Car Review: Alfa Romeo Sale to VW Rumors Surface Again

Friday, December 3, 2010

Alfa Romeo Sale to VW Rumors Surface Again

Back in April, the Fiat Group announced yet another round of plans to revive its money-losing Alfa Romeo brand, which included the development of new models and a re-launch in the U.S market. At that time, this seemed possible as the Italian maker intended to make good use of Chrysler and its RWD platforms to expand the model range.

However, at the end of August, Alfa Romeo was rumored to be hemorrhaging about €200 million (US $261 million) annually. The brand-hungry Germans over at Volkswagen felt Fiat's need and offered to take over the historic Milanese company. After much unrest, in October, Fiat CEO Sergio Marchionne put an end to the rumors and reiterated his turnaround strategy, while Alfa estimated losses climbed to €306 million or about $400 million.
Now, Automotive News [AN] claims that in the past months the two companies have been discussing the sale of Alfa Romeo, but Marchionne is still undecided. So, what will happen next?
Inside sources told AN that the decision is not only about money, even though Fiat could use the cash and Volkswagen has plenty of it (http://carscoop.blogspot.com/2010/11/vw-group-to-invest-516-billion-in-its.html). But this is a classic case of the door swinging both ways. If Fiat can survive the next couple of years, which will be the most difficult period of the turnaround plan and keep Alfa Romeo, then it could count on the premium brand to spearhead its next move.
The other scenario sees Fiat earning some quick cash, but still struggling in two year’s time, so, yes, the pressure is really on Mr. Marchionne’s shoulders.
My take on the matter is that Alfa should not be sold. Fiat has the opportunity to use platforms sourced from Chrysler, so rear-wheel drive Alfa’s could make a much anticipated come-back. Not taking this step doesn’t make sense.
Furthermore, if the Volkswagen Group acquires Alfa, it will have a tough time fitting the Italian company in a portfolio that includes brands like VW, Audi and Seat. In any case, only time will tell. In the meantime, take a look at the list below, in which Automotive News reasons the benefits of keeping or selling Alfa Romeo.

By selling Alfa, Fiat could:
• Cash in between 1.5 billion to 2 billion euros. Then the post-spinoff Fiat Auto would be virtually debt-free;
• Slash product development expenditures of at least 1.5 billion euros, since Fiat no longer would have to launch five new Alfas from 2012 through 2014;
• Boost profits in 2011 and 2012, since the company would be rid of Alfa's annual losses projected at about 200 million euros;
• Reintroduce Dodge as a sporty brand in Europe, positioned above the mainstream Fiat brand. A sporty Dodge would not overlap Lancia-Chrysler, which will focus on comfort.
And here are six good reasons why Marchionne should keep Alfa Romeo:
• If Fiat can fight through the next three years, it will emerge in 2014 with fatter profit margins and a nearly debt-free balance sheet, according to Mediobanca Securities;
• Fiat can raise as much as 2 billion euros by selling Magneti Marelli, Comau and Teksid, which produce auto parts, production tooling and engine blocks. Then Fiat wouldn't have to sell Alfa, and it could focus more closely on the auto industry. Investors would like that;
• A relaunched Alfa eventually could command profit margins of 10 percent or so. That would help Fiat to generate the 3.5 billion euro annual operating profit that Marchionne has promised by 2014;
• Fiat will save money by letting Alfa Romeo and Chrysler share platforms. Moreover, Alfa could generate sales of 500,000 units a year, helping Fiat and Chrysler to achieve economies of scale. Roughly 300,000 of the 500,000 units of Alfa planned by 2014 will be based on architectures shared with Chrysler;
• Since Alfa Romeo will share its compact wide global architecture with Jeep, Fiat could produce those vehicles together in crucial growth markets such as China and Russia;
• Without Alfa Romeo, Fiat would be hard-pressed to make reasonable volumes and decent profits with mid-sized and large cars. Aside from Ferrari's handful of supercars, Fiat would be forced to eke out a profit from low-margin segments such as minicars and compact cars.