FIAT: AN UPDATE

UNCLAS SECTION 01 OF 03 ROME 001409

SIPDIS

EUR/WE, EB/TRA, DRL/IL
DOL FOR ILAB/BRUMFIELD
USDOC 4220/IEP/EUR/OWE/SED/DDEFALCO
TREASURY FOR CAROL CARNES

SENSITIVE

E.O. 12958: N/A
UNCLASSIFIED

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TAGS: ECON EFIN EIND ELAB PGOV EFIN EIND ELAB PGOV EFIN EIND ELAB PGOV IT ITECON ITECON
SUBJECT: FIAT: AN UPDATE

REF: A) 02 ROME 5139

THIS CABLE IS SENSITIVE BUT UNCLASSIFIED. PLEASE PROTECT
ACCORDINGLY. NOT FOR INTERNET DISTRIBUTION.


1. (SBU) SUMMARY: A SENIOR FIAT OFFICIAL GAVE US A
DETAILED EXPLANATION OF THE FIRM'S FINANCIAL PROBLEMS,
STEPS TAKEN TO DATE TO IMPROVE THE SITUATION, AND FIAT'S
FUTURE OUTLOOK. WITH THE SALE OF ITS TWO PROFITABLE
JEWELS -- TORO INSURANCE AND FIAT AVIO -- FIAT WILL BE A
SMALLER FIRM, CENTERED ON AUTOS AND HEAVY EARTHMOVING
EQUIPMENT. RECOVERY OF FIAT WILL DEPEND ON AN ECONOMIC
RECOVERY IN ITALY AND THE EU, AS WELL AS IMPROVED
CUSTOMER ACCEPTANCE OF FIAT MODELS. A DECISION TO EXTEND
GOI SUBSIDIES FOR AUTO PURCHASES MAY HELP. END SUMMARY.


2. (SBU) ECONCOUNS AND ECON SPECIALIST MET FIAT'S SENIOR
VICE PRESIDENT FOR EXTERNAL RELATIONS, MAURIZIO BERETTA,
ON MARCH 28 TO DISCUSS FIAT'S EFFORTS TO RECOVER FROM ITS
FINANCIAL MELTDOWN. BERETTA NOTED THAT MUCH OF THE PRESS
COVERAGE OF THE FIAT SITUATION HAD BEEN EITHER DISTORTED
OR EXAGGERATED. HE OFFERED TO DISCUSS THE CAUSES OF THE
FIAT CRISIS, THE REMEDIES THAT HAD BEEN PURSUED AND
FIAT'S OUTLOOK FOR THE FUTURE.

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HOW DID THIS HAPPEN?
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3. (SBU) BERETTA TOLD ECONCOUS THAT TWO CONCURRENT
NEGATIVE DEVELOPMENTS (IN ADDITION TO A GENERAL SLOWDOWN
OF THE ECONOMY) CAUSED THE FIAT CRISIS TO EMERGE SO
VIOLENTLY OVER 2001/2002. FIRST, FIAT'S STRATEGY IN THE
`90S HAD BEEN TO BECOME A GLOBAL COMPANY. THUS, IT HAD
HEAVILY INVESTED OUTSIDE ITALY, PARTICULARLY IN COUNTRIES
SUCH AS ARGENTINA, BRAZIL, TURKEY, INDIA, CHINA AND
POLAND. THE ECONOMIC HARDSHIPS AND FINANCIAL CRISES
WHICH HIT THESE COUNTRIES OVER THE LAST FEW YEARS LED TO
THE FAILURE OF MANY OF THESE INVESTMENTS. ARGENTINA WAS
AN EXTREME CASE, WITH CAR SALES FALLING BY 90 PERCENT.
HOWEVER, LOSSES WERE SERIOUS ALSO IN BRAZIL AND TURKEY,
AS WELL AS OTHER COUNTRIES.


4. (SBU) THE SECOND DEVELOPMENT TO HIT FIAT WAS THE MORE
RIGOROUS APPROACH TO COMPANY DEBT EVALUATION TAKEN BY
RATING AGENCIES AFTER THE ENRON CASE. FIAT HAD RUN A
VERY LARGE DEBT (APPROXIMATELY USD 25 BILLION) IN NET
TERMS) FOR A VERY LONG TIME. FIAT MANAGEMENT FELT THAT
THE LARGE DEBT WAS MANAGEABLE, AS IT WAS LARGELY BALANCED
BY ACCOUNTS RECEIVABLE FROM PRIVATE CAR PURCHASERS "WHO
ARE TRADITIONALLY GOOD PAYERS." AFTER ENRON, HOWEVER,
FIAT'S CREDITORS ARGUED THAT THE OUTSTANDING DEBT WAS TOO
LARGE, AND RATING AGENCIES THREATENED TO DOWNGRADE THE
FIRM. FIAT WAS REQUIRED TO RAPIDLY REDUCE ITS NET DEBTS
BY ONE HALF (FIAT'S CREDITORS ARE PRINCIPALLY THE FOUR
LARGEST ITALIAN BANKS: UNICREDITO, CAPITALIA,
BANCAINTESA, SANPAOLO).


