Strategic Alliances - Fiat_Chrysler Alliance_Pranav Sharma

Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance i

SUMMARY

Organisations are increasingly forming strategic alliances with other firms in order

to improve their competitiveness. This dissertation provides an insight into

strategic alliances, examining the motives behind alliances and highlights the

beneficial opportunities offered by an alliance.

The recent Fiat-Chrysler alliance has been investigated to provide a better

understanding of strategic alliances and a case study analysis of Fiat has been

conducted to provide recommendations for its future strategy. The effect of the

global financial crisis on the automotive industry and its role in instigating

alliances between companies has also been studied. The analysis illustrated that

Fiat is a strong performer having a good product offering. It is operating within a

highly competitive industry and is affected by various external factors such as

legislation, environmental concerns and global economic condition.

It is concluded that a strategic alliance offers a number of advantages to

companies provided that right partners are selected. It is important to work

cohesively to achieve mutual objectives. The Fiat-Chrysler alliance has the

potential to offer several benefits to both parties. It provides the critical mass

required to reap benefits of economies of scale within the industry. It also reduces

product development cycles, makes available ready to use distribution channels

and increases product portfolio. Fiat can accomplish its potential by having an

efficient alliance with Chrysler and develop to be a market leader in its industry.

Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance ii

ACKNOWLEDGEMENTS

I would like to thank my project supervisor, Professor David Walker for the

support and guidance imparted throughout the course of this dissertation.

Especially for being flexible with the project meeting schedules and patiently

answering all my e-mails and telephone calls. Your knowledge and advice has

been invaluable.

I am also thankful to Dr. Andrew Tobias for his constant support and advice

throughout the MSc course always encouraging us to think from a new

perspective and to perform to the best of our ability. Many thanks to Janet Morris

for patiently and efficiently answering numerous queries and concerns.

I am grateful to David Nuttall, my former head of department at LDV Group Ltd,

for endorsing my application for this course and also for being an excellent

mentor. I am also grateful to Ian Bugby and Mark Hopkins, former project

managers at LDV, for assisting me with my workload whenever I was away from

work for course lectures and exams - it really did make life a lot easier.

I would like to thank my family for their constant affection, advice and

motivation.

Thanks to all my friends and classmates for their help, support (and much needed

distraction!) You all have really made this course a truly enjoyable and

memorable experience.

Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance iii

CONTENTS

CHAPTER 1: INTRODUCTION ..................................................................... 1

1.1 INTRODUCTION ........................................................................................... 1

1.2 PROBLEM SETTING ...................................................................................... 2

1.3 AIM AND OBJECTIVES ................................................................................. 3

1.4 LIMITATIONS / CONSTRAINTS ...................................................................... 4

1.5 ASSUMPTIONS ............................................................................................. 5

1.6 DISSERTATION STRUCTURE ......................................................................... 5

CHAPTER 2: LITERATURE REVIEW .......................................................... 7

2.1 STRATEGIC ALLIANCE ................................................................................. 7

2.1.1 Motives for Strategic Alliances .......................................................... 10

2.1.2 Types of Strategic Alliances ............................................................... 12

2.1.3 Main Challenges faced by companies ................................................ 14

2.2 ANALYSING THE EXTERNAL AND INTERNAL ENVIRONMENT ....................... 15

2.2.1 PESTLE Analysis .............................................................................. 16

2.2.2 Porters Five Forces ......................................................................... 18

2.2.3 SWOT Analysis .................................................................................. 23

CHAPTER 3: METHODOLOGY .................................................................. 25

3.1 CASE STUDY ............................................................................................. 25

3.2 DATA COLLECTION ................................................................................... 25

3.3 RESEARCH PROCEDURE ............................................................................. 26

CHAPTER 4: COMPANY DESCRIPTION- FIAT ...................................... 28

Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance iv

4.1 HISTORY ................................................................................................... 28

4.2 CURRENT STATUS ..................................................................................... 29

4.3 BRANDS AND PRODUCTS ........................................................................... 31

4.3 GLOBAL AUTOMOTIVE MARKET ................................................................ 34

4.3.1 Fiat Automobiles Performance .......................................................... 35

4.4 FIAT GROUP 2009 PERFORMANCE AND FINANCIAL ANALYSIS .................... 38

CHAPTER 5: ALLIANCE .............................................................................. 42

5.1 EFFECT OF THE FINANCIAL CRISIS ON THE AUTOMOTIVE INDUSTRY ........... 42

5.1.1 Effect of the Recession on Fiat ........................................................... 44

5.2 ALLIANCES WITHIN THE INDUSTRY ............................................................ 45

5.3 FIAT CHRYSLER STRATEGIC ALLIANCE ................................................... 45

5.3.1 Fiat Chrysler Alliance ..................................................................... 46

5.3.2 Motives for the Alliance ..................................................................... 47

5.3.3 Advantages to Chrysler ..................................................................... 49

5.3.4 Advantages to Fiat ............................................................................ 50

5.4 SIMILAR ALLIANCES WITHIN THE INDUSTRY .............................................. 52

CHAPTER 6: ANALYSIS AND DISCUSSION ............................................. 58

6.1 PESTEL ANALYSIS .................................................................................. 58

6.2 PORTERS 5 FORCES ANALYSIS .................................................................. 65

6.3 SWOT ANALYSIS ..................................................................................... 69

CHAPTER 7: CONCLUSION & RECOMMENDATIONS ........... ............... 75

7.1 CONCLUSION ............................................................................................ 75

7.2 RECOMMENDATIONS ................................................................................. 78

REFERENCES ................................................................................................ 80

Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance v

APPENDIX 1 ................................................................................................... 84

APPENDIX 2 ................................................................................................... 88

Table of Figures FIGURE 1: MOTIVES FOR STRATEGIC ALLIANCES ................................................. 12

FIGURE 2: PORTERS FIVE FORCES ...................................................................... 18

FIGURE 3: SWOT ANALYSIS ............................................................................... 23

FIGURE 4: GROUP STRUCTURE ............................................................................ 30

FIGURE 5: FIAT GROUP CURRENT PRODUCT MIX VS MARKET .............................. 33

FIGURE 6: GLOBAL AUTOMOTIVE INDUSTRY VALUE 2005-2009 .......................... 34

FIGURE 7: FIAT 2009 SALES PERFORMANCE ........................................................ 35

FIGURE 8: 2009 SALES SPLIT BY BRAND.............................................................. 35

FIGURE 9: FIAT CHRYSLER COMBINED MARKET SHARE .................................... 36

FIGURE 10: FIAT GROUP PERFORMANCE SNAPSHOT ........................................... 38

FIGURE 11:FIAT AUTOMOBILES PERFORMANCE (INCL. MASERATI AND FERRARI) . 40

FIGURE 12: TRADING PROFIT MARGIN ................................................................ 40

FIGURE 13: GLOBAL SALES DECLINED IN THE RECESSION .................................... 42

FIGURE 14: SALES DECLINED IN USA ................................................................. 43

FIGURE 15:SALES DECLINED IN WESTERN EUROPE .............................................. 43

FIGURE 16: FIAT 1ST QTR 2009 NET REVENUES .................................................. 44

FIGURE 17: EXAMPLE OF TECHNOLOGICAL BENEFITS TO CHRYSLER ..................... 49

FIGURE 18: FORECAST OF FIAT-CHRYSLER SYNERGIES ........................................ 50

FIGURE 19: VEHICLE ARCHITECTURE SHARING OPPORTUNITIES WITH CHRYSLER . 51

FIGURE 20: GLOBAL INDUSTRY VALUE FORECAST 2009-2014 ............................. 56

FIGURE 21: GLOBAL LIGHT VEHICLE SALES BY VOLUME ..................................... 57

FIGURE 22: GLOBAL OEM SALES FORECAST 2008-2015 ..................................... 57

FIGURE 23: ECONOMY AND AUTO INDUSTRY ....................................................... 62

FIGURE 24: NUMBER OF CARS PER 1000 PEOPLE IN 2008 ..................................... 62

FIGURE 25: IMPORTANCE OF ISSUES RATED BY AUTOMOTIVE EXECUTIVES ........... 64

FIGURE 26: PORTERS FIVE FORCES ANALYSIS..................................................... 65

Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 1

CHAPTER 1: INTRODUCTION

1.1 Introduction

Globalisation, competitive market pressures and increasing customer demands has

lead Companies to constantly evaluate the business environment and implement

strategies in order to remain commercially competitive and successful. One of the

