What are the underlying problems facing Fiat’s car division?
Fiat is an Italian company with its business once solely concentrated in Italy. After the post war period, Fiat with the help from Italian government became the number one automobile manufacturer in Italy. Fiat enjoyed that position for almost 50 years without any threat from other European players. However, decades of doing business with ease and with the help of Italian government had created operational, strategic and managerial inefficiencies within the company. For almost 5 decades even with its huge success in the Western European market, Fiat never thought of expanding beyond the region. Finally, by the time it realized that it has started losing its market share in the Italian market as well as the European market, it was too late. Most of its competitors were already present in the major international markets. In a bit to expand its presence on a large scale beyond the Italian market, Fiat committed the second mistake by penetrating Latin America, Poland and Turkey and focusing less on the Italian market (Johnson 2006). Its business revenue from Italian market, therefore, suffered hugely. But its move into Latin America, especially the two largest Latin American countries - Brazil and Argentina, coincided with a time when these two economies were going through financial troubles. Therefore, Latin Americans had less disposable income in their hands, and they instead showed more interest in buying cheaper imported cars from the Far East than Fiat cars (Johnson and Turner 2006).
Capacity constraint is another problem that also created issues in the past. In 2000, Fiat had a total capacity of manufacturing 2.2 million cars from its European facilities (Johnson 2006). Most of its competitors had capacities far more than that of Fiat. Competitors were able to enter the new market easily and fulfill the increased demands from their existing facilities. This not only improved the capacity utilization of those companies but also improved their operating cost. Thus their market share, revenue and profit margin improved. However, Fiat took some contradictory decisions. As most of its facilities were underutilized in 2000, Fiat started closing plants to improve the capacity utilization and thus improve its operating margin. In this process within the next 2 years, Fiat actually reduced its European capacity from 2.2 million to 1.9 million cars (Johnson and Turner 2006).On the other hand, as the business shrunk in Italy and other markets in which Fiat was operating, it made attempts at expanding its business. It entered into newer markets like Turkey and Poland and even some other Eastern European markets. However, even if there were demand for cars from those markets, Fiat did not have the required capacity to fulfill the demand in a timely manner. This contradictory strategy created revenue and market share loss in almost all the markets in which it operated.
The future of Fiat is still reeling under the shock of the past mistakes it committed. Fiat made a huge mistake in between 1995 and 2001 by spending only US$45 billion on the Research and Development of the car division while its competitors like Volkswagen spent about five times more on the same (Johnson and Turner 2006). The result that ensued was a distinct gap in the product portfolios of Fiat with its competitors. While Volkswagen enriched its product portfolio by introducing mini vans and SUVs, Fiat remained complacent with its image as a manufacturer of small cars. Thus, Fiat notably failed to cash in on the rising market of mid-sized cars and MUVs in the Western European Market. Though Fiat tried to make a late entry into the SUV and MUV market, but it encountered a spectacular failure there as its competitors like Volkswagen and Ford already had an established presence in the SUV segment. Besides, Fiat being slow to enhance the quality of its products fell far behind its rivals in terms of quality.
One of the problems facing Fiat is the family-owned business structure. Fiat management is controlled by the Agnelli family that has 30.4% stake in the company (Clark 2012). The problem with family type of business is the passing of the ownership of business from one generation to another. The business acumen present in the leader of one generation might not be there in the leader of another generation. The generational transmission of business leadership, therefore, poses many problems for a family run company. Fiat is not an exception. For example, Fiat suffered the consequences of poor decision-making by its leaders in the beginning of this century. Gianni Agnelli, who was a chairman of Fiat between from 1966 to 1996, was often criticized for not taking tough managerial decisions in times of need. Furthermore, family business also gets affected by the deaths of the leaders, and Fiat too got affected when Giovanni Alberto Agnelli, who was to become a chairman after Cesare Romiti, and Umberto Agnelli, who was a chairman of Fiat for 16 months, died all of a sudden (Clark 2012).
Finally, Fiat in a bid to revive its business went for a partnership with General Motors. General Motors showed interest in buying the company. This intention created problem between Fiat and the Italian government as Fiat was a symbolic brand of Italy. Fiat soon started falling out of favor from the Italian government. This coupled with its reducing revenue and increasing losses made matters worse for Fiat. GM soon understood that investing in Fiat was a bad choice and soon discarded the decision to buy Fiat (Johnson 2006). Fiat at the end of 2002 was making heavy loss from its operations and got no money from any investors to revive the operations. Fiat was approaching towards a possible bankruptcy.