5. (SBU) FIAT WAS ABLE TO HALVE ITS NET DEBT IN 2002 BY
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SELLING 38 PERCENT OF FERRARI, 14 PERCENT OF ITS 38
PERCENT STAKE IN ENERGY COMPANY EDISON, AND BY OBTAINING
A CITICORP CREDIT LINE GUARANTEED BY THE REMAINING
INTEREST IN EDISON. IN 2002, FIAT ALSO SOLD ITS SIX
PERCENT INTEREST IN GENERAL MOTORS.

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FOCUSSING ON THE CORE BUSINESS
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6. (SBU) FIAT'S OBJECTIVE, SAID BERETTA, WAS TO FINANCE
RESTRUCTURING OF ITS CORE BUSINESS. FIAT PLANNED TO
RAISE USD 4 BILLION DURING 2003 THROUGH THE SALE OF TORO
ASSICURAZIONI (A FIAT OWNED INSURANCE COMPANY) AND FIAT
AVIO. A BINDING PURCHASE AGREEMENT ALREADY HAS BEEN
SIGNED (FOR USD 2.4 BILLION) FOR TORO. BERETTA IS
CONFIDENT THAT A BINDING PURCHASE AGREEMENT FOR FIAT AVIO
WILL BE SIGNED BY JUNE 2003 WITH THE CARLYLE GROUP (U.S.)
AND ITALIAN PARASTATAL AEROSPACE/DEFENSE COMPANY
FINMECCANICA FOR A PRICE RANGING FROM USD 1.6 BILLION TO
1.8 BILLION. FINMECCANICA WOULD BE A MINORITY PARTNER.

UNCLASSIFIED

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ACTION EB-00

INFO LOG-00 AID-00 CIAE-00 CTME-00 DODE-00 EXME-00 EUR-00
E-00 UTED-00 VC-00 FRB-00 TEDE-00 INR-00 ITC-01
VCE-00 AC-01 NSAE-00 OMB-01 OPIC-01 PRS-00 ACE-00
SP-00 SSO-00 STR-00 TEST-00 TRSE-00 USIE-00 DRL-01
G-00 SAS-00 /005W
-------------- 4FC0AF 031347Z /07
R 021412Z APR 03
FM AMEMBASSY ROME
TO SECSTATE WASHDC 9078
INFO AMCONSUL MILAN
AMCONSUL FLORENCE
AMCONSUL NAPLES
EU MEMBER STATES COLLECTIVE
DEPT OF LABOR WASHDC
DEPT OF COMMERCE WASHDC
DEPT OF TREASURY WASHDC

UNCLAS SECTION 02 OF 03 ROME 001409

SIPDIS

EUR/WE, EB/TRA, DRL/IL
DOL FOR ILAB/BRUMFIELD
USDOC 4220/IEP/EUR/OWE/SED/DDEFALCO
TREASURY FOR CAROL CARNES

SENSITIVE

E.O. 12958: N/A
UNCLASSIFIED

PAGE 02 ROME 01409 02 OF 03 031347Z
TAGS: ECON EFIN EIND ELAB PGOV EFIN EIND ELAB PGOV EFIN EIND ELAB PGOV IT ITECON ITECON
SUBJECT: FIAT: AN UPDATE


7. (SBU) ONCE TORO AND FIAT AVIO ARE SOLD, FIAT PLANS TO
CONCENTRATE ON ITS THREE CORE COMPANIES:

FIAT AUTO - CAR MANUFACTURING
CNH - A U.S. INCORPORATED FARMING MACHINERY COMPANY
IVECO - COMMERCIAL VEHICLES


8. (SBU) THE THREE FIRMS GENERATE AROUND USD 40 BILLION IN
ANNUAL REVENUES (USD 20 BILLION, USD 11 BILLION AND USD 9
BILLION RESPECTIVELY). FIAT WILL RETAIN SMALLER
ACTIVITIES SUCH AS ITS PLANT MANAGEMENT COMPANY COMAU,
SPARE PARTS PRODUCER MAGNETI MARELLI, AND THE TURIN-BASED
DAILY NEWSPAPER LA STAMPA. FIAT WILL ALSO KEEP ITS 60
PERCENT SHARE IN FERRARI. BERETTA SAID THAT FIAT INTENDS
TO INVEST USD 2.5 BILLION ANNUALLY FOR EACH OF THE NEXT
THREE YEARS TO RENEW THE ENTIRE AUTO PRODUCTION LINE.