available strategic options to a Company is forming a strategic alliance with

another firm to join forces and work together in order to address concerns such as

resource shortages, reduce product development cycles, adding additional

production facilities and distribution channels.

Fiat is one of the largest automotive manufacturers in the world, catering to major

segments of the passenger and commercial vehicle market. The automotive

industry is considered highly competitive due to the maturity of the market,

similar products and number of manufacturers. The buyer is mainly influenced by

price and product performance. Manufacturers are highly concerned with product

cost which is influenced by many external factors such as legislations, raw

material costs, currency exchange rates, energy costs and taxes as this affects the

final product pricing. The aim is to attain competitiveness while sustaining

profitability.

The recent global financial crisis has added to the woes of the industry and vehicle

manufacturers are taking a number of strategic decisions in order to remain

competitive. In the past year the automotive industry has seen a number of


bankruptcies, restructuring efforts and consolidations. The business environment

is constantly changing and it is essential that an organisation continuously

evaluates its position within the market and plans effectively for the future. The

strategy of a business is developed to achieve the organisational goals and is

shaped by the strengths and weaknesses of an organisation and also the macro-

environment that it survives in which highlights the threats and opportunities.

Lately a number of organisations have entered into strategic alliances with one or

more partners. This dissertation studies the reasons and motives behind such

alliances and the opportunities an alliance provides to the companies. The recent

alliance between Fiat Group and Chrysler has been investigated to obtain a better

understanding of strategic alliances. The recent financial crisis has also been

studied with regards to its effect of acting as a catalyst for alliances within the

automotive industry. This external environment analysis coupled with analysing

Fiats current market positioning has resulted in a number of recommendations for

the future direction of Fiats strategy.

1.2 Problem setting

Cars are expensively priced items, which makes them peculiarly vulnerable to

any downturn in confidence, GDP, wealth and income. (Warren - The Telegraph,

2009)

The automotive industry is a highly competitive industry and has been greatly

affected by the recent financial crisis. The lack of availability of finance and a


hampered consumer confidence has lead to a decline in demand and a substantial

amount of overcapacity within the industry. This lead vehicle manufacturers to re-

consider their strategies in order to sustain themselves in the recession and remain

competitive for the future.

In 2009, Fiat Group formed a Global strategic alliance with Chrysler. Fiats

decision to form an alliance with Chrysler needs to be studied and the current

industry scenario needs to be analysed in order to provide recommendations for

Fiat to remain competitive. Therefore the problems that arise from this event are:

1. What are the motives behind the Fiat-Chrysler alliance?

2. What Benefit would the alliance provide to both Fiat and Chrysler?

3. How the recent recession and other external factors affect the automotive

industry?

4. What is the current position of Fiat in the automotive industry and what

steps should it take to remain competitive in the future?

1.3 Aim and Objectives

The aim of this dissertation is to examine the need for the Fiat-Chrysler alliance

and weigh the opportunities offered by the alliance. Consideration will be also

given to the macro and micro environment in order to provide recommendations

for a sustainable future for Fiat.

The objectives of this Dissertation are:

1. To analyse the need for the Fiat-Chrysler Alliance.

2. To analyse Fiats current position in the Global Automotive Marketplace


3. To analyse the external and industry environment that might affect Fiat

4. To provide recommendation for Fiat to remain competitive in the future.

The dissertation will also provide a background into the theory of strategic

alliances as a strategic option. It will also provide information about:

1. What is a strategic alliance and why companies form strategic alliances.

2. The opportunities an alliance provides to a company.

3. The effects of the External factors and Business environment on the

strategy of a firm and how to consider these factors when making strategic

recommendations and decisions.

1.4 Limitations / Constraints

The scope of the dissertation is limited to Fiat Groups automotive business and

the Fiat-Chrysler Alliance that was formed in 2009.

Also, in July 2010, Fiat Groups board approved the plan to separate its industrial

and automotive businesses into two separate companies in order to create to a

global automotive company in collaboration with Chrysler (Fiat Group, 2010).

The issues discussed and recommendations outlined in this dissertation revolve

around Fiats automotive business only and author is aware that Fiat Groups

future strategic decisions may be affected by the state of other businesses and

activities of the conglomerate.


1.5 Assumptions

The automotive market is still recovering from the recession.

The alliance will be a long term partnership.

Fiat will remain in a stable financial condition.

1.6 Dissertation Structure

The dissertation comprises of 7 Chapters:

Chapter 1 Introduction

This chapter explains the background to the project and introduces the problem,

aims and objectives.

Chapter 2 Literature review

This chapter discusses the theory of strategic alliances, the motives for alliances

and the benefits provided by an alliance. It also discusses the importance of

considering the external and internal environment during strategy formulation.

Chapter 3 Methodology

This chapter explains the research method followed in this dissertation.

Chapter 4 Company Description

This chapter provides information about Fiat Group, Its history, current status,

products, sales and financial performance are discussed.


Chapter 5 Alliance

This chapter provides background on the effect of the recession on the automotive

industry and how it lead to an increase in restructuring and alliances within the

industry. The Fiat-Chrysler alliance is explained and the benefits and

opportunities to both firms are highlighted.

Chapter 6 Analysis and Discussion

In this chapter, a PESTEL Analysis, Porters Five forces Analysis and a SWOT

analysis is conducted to assess the external and internal factors that would shape

Fiats future strategy.

Chapter 7 Conclusion and Recommendation

In this chapter, the results of this dissertation are concluded and recommendations

have been made for Fiats future strategy.


CHAPTER 2: LITERATURE REVIEW

2.1 Strategic Alliance

A Strategic Alliance can be defined as an agreement between organisations in

which each entrusts certain amount of resources to achieve a set of objectives.

Alliances can be formed with a wide variety of Partners depending on the

objectives of the partnership. The partnership may include organisations in the

supply chain such as customers and suppliers. It may even include competitors or

Organisations external to the business such as Universities or Government bodies.

Strategic Alliances provide Organisations with the opportunity to improve their

competitive positioning, enter new markets, build on core competencies, risk

sharing and research and development costs sharing .(Bain & Co, n.d.)

Hooley et al. (2007) emphasise that building relationships with other companies is

essential to compete effectively as Organisations face an extraordinary set of

challenges due to constantly changing markets, rapidly evolving technologies,

shortage of resources and skills and increasingly demanding customers.

Alternatively Thompson (2001) classifies as alliance as a defensive move rather

than as a growth opportunity with the intention to increase competitive advantage

without having a merger or an acquisition.

