How Fiat found its sweet spot

The Italian company has a lot to offer Chrysler: style, value and a track record of a remarkable comeback.

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By Jeff Israely, contributor

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(Fortune) -- Whether the driver was Sophia Loren or Marcello Mastroianni, or just your average Giuseppe, the compact-but-curvy cinquecento (500) was Fiat's low-cost contribution to the aesthetic of Italy's dolce vita glory days of the 1960s. Reintroduced two years ago, the ever elegant-and environmentally much friendlier-Fiat Nuova 500 has become the symbol of the Turin automaker's long and grinding road back from the brink of insolvency.

Cited by President Obama as the last hope to save Chrysler from bankruptcy, Fiat appears to have rediscovered its sweet spot for designing models that are both affordable and easy on the eyes. The Presidential shout-out during last week's ultimatum to American automakers was of course about much more than aesthetics.

Obama's public endorsement comes more than two months after Fiat and Chrysler had unveiled the outlines of an eventual merger that would give the Turin-based company a major stake in the smallest of the Big Three in exchange for Fiat's know-how and technology in making practical, fuel-efficient cars.

It was probably more than mere coincidence that the Fiat-Chrysler deal was first announced on Jan. 20, just hours before Obama was sworn in as president, the launch of a new administration that not only would be greener, but also no longer had the luxury to idle as Detroit kept burning through cash and building yesterday's models.

The deal was in fact contingent on the new Administration's bailout plan, a top Fiat official said in a phone interview on Inauguration Day. Forging the deal during the Washington leadership vacuum was a gamble, though certainly a well-measured one: for Fiat so far has not offered to put up any hard cash for what would be a 20% to 55% stake in Chrysler.

Stepping swiftly into this window of opportunity may prove to be the latest deft touch from Fiat CEO Sergio Marchionne, widely hailed for the carmaker's turnaround. The Italian-born, Canadian-raised executive has streamlined what was a cumbersome management structure, while refocusing Fiat on its time-tested prowess of making stylish small cars--now with an eye on the environment too.

Focusing on green technology, the company's total fleet reached the top of Europe's list in 2008 for lowest emissions, giving off an average of 0.475 lbs of CO2 per mile. In addition to the celebrated return of the 500, Fiat has unveiled several other models--including the updated Panda hatchback and the versatile, minivan-like five-seater Qubo-that have been praised by industry insiders and European consumers alike. The Turin company also owns the Alfa Romeo brand, which, like Fiat, has long been unavailable in American showrooms. With the Chrysler deal that could soon change.

Founded in 1899 by wealthy Turin landowner Giovanni Agnelli, Fiat became both a key engine of Italy's postwar economic boom and an internationally recognized symbol of Italian style under Agnelli's jet-setting grandson, Gianni Agnelli. But by the 1990s, says Italian economist Fabiano Schivardi, the company had over-diversified and was run with a far too familial and burdensome management structure.

The deaths of Agnelli in 2003 and his younger brother Umberto 16 months later left the company's survival in serious doubt. That's when Marchionne was hand-picked by longtime Agnelli confidante Gianluigi Gabetti and John Elkann, then 28, Gianni Agnelli's grandson and heir to the family's business empire.

Elkann decided to reinvest family money into the car business, and give carte blanche for a company-wide overhaul to Marchionne, who had risen to the top of a Swiss-based quality control company and sat for several years on Fiat's board.

The new CEO had a three-pronged approach to turning the company around: clean house of top executives and middle managers who'd grown complacent in the final Agnelli years; forge limited partnerships with other automakers, including Tata in India; and above all, return to the core business of making affordable automobiles. "Now you have a base of top 30- and 40-something managers," says Schivardi. "They also bet on clean technology, which acquired major value at the moment Obama was elected."

Not surprisingly, Fiat too is suffering from a drop in sales as the auto industry reels from the global economic crisis, though the Italian government's new-car purchase incentives have helped cushion the blow.

Ironically, Fiat's relatively good health, and hopes that it may help rescue Chrysler, can be traced from the ashes of its last foray into Detroit. After averting bankruptcy with the help of top Italian banks, Fiat pocketed a $2 billion cash payout in 2005 from General Motors. The U.S. automaker, which had linked up with Fiat in 2000 in a joint-operating agreement and stock swap, was forced to pay the whopping sum to extricate itself from having to buy the then-struggling Italian company outright according to the terms of the original deal.

The current deal with Chrysler, which Obama wants to see finalized by the end of the month if the U.S. automaker is to qualify for the $4 billion of loans laid out by Washington, again seems to favor Fiat. With an initial stake of 20% in exchange for technology and senior-management attention, the Italians could see their share rise to as much as 55%, as Fiat gets access to Chrysler sales network in North America.

Though no monetary investment or debt risk for Fiat is envisioned at the outset, that would likely change if the Italians decide to commit to the merger. But there's something more important than money and perhaps even small-car technology that Fiat can offer Chrysler now: its own recent experience of how to turn around a failing business model. To top of page

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