The implications of Fiat for ‘Doing Business in Europe’
Business Environment in Europe
Unlike most other areas, Europe is a market remarkably different from other markets. Most of the big markets like the North American economy are dominated by one country and that is USA. Similarly, Asian Economy is dominated by four countries, namely, China, Japan Korea and India (Rae 2013). However, the same cannot be said for the European economy which might be very large overall, but is divided into small fragments that make the whole of it. The total European Union GDP is bigger in size than that of the US GDP. European economy has gone through a lot of changes over time.
European Business Environment over the Years: Economic Factors and Fiat
Western Europe developed its economy is silos after the World War II. After the end of the World War II when USA started opening its market by using the global market tactics to improve its growth prospects and the size of its economy, Western Europe had done exactly the opposite. Between 1950 and 1980, most of the Western European nations mainly concentrated on their domestic markets. Especially, the three biggest economies of Europe - Germany, France and Italy were more focused on the in-house growth philosophy than the open market philosophy (Weidenfeld 1981). During that time most of the companies in those countries developed with the help of government support. If we look at the example of automobile companies, we will see that almost all the large European automobile manufacturers were selling most of their vehicles in their own countries. Fiat was no exception and till 1980s, almost 80% of Fiat’s sales came from the Italian market only. The same can be said for Daimler, Volkswagen and other European brands. However, from 1980s onwards the situation started changing. Britain was the first country to go ahead with globalization, and it opened its market to the outside world in 1984 under the leadership of Margaret Thatcher. The GDP growth rate of Britain went up after the globalization. The unemployment rate in Britain was also less than most other Western European countries. Soon a whole new trend of globalization took place in the whole Western European market (Rae 2013). By 1990s, most of the European market opened up. Also, during this time the Western Europe countries came together to create the European Union. This opened up a huge opportunity for the EU companies to expand their business beyond their national boundaries as all the member countries of EU had free trade agreement between them. During that time most of the automobile companies started expanding their business beyond their nations (Rae 2013). For example, Peugeot, Mercedes, Volkswagen and Renault reached out to other countries for business expansion. Fiat, however, did not respond to the change quickly being complacent about its market position in Italy. However, within few years of establishment of the European Union, almost all the other automobile companies entered into the Italian market and Fiat’s market share dropped by 25% within 5 years.
The creation of the European Union changed the economy of doing business in the region completely. From being a very conservative, nationalized and segmented business environment, EU became the largest open market where fierce competition to gain market share existed. Fiat could not perceive the impact of the changed market scenario and missed the boat due to which Fiat is now struggling to get back to its past glory.
Western Europe: Political Factors
Political factors played a big role in the business of Europe. After the war, the EU countries operated on nationalized basis, and they opened up their business based on political diplomacy. For example, UK had a good relationship with USA, so UK opened its market to USA for many goods and products including automobile as early as 1960s (Rae 2013). Similarly, Spain had good political ties with Italy, so the Italian and Spanish markets were open to each other for business long time before the globalization or EU came. On the contrary, Germany and France did not share a good political relationship over the years and rarely conducted business negotiations with each other (Rae 2013). Political relationships made the European market quite fragmented. This consolidated certain brands in certain markets and made them non-existent in others. For example, L’Oreal was the largest selling cosmetic brand in France, Spain and Italy but was almost non-existent in Germany and other Scandinavian countries till early 1990s. The creation of EU completely changed the way of doing business in Europe.
Fiat was the biggest brand in Italy and Spain. Before 1990s, the Italian government created an environment that not only supported the growth of Fiat but also created barrier for other automobile companies to flourish in the Italian market. That way Fiat was able to maintain its numero uno position in the Italian market for so many decades. However, when Italy joined the European Union, it came under the pressure from the other EU countries to lift the trade barriers which gave unfair advantages to the Italian companies like Fiat. This political pressure from the other EU members forced the Italian government to do away with the legislations favorable to Fiat (Clark 2012). Fiat started getting competition from other automobile companies in the Italian market on a level field. Fiat being not ready for the change suffered huge losses from the late 1990s.