Regardless of the reasons for the alliance, it is essential that all parties work

together cohesively. Lorange and Roos (1993) state that the alliance should be


structured so that it is the strategic goal of both parties for it to succeed. On the

other hand, Ohmae (1989) argued that the alliance is beneficial when each partner

has a different strategic intent. For example, one partner can pursue a strategy of

globalisation while the other partner can take a more passive role as a technology

supplier (Lorange and Roos, 1993).

In summary, the goals and objectives of each partner can be different but they

should compliment each other and work towards achieving their objectives with a

successful alliance.

The need for strategic alliances

The rise International business and increasing competitive pressures on firms has

lead firms to a need to collaborate with partners in order to address concerns such

as resource shortages, reduce product development cycles and additional

distribution channels.

Each international market needs a region specific strategy and this need

encourages firms to form alliances with local partners that understand the market

well. The recent rapid developments in technology pressurises firms to constantly

adjust to customer demands and respond with shorter product life cycles. This

requires a competent and flexible resource base and has lead firms to jointly

pursue Research and Development activities that provide a flexible and sufficient

resource base. This also brings together several different competencies to ensure a

commercially successful strategy. In summary, each partner puts forward its best

in order to result in a successful product. (Lorange and Roos, 1993)


Companies are in a very dynamic business environment and need to respond

quickly to any opportunities or threats. Alliances provide flexibility in operations

and the ability to change quickly in terms of product innovation (Connell, 1988).

Thompson (2001) further summarises the reasons for companies to form alliances:

Cost of Joint Venture / Acquisition: The cost of joint ventures or taking

over another business may unaffordable for a company and therefore it

may be feasible to form an alliance in order to work towards mutual goals.

Legal Constraints: Certain legislation may prevent a company from

acquisitions but still the larger size is required to sustain in the industry.

This forces companies to work together as part of alliances keeping

separate businesses at the same time.

Political or cultural differences: These differences prevent mergers and

acquisitions and therefore an alliance is used as a better alternative to assist

in integration of separate businesses.

Customer Demands: The increasing popularity of a total customer

support packages indicates that a businesss associations with other firms

can help secure inventory, mould distribution channels and control costs.

This also provides organisations with the opportunity to specialise in those

areas where they are more competent.


Protectionism: International Government protectionist policies may make

it mandatory for foreign companies to form an alliance or joint ventures

with a local partner.

2.1.1 Motives for Strategic Alliances

The motives for Companies to enter strategic alliances would depend on the

strategic position and goals of each partner. Lorange and Roos (1998) explain that

the strategic positions of each partner will define the motives of the alliance:

Market Leader

A Market leader would be having major market share, leading technology or

better quality.

Defensive: When the strategy of the strategic alliance in line with the core

strategy of the Parent firms overall portfolio and the firm enjoys a relative

leadership in the industry. The aim of the organisation may be access to

new markets or technology or even secure additional resources to maintain

and defend its lead.

Remain: A firm may form a strategic alliance with another firm that plays

a relatively peripheral role in its overall portfolio in order to maintain its

competitive position.


Follower

A follower that is aspiring to increase its market share:

Catch up: This strategy is used when the firm is more of a follower in the

industry. The firm may form a strategic alliance with another firm in order

to improve its product offering and competitive positioning in the market.

Restructure: If a firm is more of a follower in the market than a leader, it

may form a strategic alliance in order to restructure to secure its business

and perform better.

Apart from the strategic positioning motives, the alliance will also have certain

operational motives and objectives that assist the company in achieving the

strategic goals. Zajac (1990) conducted a study on the motives of alliances and

summarised four objectives (show in figure 1) that most companies have for

strategic alliances that would lead to a better competitive position.


Figure 1: Motives for Strategic Alliances

Motives for Strategic Alliances

(Zajac, 1990)

Acquiring means of distribution and

preempting competition, 35%

Obtain economies of scale, 20%

Overcome legal and regulatory barriers, 20%

Gain acces to new technology &

diversify portfolio, 25%

Source: Zajac, 1990

2.1.2 Types of Strategic Alliances

Ad-Hoc Pool: In this type of a strategic alliance, the partners invest minimal

resources typically on a provisional basis in order to compliment and support each

other. These resources are then drawn back by the parent company at the end of

the project or alliance. An example of this may be agreements between airlines to

share aircraft and staff for a certain period. (Lorange and Roos, 1993)

Consortium: In this type of an arrangement, the amount of resources invested by

partners is more than that in the Ad-Hoc relationship. Whatever value is created

by this strategic alliance is then distributed back to all the partners. This type of an


alliance is usually seen during joint Research and Development activities.

(Lorange and Roos, 1993 )

Project Based Joint Venture: In a project based joint venture, the partners create a

common organisation by investing minimum resources in order to jointly work

towards their strategic goals. The resources generated are not distributed back to

the partners. The financial results such as dividends and payments are distributed.

An example of this would be a country specific alliance between firms. (Lorange

and Roos, 1993 )

Full Blown Joint Venture: In this type of an alliance, the partners invest large

quantities of resources in order to achieve their goals. The alliances resources are

retained in the alliance itself. (Lorange and Roos, 1993 )


2.1.3 Main Challenges faced by companies

Companies need to ensure that they choose their alliance partners carefully.

(Houghton, 1990) has summarised some of the main challenges faced by

companies when forming strategic alliances:

Compatibile strategy and Culture: It is essential for the firms to have a

strategy that compliments one another and helps in achieving the end

objectives. To have a successful alliance it is also important for the firms

to understand and respect each partners working culture and modify their

own culture to suit the alliance.

Comparable contribution: The amount of resources invested by each

partner needs to be agreed at the start of the agreement and the partners

should be equally committed in ensuring the planned demands and targets

are met.

Compatible strengths: To form a successful alliance, a company should

ensure that the chosen partners competitive strengths compliment its own.

This way both companies can overcome their own resource and skill

shortages.

No conflict of interest: There should not be any conflict of interest. This

ensures that all firms are working towards a successful alliance.


Climate of trust and mutual understanding: It is essential to have trust and

understanding and open communication between the partners in an

alliance. This leads to better working relationships and smoother

operational performance between the companies.

2.2 Analysing the External and Internal Environment

In the words of the Greek philosopher Heraclitus The only constant is change.

Thompson (2001) states that success can be short-term for some organisations as

the speed of change in most industries and markets has increased. This change has

also resulted in shorter product lifecycles.

There is also interdependency between different products, services and businesses.

The organisation is dependent on its suppliers and customers. Competition also

plays a major role in shaping the impact on company. These industry players are

also affected by wider macro environmental forces such as Political,

Environmental, Social, Legal and technological (Thompson, 2001). This means

that an organisation that enters alliances based on a set strategy and objectives also

needs to continuously monitor and respond to the ever changing external

environment. Its strategies, plans and values need to continuously adapt to the

changing environment and manage its resources to take advantage of opportunities

and counter threats. (Thompson, 2001)

This dissertation undertakes two external (PESTLE Analysis and Porters Five

Forces) and one internal analysis (SWOT Analysis).


2.2.1 PESTLE Analysis

This analyses the external factors affecting the industry and organisation.

PESTLE stands for - Political, Economic, Sociological, Technological, Legal,

Environmental (CIPD, 2008).

A PESTLE analysis is a useful tool for understanding the external environment in

which an organisation operates. It helps in understanding risks associated with the

operations and highlights the position, opportunities and direction for an

organisation.