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RELATIONSHIP WITH GENERAL MOTORS
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9. (SBU) BERETTA DETAILED THE THREE BASIC POINTS OF THE
FIAT-GENERAL MOTORS AGREEMENT.

-- CREATION OF A JOINTLY OWNED COMPANY TO PROCURE AND
DEVELOP THE ELECTRO-MECHANICAL CORE (MOTORS, ELECTRONIC
SYSTEMS GEARS, ETC.) OF FIAT AND OPEL (GM-OWNED) CARS FOR
EUROPEAN AND SOUTH AMERICAN MARKETS. BERETTA CLAIMED
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PAGE 03 ROME 01409 02 OF 03 031347Z
THAT THIS VENTURE WAS PROCEEDING WELL.

-- INTEGRATED/JOINT DEVELOPMENT OF NEW FIAT AND OPEL
MODELS. FOR EXAMPLE, THE 2006 VERSIONS OF FIAT PUNTO AND
OPEL CORSA LIKELY WILL HAVE 70 PERCENT OF PARTS IN
COMMON, ESSENTIALLY ALL "NON-VISIBLE" COMPONENTS OF THE
CARS WILL BE IDENTICAL.

-- THE PUT OPTION. FIAT HAS THE OPTION TO SELL ITS
ENTIRE REMAINING CAPITAL (80 PERCENT - GM ALREADY OWNS 20
OF FIAT) TO GENERAL MOTORS ANY TIME BETWEEN JANUARY 2004
AND JULY 2009 AT "FAIR MARKET VALUE". BERETTA SAID THAT
IT IS IMPOSSIBLE TO PREDICT WHETHER THE OPTION WILL BE
USED. IN ANY CASE, HE STRESSED, "IT IS IN THE BEST
INTEREST OF BOTH COMPANIES THAT FIAT OVERCOME
DIFFICULTIES AND FLOURISH AGAIN."


10. (SBU) BERETTA CONFIRMED THAT, WHETHER THE PUT OPTION
IS EXERCISED OR NOT, THE INTEGRATION PROCESS WITH OPEL
WILL CONTINUE. TOGETHER, FIAT AND OPEL HAVE CLOSE TO A
15 PERCENT SHARE OF THE EUROPEAN MARKET, CLOSE TO
VOLKSWAGON'S 16 PERCENT SHARE.

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THE FUTURE.."NOT TOO GOOD IN 2003"
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11. (SBU) BERETTA SUGGESTED THAT RESTRUCTURING WOULD
CONTINUE OVER THE NEXT YEAR OR TWO. AT THAT POINT, HE
PREDICTED, FIAT WILL HAVE OVERCOME MOST OF ITS FINANCIAL
DIFFICULTIES AND BE A PRINCIPAL PLAYER IN THE EUROPEAN
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AUTO MARKET. ASKED ABOUT THE OUTLOOK FOR THE ITALIAN
AUTO SECTOR, BERETTA WAS PESSIMISTIC IN THE SHORT TERM.
HE ANTICIPATED A NET DROP IN SALES WHEN GOI SUBSIDIES
EXPIRE MARCH 31. BERETTA INDICATED THAT HE HAD BEEN
UNSUCCESSFUL IN CONVINCING PRODUCTIVE ACTIVITIES MINISTER
MARZANO AND FINANCE MINISTER TREMONTI TO EXTEND AUTO
PURCHASE SUBSIDIES BEYOND THAT DATE. (NOTE: PRODUCTIVE
ACTIVITIES MINISTER MARZANO, IN FACT, ANNOUNCED MARCH 29
THAT THESE SUBSIDIES WOULD BE EXTENDED.)


12. (SBU) BERETTA DOUBTED THAT THE ITALIAN OR EUROPEAN
ECONOMY WILL RECOVER DURING 2003, ALTHOUGH HE NOTED THAT
DEVELOPMENTS IN IRAQ WOULD PLAY A MAJOR ROLE. BERETTA
BELIEVES THAT, WHILE NEW MODELS MAY SERVE TO INCREASE
FIAT'S SHARE OF THE AUTO MARKET, THAT MARKET IS
SHRINKING. FIAT WILL HAVE, AT BEST, A LARGER PIECE OF A
SMALLER PIE.