Western Europe: Cultural Factors
Cultural factors, in case of Europe, play a major role when it comes to doing business. Almost all the European countries cherish distinct culture. For example, French and German people are very much proud of their culture and love their own products and organizations. It is, thus, culturally not easy to penetrate into the German and French market easily for a company not from that country. On the other hand, Italy, Spain, Portugal, and Britain are more liberal culturally and can embrace products from other regions quite easily (Maria 2012). It is, therefore, easy for a company from another region to expand its business in those countries.
This factor also played a big role in the failure of Fiat. When Mercedes or Volkswagen came to Italy, the Italian people easily embraced the new brands and cars. They loved their own brand (Fiat) but they were also ready to experiment. On the other hand, when Fiat went to France, it failed miserably there as the French were not open to the idea of buying a car not made in France (Clark 2012).
Emerging European Economies
European economy has two distinct groups of countries. Western European economies or the European Union members are the countries which are the traditional big economies, and they had higher GDP growth in 1980s and 1990s, but since then the growth has plummeted. Currently, most of the Western European countries are seeing minimal growth rate (Bojadzieva 2005). The companies doing business in these countries alone are, therefore, facing a growth challenge.
However, Eastern European countries were historically underdeveloped than its Western neighbors. In recent years and after the globalization, these countries are witnessing higher economic growth rate. Due to the availability of cheap labor, a lot of companies are setting their manufacturing plants in those countries that are helping those countries to grow at a faster rate and also create employment. Countries like Poland, Croatia, Ukraine and Czech Republic are seeing almost 5% GDP growth rate (Bojadzieva 2005).
When the European Union was formed, most of the companies within the EU region first expanded within the EU. However, companies which were late to respond started losing ground. Fiat was a great example of that. What Fiat could have done during that time was to expand its small car business in those emerging economies where it not only would have found new customers for its small cars, but also setting up manufacturing facilities in those countries could have given Fiat access to cheap labor. The operating cost of producing a car would have reduced drastically for Fiat. Fiat can still do that as the emerging markets are yet not saturated with a lot of players, and there are lots of opportunities.
Research and Development in Doing Business in Europe
Europe is a developed market. The customers in that market are mature, and they have access to products of very high quality. It is, therefore, important for any company to not only produce products of world class quality but also improve on the quality continuously. Apart from quality, customers also seek for innovation and new features in the products (Felbel 2002). Companies capable of coming up with newer products continuously have historically done better than other companies in Western Europe.
The production of high quality, new and better products require research and development. It is, therefore, important for any company to invest substantially on the research and development to be successful in the European market. Most of the large automobile companies in Europe invest a hefty amount every year on the research and development. They may not get immediate return on the investment made but may get return in the long run when a better product comes out as a result of R&D. Fiat is one of the few companies to have reduced its R&D budget drastically between 1990 and 2002 (Johnson and Turner 2006). During that time the company was not able to come up with any new innovation and remained stuck with its existing products whereas its competitors launched many new products in the market.
Strategies and Support for doing business in EU
Before 1980s, there was an easy formula to do business in the Western European countries. Apart from being a company with great products, a company also needed political blessing to do business in a country successfully. However, that formula to do business changed during and after 1980s and also after the formation of the European Union (Felbel 2002). Now the European Union members are bound by the stability and growth pact. Also, they are bound by the free trade agreement for most of the goods and services. So the old formula of doing business successfully has changed. Now, there is a huge competition in every sector, and most of the sectors are dominated by a few big players holding the majority of the business in big economies like Italy, France, Germany, Spain and the United Kingdom (Felbel 2002). If a company only concentrates on one country, then that company may not do very well under the current circumstances.
Although we have mentioned in this article a number of times that the free trade agreements have created an easy way of doing business in other countries, but it is easier said than done. For example, in order to sell cars in France at a massive scale, Fiat may need to set up a plant in France. It is not easy for a company that has never operated in France to begin operation there. French has stringent labor laws and trade union practices markedly different from that of Italy. Even if Fiat sets up a plant in France and there is no barrier to do business, it will not be able to successfully conduct its expansion without the knowledge of business practices in France, local laws and legal barriers to business. Europe may seem a single large economy, but it is actually constituted of many culturally, economically and politically different economies and so doing business in Europe successfully is quite complex than doing business in other regions.
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