The PESTLE model urges companies to understand and consider the following

factors:

Political and Legal: These are the political and legal factors that affect the

environment in which a firm operates. This includes areas such as tax

policy, employment laws, legislation, environmental regulations, trade

restrictions and reform, tariffs and political stability. These political and

legal influences have a direct impact on the day to day running of a

company and therefore play an important role in shaping its strategy. (CIPD,

2008)

Economic: These are the factors affecting the global and national

economies that have a direct or indirect impact on an organisation. The

degree of the impact will vary depending on the business. Considerations

include health of the global economy, level of interest rates, exchange rates


inflation, labour rates, availability of credit, cost of living, etc. (CIPD,

2008)

Social: These are the factors related to changing social trends that would

affect an organisation. It is important to take into account the currently

occurring social changes in the markets in which a firm operates. This

includes factors like cultural norms and expectations, population growth

rate, age distribution, attitudes, importance of safety, global warming etc

that would affect customer behaviour and attitudes towards a product or a

service. (CIPD, 2008)

Technological: Technological changes can affect a firms business and

competitive position. New technologies are continually being developed and

the rate of change itself is increasing and this impacts a Companys product

or service offering. Technological changes also bring up barriers to market

entry. Companies need to closely follow these changes in order to ensure

that their offerings remain competitive. (CIPD, 2008)

Environmental: This covers the ecological and environmental aspects that

impact the operations of an organisation. Many of these factors will be

intertwined with the economic or social factors. (CIPD, 2008)

These various external factors will have a major impact on business operations.


2.2.2 Porters Five Forces

Michael Porter put forward five forces that shape competition at the business unit

level within the industry. Firms need to understand their industry environment and

forecast the results of certain strategies in order to thoroughly to plan future

strategies. A methodical analysis of these forces helps organisations highlight

keys to competitiveness in their particular industry (Hooley et al., 2007).

Figure 2: Porters Five Forces

Source: www.vectorstudy.com

The bargaining power of suppliers

The balance of power between suppliers and industry members can greatly affect

the level of competition within the industry. The level of competitiveness

increases when suppliers or customers exert greater power on the organisations in

their industry (Hooley et al., 2007).


Hooley et al. (2007) and Thompson (2001) state that the bargaining power of

Suppliers depends on:

Supplier concentration: A fewer number of suppliers means that buyers have less

choice and therefore less bargaining power. Suppliers would also be having more

power in the industry when the buyers are fragmented and have low or irregular

order sizes.

Switching costs: If a supplier is delivering certain key components to a customer

which cannot be sourced easily from an alternative supplier without incurring of

high initial costs (e.g. tooling costs) then the power of the customer decreases and

supplier power will increase.

Differentiation of supplier offerings: A supplier having a distinct product or

service which cannot be purchased from elsewhere can have considerable

bargaining power over a customer.

Bargaining Power of Buyers

The bargaining power of buyers also affects the degree of competition within an

industry. Hooley et al. (2007) state that higher buyer power increases competition

within the industry. Buyer power depends on the following:

Concentration of buyers: A smaller number of buyers than sellers results in buyers

having a higher bargaining power.


Alternative sources of supplies: Buyers can easily threaten to switch suppliers and

therefore the supplier needs to be competitive in order maintain demand for its

products.

Switching costs: Buyers have greater power when the switching costs are low as

they can obtain goods from alternative suppliers to get better deals without

incurring high initial costs.

Threat of substitutes

Successful products may be copied or substituted. New entrants may use existing

technology available in the industry or they may try to transform the industry

through innovative solutions (Hooley et al., 2007). Substitutes increase

competition in the industry by:

Making existing technologies obsolete: In todays world of rapid change, there is

immense competition between firms to develop new products and differentiate

offerings in order to remain market leaders or enter new markets.

Product Improvements: Improvements in technologies also lead to an increase in

industry competitiveness.


Businesses need to continuously improve their products in order to make them

competitive and protect their technologies in the form of patents and copyrights to

ensure products are not substituted easily.

Threat of new entrants:

Organisation must also consider the potential threat of new entrants joining the

industry. New entrants increase the number of products on offer to customers and

reduce market share of existing industry leaders thus increasing the competition

within the industry. Hooley et al. (2007) states the following conditions that make

it easier for newcomers to enter markets:

Low costs / ease of entry

Existing or new distribution channels are open to use

Less Retaliation by competitors

Low product differentiation

Gaps within the market

Competitive rivalry within the industry

This involves assessing the rivalry between the existing players of the industry.

This is dependent on a number of conditions. Hooley et al. (2007) and Thompson

(2001) state the following factors:


Size and market share: Competitors who have a similar market share compete

fiercely to increase their share. This is normally seen by increased advertising,

promotion and technological innovation to attract the customer.

Market growth rate: At the maturity and decline stages of the product life cycle,

the market size for a product starts to contract and sales growth is attained at the

expense of competitors. This results in increase in rivalry.

High exit barriers: If an industry has high exit barriers, firm compete hard to

maintain their positions and remain successful.

Low product differentiation: Low differentiation in product or service offering

leads to increased competition over factors such as service and price. This is also

due to low switching costs for customers.

High fixed costs: When fixed costs are higher in relation to variable costs,

companies require to continuously increase sales in order to cover the investment.

This boosts rivalry within the industry.


2.2.3 SWOT Analysis

SWOT stands for Strengths, Weaknesses, Opportunities and Threats. The analysis

focuses on the organisation in question and shows where its internal strengths can

be matched to make the most of the available opportunities and combat any

potential threats.

Figure 3: SWOT Analysis

Source: www.exelsia.ch

It helps in identifying the most important factors (both internal and external) that

affect the Company and its markets. This information is then used in strategy

formulation in which Strengths and Weaknesses are aligned with opportunities

and threats to ensure that its strengths are deployed in order to gain most from

opportunities, at the same time reducing any risks and working on eliminating

weaknesses.


Strengths: This involves identifying what the firm is good at relative to its

competitors.

Opportunities: The ever changing business environment creates new opportunities

for a firm. To capitalise on these opportunities, the firm needs to identify them

well in advance.

Weaknesses: This involves identifying what a company is bad at compared to its

competitors.

Threats: The changing business environment also presents an organisation with

threats and risks that need to be monitored and removed or reduced effectively.

These existing strengths need to be exploited in areas of opportunity and used to

counter threats. Weaknesses should be worked upon and new strengths should be

built to take advantage of new opportunities and prepare for threats.

(Thompson, 2001; Hooley et al., 2007)


CHAPTER 3: METHODOLOGY

3.1 Case Study

A case study analysis presents an account of past events in a business or industry

and highlights the conditions that a business had to deal with over a period of

time. It also includes studying factors such as the changing external environment,

the companys internal strengths and weaknesses and the nature competitiveness

in the industry in order to map out a future strategy for the firm. (Davies, n.d.)

3.2 Data Collection

The data and information used in this dissertation is secondary data. Secondary

data consists of data that has been collected by someone else for another purpose

and is readily available. It can be in the form of market research reports,

government statistics, Journals etc.

The First advantage of using secondary data is that the researcher does not have to

devote time and resources to collecting the data as it is readily available. The

second advantage of using secondary data is the extent of data available. Few

researchers would have the resources to collect data from a large sample size. The

third advantage in using secondary data is that frequently the information

gathering is conducted by experts and professionals and that expertise may not be

available to smaller projects. (Cambridge University Press, n.d.)

The disadvantage to using secondary data is that it does not answer particular

questions that a researcher may want to ask. A second major disadvantage of


using secondary data the methodology may be questionable. (Cambridge

University Press, n.d.)

