly, such a package of solutions will
be calibrated to the needs of the two partners, but it is worthwhile noting that the new
company also has the objective of positioning itself as a supplier for other automakers,
both those belonging to the General Motors galaxy (allies like Suzuki) and to companies
completely independent from Fiat and GM (in this respect the press has already talked
about an interest by Rover-MG).
Table 8
Italy
Fiat-GM powertrain employee distribution
9,500
Germany
4,500
Brasil
4,000
Austria
2,000
Sweden
1,500
UK
1,000
Hungary
1,000
Turkey
1,000
Poland
1,000
Total
25,500 (of which Fiat Auto has 14,000 and GM 11,500)
Source: Fiat & GM
On the whole, this implies converging from a set of 32 distinct families, 16 for both GM
and Fiat, to a single package of 19 families, almost cutting current supply in half. Luckily
for the two partners, the competences developed in the past on this kind of technology
appears rather complementary, with Fiat Auto in a relative leadership position in diesel
engines and GME in a relative leadership position in gearboxes. Therefore, the
convergence process should be carried out quickly, with the result being an important
innovation process for the partners who will end up with the best elaborated by both.
The strategic mission aims at achieving competitive advantages in terms of leadership
in costs, in quality, in performance and in product innovation. In organisational terms, an
industrial plan has been mapped out for convergence on gasoline and diesel engines and
transmissions, with resulting competitive costs, performance and quality; all of this
taking into account the different product families, the different brands and the different
needs of customers. Such a plan is expected to be completed by the end of 2004.
The strategy of the new company aims to achieve improvements in the following
areas:
•
product differentiation
•
reduction in development costs
•
optimisation of manufacturing capacity
•
reduction in time to market.
The key objective is continuous improvement in the competitiveness of engines and
transmissions through continuous incorporation of product innovations and reduction of
their total cost. These benefits will be transferred to the mother companies by the JV,
whose revenues for these sales will correspond mainly to the costs sustained.
6
Implications of partnering
International strategies require heavy investments that imply financial risk. If this risk is
large, exclusive ownership of assets (and hierarchical transactions) become less efficient
Partnering in the global auto industry: the Fiat-GM strategic alliance
351
and there are strong incentives for OEMs and suppliers to engage in bilateral
relationships, based on reciprocal contract obligations (or property right exchanges) and
aimed at cooperation and risk sharing [14].
Furthermore, organisational complexity stemming from internationalisation, fast
changing market trends, and new product and process technologies, seek organisational
capabilities and learning processes that cannot be fully available to a single OEM or
supplier.
Thus, M&As and alliances in the auto industry are not only means to reduce and
share financial risks, but also devices for increasing knowledge bases and count on a
wider set of organisational capabilities [15–17].
The FIAT-GM alliance is peculiar and interesting exactly because it bets on
this ‘double effect’: risk sharing and knowledge base enhancement for both partners.
Counter-intuitively, the balanced structure and ‘non invasive’ character of this alliance
could foster cooperation and facilitate the achievement of synergies and mutual
advantages.
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