13. (SBU) BERETTA WAS POSITIVE, HOWEVER, THAT THE RECENT
APPOINTMENT OF UMBERTO AGNELLI AS FIAT CHAIRMAN WOULD BE
GOOD FOR THE COMPANY. THE AGNELLIS STILL OWN AROUND 30
PERCENT OF FIAT AND, HE STRESSED, THE RETURN OF THE

UNCLASSIFIED

UNCLASSIFIED PTQ0792

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ACTION EB-00

INFO LOG-00 AID-00 CIAE-00 CTME-00 DODE-00 EXME-00 EUR-00
E-00 UTED-00 VC-00 FRB-00 TEDE-00 INR-00 ITC-01
VCE-00 AC-01 NSAE-00 OMB-01 OPIC-01 PRS-00 ACE-00
SP-00 SSO-00 STR-00 TEST-00 TRSE-00 USIE-00 DRL-01
G-00 SAS-00 /005W
-------------- 4FC0CD 031347Z /07
R 021412Z APR 03
FM AMEMBASSY ROME
TO SECSTATE WASHDC 9079
INFO AMCONSUL MILAN
AMCONSUL FLORENCE
AMCONSUL NAPLES
EU MEMBER STATES COLLECTIVE
DEPT OF LABOR WASHDC
DEPT OF COMMERCE WASHDC
DEPT OF TREASURY WASHDC

UNCLAS SECTION 03 OF 03 ROME 001409

SIPDIS

EUR/WE, EB/TRA, DRL/IL
DOL FOR ILAB/BRUMFIELD
USDOC 4220/IEP/EUR/OWE/SED/DDEFALCO
TREASURY FOR CAROL CARNES

SENSITIVE

E.O. 12958: N/A
UNCLASSIFIED

PAGE 02 ROME 01409 03 OF 03 031347Z
TAGS: ECON EFIN EIND ELAB PGOV EFIN EIND ELAB PGOV EFIN EIND ELAB PGOV IT ITECON ITECON
SUBJECT: FIAT: AN UPDATE

AGNELLI FAMILY WILL BRING NEW LIFE TO FIAT.

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EMPLOYMENT LEVELS
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14. (SBU) BERETTA WAS MORE OPTIMISTIC REGARDING FIAT'S
ABILITY TO AVOID CLOSING PLANTS OR FIRING MOST OF ITS
WORKERS. HE INDICATED THAT, OUT OF A TOTAL OF 8,100 FIAT
FACTORY EMPLOYEES TEMPORARILY LAID OFF, APPROXIMATELY 500
WERE ALREADY ON EXTENDED UNEMPLOYMENT BENEFITS LEADING TO
RETIREMENT. APPROXIMATELY 2000 WOULD EITHER RETIRE
(NATURALLY OR THROUGH EARLY RETIREMENT SCHEMES) OR MOVE
INTO LONG TERM UNEMPLOYMENT PROGRAMS THAT WOULD TAKE THEM
TO RETIREMENT AGE. THE REST WOULD RESUME WORK. OF THE
PRINCIPAL FIAT FACTORIES, ONLY THE SICILIAN PLANT OF
TERMINI IMERESE WILL SUFFER SUBSTANTIAL REDUCTIONS IN
FORCE. BERETTA DID NOT FORESEE SIGNIFICANT PERSONNEL
REDUCTIONS FOR CASSINO, MELFI AND THE HISTORIC MIRAFIORI
(TURIN) FACTORIES. THE POMIGLIANO (NAPLES) PLANT, WHICH
PRODUCES ALFA ROMEOS, MAY EVEN EXPAND. BERETTA INDICATED
THAT, EVEN AFTER SELLING TORO AND FIAT AVIO, FIAT WOULD
REMAIN ITALY'S LARGEST INDUSTRIAL GROUP.

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COMMENT
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PAGE 03 ROME 01409 03 OF 03 031347Z

15. (SBU) FIAT, ACCORDING TO BERETTA, HAS DRAMATICALLY
RETHOUGHT ITS ENTIRE CORPORATE STRATEGY. BY SELLING OFF
FAMILY JEWELS SUCH AS TORO AND FIAT AVIO, THE FIRM HOPES
TO SURVIVE (IN THE SHORT TERM) AND REPOSITION ITSELF TO
SUCCEED IN ITS CORE BUSINESS (OVER THE LONGER TERM).
BERETTA WAS NOT PARTICULARLY OPTIMISTIC REGARDING EITHER
FIAT OR THE ITALIAN AUTO MARKET IN GENERAL.
NONETHELESS, HE ARGUED THAT FIAT WOULD RECOVER FROM ITS
TRAVAILS TO REMAIN A PLAYER IN THE EUROPEAN AUTOMOBILE
SECTOR.


16. (SBU) WHILE THE GOI HAS DONE ITS BEST TO AVOID
INTERVENING LEGALLY OR FINANCIALLY IN THE FIAT CRISIS, WE
DO NOT DOUBT THAT IT HAS PLAYED A KEY ROLE BEHIND THE
SCENES. THIS ROLE, HOWEVER, HAS BEEN PRIMARILY
ENCOURAGING DIALOGUE WITH CREDITORS AND UNIONS, AND
CONVINCING FIAT MANAGEMENT THAT THE FIRM WOULD NOT BE
BAILED OUT AND, THUS, WOULD HAVE TO SAVE ITSELF.

SEMBLER

UNCLASSIFIED

>
2003ROME01409 - Classification: UNCLASSIFIED