The secondary data used in this dissertation are mostly from Fiats annual reports,

Investor presentations and Independent market research reports. Data has also

been taken from Chryslers website to obtain Chryslers view on the alliance.

Additional data has been collected from online journals, news articles,

independent insight reports and published articles. Books and academic journals

have also been used to provide background theoretical knowledge.

3.3 Research Procedure

Subsequent to the Literature Review, the following steps were taken to

analyse the Fiat-Chrysler Alliance.

3.3.1 Study the effect of the recession on the Automotive Industry

The recession had an adverse impact on the automotive industry and lead to a

lot of changes within the sector. It is important to understand how the

recession has affected the industry and the factors that vehicle manufacturers

are dealing with in order to define their future strategies. This part also

studies how the recession acted as a catalyst for consolidation and alliances

within the industry.

3.3.2 Study the Fiat-Chrysler Alliance

The background and reasons behind the decision for Fiat to form an alliance

with Chrysler are analysed. The structure of the alliance is also studied to


form a better understanding of the possible synergies and benefits to both

parties.

3.2.3 Analysis of Fiats External Environment

The Macro environment is analysed by using a PESTEL Analysis and

Porters Five Forces analysis. These tools provide an overview of the various

external factors and industry forces that will affect the companys day to day

operations and eventually its position in the marketplace The factors are then

classified into Business threats and opportunities.

3.2.4 Fiats Current scenario analysis

The current structure, market positioning, products, operations and financial

results of Fiat are analysed so as to gauge its strengths and weaknesses. These

are then combined in the form of a SWOT analysis with the threats and

opportunities that the company is exposed to. This analysis assists in drafting

future strategic recommendations for the business.


CHAPTER 4: COMPANY DESCRIPTION- FIAT

4.1 History

Fiat is an acronym for Fabrica Italiana Automobili Torino (Italian Car Factory of

Turin). It was established in 1899 by Giovanni Agnelli in Turin, Italy. It is now

the largest industrial enterprise in Italy with businesses spanning a number of

sectors such as passenger cars, commercial vehicles, agricultural and construction

equipment, engines, transmissions and components. (Fiatgroup.com, n.d.)

Key events in Fiats History (Fiat.com, n.d.):

1899: Fiat is established in Turin.

1903: Fiat is listed on the stock exchange and manufactures its first truck.

1919: Produces its first tractor.

1936: Launched Topolino which is the smallest economy car in the

world.

1953: The first diesel powered passenger cars are introduced.

1967: Fiat acquires Magnetti Marelli which is a manufacturer of

automotive components and systems.

1975: Fiat established Iveco for commercial vehicles and Ferrari joins the

Fiat group.

1978: Lancia automobiles is acquired and Comau and Teksid are setup that

specialise in production systems.

1984: Acuisition of Alfa Romeo.


1993: Maserati is added to the groups automobile business.

1999: New Holland and Case Corporation merge to form an agricultural

giant.

2004: Sergio Marchionne joins as Fiats CEO.

2005: Fiat Group back into profit.

2007: Fiat Launches the Fiat 500 car model and the Abarth brand is

revived.

2008: Fiat Group records highest ever trading profit.

2009: Fiat agrees to a global strategic alliance with Chrysler.

(Fiatgroup.com, n.d.)

4.2 Current Status

The Fiat Group is Italys largest industrial venture and one of the founders of the

automotive industry. It designs, produces and sells passenger cars, commercial

vehicles, agricultural and construction equipment, engines, transmissions and

components. It believes in technological innovation and environmentally friendly

products. The Group carries out its operations and financial services activities

through companies located in approximately 50 countries and is present

commercially in about 190 countries. Fiat has a strong research and development

capability and conducts its research and innovation activities through the Centro

Ricerche Fiat (C.R.F.) which concentrates on technology development and Elasis

which concentrates on production and process optimization in collaboration with

universities and centers of excellence worldwide. (Fiatgroup.com, n.d.)


The group operates a number of businesses that are shown in the figure 4 below.

Figure 4: Group Structure

Source: Fiat.com, n.d.

This dissertation focuses on Fiats Automobile business which comprises of Fiat

Grop Automobiles (FGA), Maserati and Ferrari.


4.3 Brands and Products

Fiat designs, manufactures and sells automobiles under various brands. Fiat, Alfa

Romeo, Lancia and Abarth are the main brands. Commercial vehicles are also

manufactured and sold under the Fiat Professional brand. Each brand below has a

specific identity and pursues a separate sales and marketing strategy.

(Fiatgroup.com)

Fiat

The Fiat brand comprises of a number of mid-budget passenger cars. The brand is

attributed to be Practical, versatile and responsive. It is focussed on customers

who are increasingly aware of environmental issues and technological innovation.

The brand produces Italian styled models that are reasonably priced.

(Fiatgroup.com)

Alfa Romeo

Alfa Romeos product offering comprises of aesthetically pleasing designs with an

individualistic focus. The attributes of Sportiness, technology, comfort and

elegance are combined to create the distinctive products. (Fiatgroup.com)

Lancia

The Lancia brand is focussed on Class and exclusivity at a reasonable price. The

models are based on Italian styling coupled with innovative technology such as

the ECOchic range. (Fiatgroup.com)


Abarth

The Abarth brand was re-launched in 2007. It provides a modern interpretation of

all of its traditional products: such as the Grande Punto and the 500 Abarth, which

have added gadgets and the performance is inspired by the world of motor racing.

(Fiatgroup.com)

Fiat Professional

This brand covers a number of light commercial vehicles offering utility and

versatility to customers. (Fiatgroup.com)

Maserati

Maserati has always produced appealing and technologically advanced saloons

derived from the racing world. It a luxury / performance car brand.

(Fiatgroup.com)

Ferrari

The Ferrari brand produces high performance sports and super cars that are

inspired by Formula 1 Racing. Fiat describes the road cars produced by Ferrari as

the most prestigious example of Italian technology and craftsmanship: exclusive

cars without equal. (Fiatgroup.com)

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4.3 Global Automotive Market

Following a stable growth period, the automobiles industry fell into decline in 2008,

which further worsened in 2009. The industry generated total revenues of $1,469.3

billion in 2009, having a compound annual growth rate (CAGR) of 0.8% for 2005-

2009. (Datamonitor, 2010)

Observing closely, the European industry reduced with a compound annual rate of

change (CARC) of -1% to reach $514.3 billion in 2009, while the Asia-Pacific

industry grew with a CAGR of 3.8% over 2005-2009, to reach $431.6 billion in 2009.

(Datamonitor, 2010)

Passenger car sales were the most profitable segment globally, generating total

revenues of $1,180 billion in 2009, which is 80.3% of the total industry value. Light

truck sales revenues were $201.1 billion in 2009, which is 13.7% of total industry

value. (Datamonitor, 2010)

Figure 6: Global Automotive Industry Value 2005-2009

Source: Datamonitor, 2010


4.3.1 Fiat Automobiles Performance

Figure 7: Fiat 2009 Sales Performance

Source: Fiat Annual Report 2009.

The table in Figure 7 above details the Sales performance for the years 2008 & 2009.

The total demand for vehicles increased by 2.2% in 2009 but there also have been

substantial drops in sales in certain European markets. Analysing this closely, it is

seen that the passenger car market performed satisfactorily, mainly due to the

government incentives and scrappage schemes in parts of Europe. The commercial

vehicle market showed a sharp decline in sales due to decrease in demand from

businesses affected by the financial crisis. (Fiat Annual Report, 2009)

Figure 8: 2009 Sales Split by Brand

Source: Fiat: A review of our past 2010


Figure 8 above shows that passenger car sales provided the bulk of the total

automotive sales for Fiat.

Western Europe and Asia are Fiats main markets and demand in these countries was

affected greatly by the financial crisis of 2008. The first half of 2009 showed poor

performance. Scrapping incentives introduced by various European governments

increased sales during the second half of the year leading to a gradual recovery in

demand for vehicles. In Germany the demand increased by 23.2% due to the

scrappage scheme. Substantial gains were also seen in other European countries. In

both the UK and Spain the scrappage incentives were introduced by the second half of

the year, and therefore demand declined by 6.4% and 17.9%, respectively. (Fiat

Annual Report, 2009)

Figure 9: Fiat Chrysler combined Market Share

Source: Deloitte, 2009

Fiat has a good mix of environmentally friendly cars. Combined market share with

Chrysler is about 6.4%.


Where commercial vehicles are concerned, the 2009 LCV market in Western Europe

declined by 27.4% compared to 2008. Demand fell in all major markets such as

France declined by18.8%, Italy by 21.4%, Germany by 24.8% and the UK by 35.5%.

Fiat Professionals market share for light commercial vehicles in Italy was 39.9%, a

reduction of 3.4% compared to 2008.

In Brazil Fiat achieved an overall share of 24.5% in 2009 which was similar to 2008.

This comprised of a share for passenger cars of 24.6% and light commercial vehicle

market share of 24.1%.


4.4 Fiat Group 2009 Performance and Financial Analysis

This part of the report analysis Fiats performance based on the 2009 Annual Report.

The report had balance sheets for the whole Industrial Group and therefore this section

compares the entire Fiat Groups performance with that of the industry.

Figure 10: FIAT Group Performance Snapshot

Source: Fiat Annual Report, 2009

2009 Fiat Group revenues totalled 50,102 million. This was a decrease of 15.9%

compared to 2008 and the decline was credited to the financial crisis.

Fiats automobile business is the main contributor to the Industrial Groups revenues.

In 2009 automotive revenue was 56.2% of the total revenue. The majority of business

is coming from Western Europe. South America is another upcoming and promising


market for Fiat. The company has limited market share in North America which is a

weakness as USA is a major automotive market.

Table 1 below shows a summary of the main financial ratios from the 2009 annual

report compared to that of the industry.

Table 1: Financial Ratios

Financial Condition Fiat Industry

Debt/Equity Ratio 2.83 2.28

Current Ratio 2.2 1.3

Quick Ratio 1.7 1

Inves tment Re turns % Fiat Industry

Return On Equity -1.8 1.4

Return On Assets -0.2 0.3

Return On Capital -0.4 0.1

Management Efficiency Fiat Industry

Income/Employee -874 2617

Revenue/Employee 281101 380337

Inventory Turnover 4.6 5.4

Asset Turnover 0.8 0.6

Profit Margins % Fiat Industry

Gross Margin 14.6 17.5

Pre-Tax Margin 1 1.8

Net Profit Margin -0.3 0.3

Source: Fiat Annual Report 2009, Reuters, MSN Money)

The tables above show that Fiats 2009 performance was satisfactory compared to

industry average. The Groups investment returns for 2009 are below average such as

the return on capital is negative at -0.4% and so is the return on assets at -0.2%.

However the current ratio and quick ratio are better than the industry average and this

indicates that the company has adequate assets to pay back liabilities if required. The

quick ratio of 1.7 is much lower than the current ratio of 2.2. This means that Fiat

holds a substantial amount of inventory. Overall the group performance is reasonable

compared to the industry and it needs to work on improving its revenue and efficiency

in order to improve its profit margins.


Automobiles Business Financial Performance

Figure 11: Fiat Automobiles Performance (Including Maserati and Ferrari)

29,380

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2009

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Source: Fiat Annual Report, 2009

The Automobiles businesses reported trading profit of 719 million for 2009, down

383 million over the 1,102 million figure for 2008. All Sectors contributed

positively, although profit levels were lower than 2008. Trading margin was 2.4%

compared with 3.8% for 2008 and 1.5% for 2006. (Fiat Annual Report, 2009)

Figure 12 below shows that trading profit margin was good compared to competitors

(Toy=Toyota, PSA = Peugeot, Dai=Daimler, Nis=Nissan, VW=Volkswagen).

Figure 12: Trading Profit Margin

Source: Fiat Group: And the Journey goes on, 2010


Fiat Group Automobiles trading profit for 2009 was 470 million with a trading

margin of 1.8%, compared to the 691 million figure for 2008 (2.6% margin). The

decrease was mostly due to reduced demand for light commercial vehicles in the

global markets. Maserati had a 2009 trading profit of 11 million compared to 72

million for 2008. Ferraris 2009 trading profit was 238 million, compared to 339

million for 2008. The year-on-year decrease was attributed to adverse currency

fluctuations and also the impact of declining sales volumes due to the recession. (Fiat

Annual Report, 2009)

2010 1st Quarter Performance Update

Automobiles revenues increased by 20% to 7.3bn. Demand was maintained

due to the remainder of the scrappage schemes in several Western Europe

markets. (Fiat Group Investor Reports, 2010)

Automobiles Trading profit was 196mn with FGA at 153mn , Ferrari at

39mn and Maserati at 4mn. Please refer to Appendix 2 for more details.

(Fiat Group Investor Reports, 2010)


CHAPTER 5: ALLIANCE

5.1 Effect of the Financial Crisis on the Automotive Industry The financial crisis of 2008 greatly affected the global automotive industry. The lack

of availability of cheap financing and reduced consumer confidence resulted in a

global reduction in vehicle sales. Figure 13 below shows how global vehicle sales

dropped in August 2008. For the U.S. and Western European markets, the decline in

sales was quite swift compared to the emerging markets of Asia and South America.

This decline in sales lead to large amounts of overcapacity within the industry.

(KPMG, 2008)

Figure 13: Global Sales Declined in the Recession

Source: KPMG International, 2008


United States of America & Western Europe

Car sales in the US showed a decline of 27% Year on Year in September 2008.

Figure 14: Sales Declined in USA


Figure 15:Sales Declined in Western Europe



5.1.1 Effect of the Recession on Fiat

Figure 16: Fiat 1st Qtr 2009 Net Revenues

Source: Fiat 1St Quarter Report, 2009

Fiat sales were also affected by the financial crisis and this continued to show even in

the revenues for the first quarter 2009 were 5.6 billion, a year-on-year decline of

18%. For Q1 2009, Fiat sales of passenger cars and light commercial vehicles

combined showed a decline of 17.7% compared to 2008. In Western Europe, which is

Fiats main market, deliveries fell 17.5% to with decreases in Italy by 25.1%, France

by 8.2%, UK by 30.1%.

However, Fiat managed to make gains in Market Share. In 1st Quarter 2009, the Fiat

brand achieved a 7.4% share for Western Europe which was 0.5% higher than 1st

quarter 2008. A total of 65,800 light commercial vehicles were delivered during the

first quarter, representing a year-over-year decrease of 37.5%. For Western Europe,

deliveries were down 50.3% to 32,500 units. Fiat Group Automobiles reported a

trading loss of 30 million in 1st quarter 2009 compared with a 193 million trading

profit for the first quarter of 2008. (Fiat 1st Quarter Report, 2009)


5.2 Alliances within the Industry

This decline in sales affected the financial health and cash flow of companies and

many manufacturers turned towards the government for financial aid. This also

resulted in some companies selling off their businesses and increased mergers and

acquisitions. Fiat group CEO, Sergio Marchionne, told Automotive News Europe that

only five or six global carmakers might be left by the end of 2010. The overcapacity

in the industry can be tackled by sharing facilities to improve utilisation and Fiats

alliance with Chrysler reflects this. In a recent KPMG survey of automotive

executives, 71% of the respondents think that Mergers, acquisitions and alliances will

increase within the industry. (KPMG International, 2009)

5.3 Fiat Chrysler Strategic Alliance

Subsequent to the recent recession, Chrysler became the first major car manufacturer

to file for bankruptcy in early 2009.

At the same time, Chrysler agreed to enter into a strategic alliance with Fiat Group.

This was to protect its future as a car manufacturer and gain access to Fiats fuel-

efficient power trains and smaller car expertise which it lacks. The alliance also saved

thousands of jobs at Chrysler, its suppliers and dealers. (The Telegraph, 2009)


Chrysler Background

In 2008 it posted an $8bn loss, when US sales fell 30% to 1.45m vehicles as its

dependence on high-powered, high fuel consuming cars, trucks and SUVs left

it unable to face increase in oil prices and environmental concerns. (The

Telegraph, 2009)

Key brands: Chrysler, Dodge, Jeep.

Key vehicles: Dodge Ram pickup truck, Dodge Charger, Jeep Wrangler,

Dodge Caravan minivan, Chrysler Town & Country minivan.

North American plants: Chrysler has 30, including 12 assembly plants and 18

facilities for engines, transmissions, stamping and casting. (The Telegraph,

2009 ; Chrysler, n.d.)

5.3.1 Fiat Chrysler Alliance

The decision to file for bankruptcy also gave Chrysler access $3.3bn of financing from

the US government, which was provided to maintain cash flow and let Chrysler

operate as normal till it came out of bankruptcy. A further $4.7bn in US loans was

also promised once Chrysler exits bankruptcy. The Canadian and Ontario

governments will provide a further $2.42bn. (Quinn, 2009)

The US government will also control 8% of Chrysler while Canadian will have a 2%

of the shares. The strategic alliance provided Fiat with a 20% stake in the new

company with a possibility of that increasing to 35% once all the Government loans

have been paid back. (Quinn, 2009)

Sergio Marchionne, Fiats CEO has long stated that Fiat needs to build at least 5

Million vehicles per year to benefit from economies of scale remain competitive


within the industry. Fiat makes about 2 million cars annually, while Chrysler

manufactured 1.3 million last year. This alliance will further help Fiat achieving its

plans. (Forden, 2010)

5.3.2 Motives for the Alliance

As discussed in the Literature Review section of this dissertation, the motives for a

company to enter into a strategic alliance depends on its position within the industry.

Both Fiat and Chrysler are still lagging behind the market leaders. Therefore they can

be classed as a Follower with two motives where strategic market positioning is

concerned:

Strategic Position

Catch-up: Fiat is in a better state than Chrysler and is trying its best to catch-up

and compete with its main rivals such as Toyota, Ford and Volkswagen.

Restructure: As explained in chapter 3, when a firm is more of a follower in

the market than a leader, it may form a strategic alliance in order to restructure

to secure its business and perform better. Chryslers main motive is to use Fiat

to restructure its operations for survival within the industry.


Operational Benefits

Acquiring Distribution channels: The alliance provides both companies

valuable readily available distribution channels. Fiat has a poor network in the

US and Chryslers distribution network will be useful for the company.

Gain access to new technology: Both Fiat and Chryslers product portfolio

compliments each other. Fiat is strong is fuel efficient small cars while

Chrysler has a good line-up of heavier pickup trucks and large sedans. This

offers both the opportunity to diversify their portfolio without incurring large

costs of development.

Obtain economies of scale: The alliance provides the companies with joint

sourcing and development opportunities which would provide both with the

much needed power of economies of scale. (Camuffo and Volpato, 2002)

Manufacturing Sharing: There can be higher plant capacity utilisation by

sharing manufacturing facilities worldwide. (Camuffo and Volpato, 2002)

Achieve cost savings in design, purchasing and manufacturing by sharing

vehicle platforms. (Camuffo and Volpato, 2002)

Reducing the risk associated with the enormous resource and financial input

required by international strategies, by sharing costs and resources. (Camuffo

and Volpato, 2002)


5.3.3 Advantages to Chrysler

Access to Fiats environmentally friendly vehicle technologies and

components. (BBC News, 2009)

Substantial cost savings opportunities through vehicle architecture,

distribution, product development sharing.

Access to Fiats distribution network in Europe and growing markets outside

the US and its global supplier base (BBC News, 2009).

Chrysler will also benefit from Fiats management expertise in business revival

and access to Fiats international distribution network with focussing on Latin

America and Russia. (BBC News, 2009 : Chrysler.com, 2009)

Figure 17: Example of technological benefits to Chrysler

Source: www.trucktrend.com


5.3.4 Advantages to Fiat

Access to Chryslers extensive USA distribution network and suppliers.

A 20% equity stake in Chrysler with potential of increasing it to 35%.

The agreement does not commit Fiat to funding Chrysler in future and

Chrysler now has a much stronger balance sheet after applying for bankruptcy.

Cost and Negotiation advantages of Economies of scale by sharing product

sourcing. (BBC News, 2009)

Sharing of vehicle architectures, components and subsystems.

Common technology development programmes especially in the area of

alternative propulsion systems.

Best practice and process sharing.

Obtain valuable brands such as Jeep and Dodge.

The economic synergies due to the alliance are detailed in the table below. Fiat

forecasts an economic benefit of 1.5Bn Euros as a result of the Fiat-Chrysler

Alliance (Fiat Group, 2010).

Figure 18: Forecast of Fiat-Chrysler Synergies

Source: Fiat Group, 2010

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5.4 Similar Alliances within the Industry

Competitive pressures are leading more companies to cooperate and form similar

strategic alliances and collaborations (Frost & Sullivan, 2010):

Daimler-Nissan-Renault

Daimler is competitive in trucks and commercial vehicles and is weak

where smaller cars are concerned.

Nissan and Renault are strong in the small car segment but are not

competent in the commercial vehicle / trucks segment.

The goal of this alliance is to join hands for Product Development. (Frost

& Sullivan, 2010)

Tata-Fiat

Tata has the opportunity to source Fiats coveted diesel engines and

transmissions.

Fiat will use Tatas extensive distribution network in India to channel its

own products. (Frost & Sullivan, 2010)


Suzuki Nissan

Suzuki has well established operation in India and will assemble diesel

engines for Nissan.

Suzuki will also build Nissan vehicles in India.

This would result in better capacity utilisation by Suzuki and provide

Nissan ease of entry into the Asian markets with lower entry costs. (Frost

& Sullivan, 2010)

Renault-Nissan

Renault to provide diesel engines.

Nissan to provide electric propulsion technology.

Shared research and development costs.

Opportunity for vehicle architecture, supplier and platform sharing to

reduce costs. (Frost & Sullivan, 2010)


Ford Mazda

Platform and component sharing to reduce costs.

Joint sourcing of components.

Improved capacity utilisation by sharing assembly plants

(Frost & Sullivan, 2010)

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By 2014, the global automobiles industry is forecast to have a value of $2,526.6

billion, an increase of 72% since 2009. The compound annual growth rate of the

industry in the period 200914 is predicted to be 11.5 %.(Datamonitor, 2010)

Table 2: Global Industry value Forecast 2009-2014


Figure 20: Global Industry Value Forecast 2009-2014


The performance of the industry is predicted to improve, with an anticipated

CAGR of 11.5% for the period of 2009-2014, which is expected to steer the

industry to a value of $2,526.6 billion by the end of 2014. The European and

Asia-Pacific industries are forecasted tp grow with CAGRs of 6.6% and 5.8%

respectively, over the same period, to reach respective values of $706.8 billion

and $573.1 billion in 2014. (Datamonitor, 2010)


In 2014, the global automobiles industry is forecast to have a volume of 96.5

million vehicles, an increase of 48.5% since 2009. The compound annual growth

rate of the industry in the period 200914 is predicted to be 8.2%.(Datamonitor,

2010)

Figure 21: Global light Vehicle Sales by Volume


Frost and Sullivan (2010) predicts that Fiat-Chrysler would have one of the

highest CAGR of 12.2% between 2008-2015 period reaching sales in excess of 5

Million vehicles by 2015.

Figure 22: Global OEM Sales Forecast 2008-2015

Source: Frost & Sullivan 2010


CHAPTER 6: ANALYSIS AND DISCUSSION

6.1 PESTEL Analysis

Political & Legislative Factors:

The government has a major impact on the industry. First of all, the government

provides the framework for the industry to function. The Governments also

establish the accessibility of public transport and reduce or increase dependence

on cars. It also has the authority to decrease or increase duties and taxes, which

directly impacts the distribution and manufacturing costs of the vehicle. For

example, the recent Government driven car scrappage schemes in Europe lead to a

boost in sales for the vehicle manufacturers. In the UK, the government offered

consumers a 2,000 discount on a new car in return for trading in one that is at

least 10 years old (Armitstead, 2009). Many new innovations and product

developments are driven by a need to meet government legislation. (Investopedia,

n.d.)

Environmental Factors.

Environmental factors affect both, the customers and the operations of a company.

For example, the emphasis on the Corporate Social responsibility of a company

and its impact on the environment has lead manufacturers to consider how its

manufacturing waste is treated and has affected operational costs (Fiat, 2009).

Concerns about vehicle emissions has lead to an increase in demand for fuel

efficient and environmentally friendly cars and this means that technology is


constantly under review and there is therefore a need for constant research and

development to provide greener vehicles.

Social

The average age of the populations in Western Europe, USA, Japan and Russia

is increasing and car makers will need to address the changing demands of older

drivers in order to remain competitive. Older customers will value quality, price,

and safety above fuel economy, styling or brand. OEMs will need to focus on the

development of cheaper and user-friendly cars. Vehicles targeted for the older

drivers will need to be designed with human factors in mind: Easier vehicle

entrance and exit, larger displays etc. (Deloitte, 2009).

Urbanisation too is another important demographic trend. Population in cities is

growing globally. For example in developed countries population living in cities is

currently 75%, while in the developing world city residents signify 45% of the

population. However, by 2020, those statistics are expected to increase to 78%

and 55%, respectively. There will also be 24 mega cities with populations of at

least 10 million each by 2020. (Deloitte, 2009). This means roads will be more

congested and people may prefer smaller vehicles. This shows that social and

demographic factors play a key role in determining the final product offering in

the industry

Technological Factors

Technological advances are generally driven by changes in legislation related to

the environment, safety etc social factors such as luxury, image, sophistication or


competition between manufacturers to be technologically superior. Frost and

Sullivan (2010) states that whilst much of the attention has focused on reducing

emissions and hence advancements will be made in powertrain technology, an

increasing area of focus in the future will be environmentally friendly materials

for cars. Technological factors also offer a means of differentiation to

manufacturers.

Source: Frost and Sullivan, 2010

A report by Deloitte (2009) lists the main technological trends affecting the

industry include

1. Powertrain technology and the move to electric: Greener and more fuel

efficient powertrains such as hybrids, alternative fuels and electric cars.

2. The shift from mechanics to electronics: Cars are increasingly becoming

electronic. The German market provides a good example: In 2007,

electronic content in passenger cars was estimated at 20 to 30 percent of


production costs. By 2010, the proportion is expected to rise to 40 percent

and by 2020, the number will likely reach 50 percent.

3. Cheap and basic mobility: In emerging markets, while personal income

levels are rising, disposable income remains low. Most of the population

will not be able to afford full size or even standard compact passenger cars

that are currently offered by OEMs. The cars that will sell best to first-time

and lower income buyers in these regions are the lower priced ones. In

some cases, this means removing extra features and options from a

vehicle.

Economic

Various economic factors such as interest rates, minimum wage, state of the

economy etc affect the car industry. The recent recession affected the interest rates

and economies all over the world and increased the cost of borrowing money. This

made it more difficult for manufacturers to raise capital. The reduced availability

of credit also affected car sales adversely as the spending power of consumers was

affected. (Fiat Annual Report 2009: KPMG, 2009)

In 2009, the more than 85% of automotive executives rated the Global Economy

as a key factor affecting the Automotive Industry.


Figure 23: Economy and Auto industry

Source: KPMG Global Automotive Executives Survey 2009

An increase in economic strength also increases the spending power of consumers.

The demand for vehicles will mainly come from the emerging markets. Figure 24

below shows the number of cars per 1000 people in 2008 and highlights the

potential of the markets of the BRIC nations.

Figure 24: Number of Cars per 1000 People in 2008

Deloitte, 2009

The Economist Intelligence Unit forecasts an increase in car ownership in the

developing world and states that by 2020, the main segment will be of first time

consumers who will be value conscious (Economist Intelligence Unit, 2009). The

growth of wealth in emerging markets will also mean an increase in the number of

high-net-worth individuals which will create a demand for luxury brands. A recent


Deloitte Consulting LLP survey indicated that individuals with high levels of

disposable income, will seek luxury brands with performance features as well as

additional luxury options, such as heated leather seats, sunroofs etc. (Deloitte,

2009)

This PESTEL analysis indicates how each of these factors influences the industry

and market. Furthermore, figure 25 shows how executives from the automotive

industry have rated the factors as being relevant in shaping the industry.

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6.2 Porters 5 Forces Analysis

Figure 26: Porters Five Forces Analysis

!!"

Power of Suppliers | Medium

Vehicle manufacturers consume many materials such as steel, aluminium,

components, and also incur costs of distribution, shipping and energy usage. Suppliers

of raw materials usually provide materials to a range of sectors reducing their

dependence on the automotive companies. On the other hand, Component

manufacturers and Tier 1 Suppliers are more dependent on vehicle manufacturers for

revenue and companies like Fiat can exhibit a considerable amount of negotiating

power due to this dependence and the large order sizes. Quality standards demanded

by vehicle manufacturers have lead to a select few suppliers that a company like Fiat

may source from. Switching over to an alternative supplier might be a problem due to

the high switching costs involved in tooling investments and also the difficulties

concerned with controlling the quality of the parts. This is a stage where the existing

supplier can apply negotiating power. Manufacturers usually have a variety of

suppliers for most of their input parts, for example Toyota and Honda guarantee that


no single supplier accounts for more than 5% of purchases of major inputs hence

reducing the risks and maintaining negotiating power. Therefore the level of supplier

power is classed as medium. (Investopedia, n.d.,: Datamonitor , 2010, Fiat, n.d.)

Power of buyers | Medium

The buyers in this industry are the dealers, corporate buyers and the final end

customer. The dealers and corporate buyers usually exercise substantial financial

strength and buy in large quantities putting pressure on vehicle manufacturers to

Strategic Alliances - Fiat_Chrysler Alliance_Pranav Sharma

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