FIAT bumpy road to becoming a European champion

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Here in Italy we are all with Fiat Chief, Sergio Marchionne, and his miraculous efforts to raise several Lazaros at once. He needs moral support as he tires himself to exhaustion doing the rounds of capitals on both sides of the Atlantic – capital as money and capital as seat of government.

Not only has he visited Washington D.C. and Berlin, but also Wiesbaden (Hesse) and Mainz (Rhineland-Palatinate). He will soon stop over Rome, since the Italian government has officially asked for a meeting. The one capital which is conspicuously absent from his tour de force is Brussels, the seat of the European Commission.

This is not surprising, since the financial crisis has blurred the European Commission’s approach to state aid. On the other hand, whatever is left of a European industrial policy is played away from Brussels, in other European capitals.

But in the potential Chrysler-Fiat-Opel mega-merger there could be much beef for the competition guys in Brussels to chew – the problem being that both Chrysler and Opel to remain attractive to Fiat  for industrial reasons need  U.S. and German public purses.

State aid to companies is forbidden in principle by the EU Treaty – even though the treaty itself and secondary legislation contemplate a few exceptions to this general rule. To begin with, all state aid beyond a € 300.000 threshold must be notified to the Commission. The new entity resulting from the merger will thus have to notify the Commission the State aid it will get – since we are here in the order of tens of billions of euros. To be sure, after a preliminary assessment around 85 % of all notified State aid measures get approved by the Commission.

But this particular one does not look like a trifle. Chrysler-Fiat-Opel should present its case as restructuring aid. To get the Commission’s green light it needs a restructuring plan confined within a specific time frame, compensatory measures such as reduction of capacity, proof that Chrysler-Fiat-Opel (read Fiat) is contributing some of its own, and that it’ll be the last such aid.

Next, there is the politics of competition policy – true, the European Commission is supposed to be super partes, but we live in the real world, don’t we? Once Marchionne succeeded in persuading his German counterparts, then you would have two big member States, Germany and Italy, presumably in favour of letting the restructuring plan go ahead. But another big one, France, home of Renault-Nissan and Peugeot Citroën, presumably against.

Competition insiders are used to say that within the EU British officials were entrusted with markets liberalization, while French and German ones were in charge of state aid. A great European champion such as Airbus was built with plenty of state aid and everybody on board: France, Germany and the UK. Well, almost everybody: Italy stayed, or was left, outside. Anyhow, Chrysler-Fiat-Opel, a car champion centred – surprise! – in Italy,  risks opening a schism in Brussels state aid policy the equivalent of the reformation.

Finally, competitors can challenge State aid measures directly before national courts. But again, moves like this may be unlikely in an industry where public support is so multifaceted and pervasive as to make most competitors reluctant to call for a tough approach that, who knows, may one day strike themselves as well.

Eventually, if the European Commission finds the aid to be incompatible with fair competition on the internal market it requires the State that granted it to abolish the measure and to recover the money from the beneficiary. This threat, however theoretical, may have induced Fiat to send a few emissaries in Brussels, who are perhaps in quiet talks with some Commission officials right now. But, assuming it does exist, the political profile of a mission to Brussels is zero – particularly vis-à-vis the spectacular meetings Mr. Marchionne has been having with heads of State, prime ministers and Land governors.

The blame is obviously not with the Fiat chief, but with the European Commission itself. Three months ago (FT, 12 February 2009), Giuliano Amato and Emma Bonino suggested the creation in Brussels of a task force on the automotive sector chaired by the European Commission and composed by member states’ special representatives. The idea was to try to ride the tide of State aid ex ante, rather than just attempt to stem it ex post – when, in fact, the political profile of certain measures may have become so high as to make them unstoppable.

Had the task force been there, probably Mr. Marchionne would have already called on Brussels. But as Commissioner Neelie Kroes made clear (FT, 16 February 2009), the College did not like Amato-Bonino’s idea and it never took off.

This is a pity because the crisis, as always, is at the same time an opportunity to restructure and to become more efficient on a continental basis, as Marchionne certainly knows. It might also be an opportunity for the Commission to refashion its state aid policy in a pro-active mode – from watchdog of national champions to shepherd of a truly European one (with a long arm in the U.S.) in the car industry.

What else can be said on this affair? Marchionne is approaching sainthood here in Italy. Although Crusoe.it does not like praying in the chorus, we are ready to recognize to the man an extraordinary ability in jumping on the classic opportunity of a lifetime.
Somewhat paradoxically given the amount of state aid involved, his drive goes in one respect in what we believe is the right, pro-market, direction. It shows in fact that, yes, governments can pour money on any kind of industry, but when it comes to actually running a company they are helpless and need someone from the craft itself.

As Italians living in Italy we are certainly happy that this time around our money as taxpayers is not involved – Italians living and producing in the U.S. or in Germany may be less happy, as shown here. It may also be a healthy thing that over the years Italians have discovered things other than cars to produce and export: manufacturing still has a high share (over 20%) of Italy’s GDP, its balance of payments is in reasonably good shape, and yet the country is no longer among the world prime volume producers of motor vehicles, as shown in this World car production map (in Swedish!).

Finally there are a number of industrial considerations to be made – the long vs. short production runs, the synergies, the complementarities, the platforms, the engines, the dealership networks and on and on and on – but these we leave to the car nerds that none of us is.

We just liked a lot the following comment on the case made in an American economic blog, Megan McArdle’s Asymmetrical Information, on this post.

How long can Fiat-Chrysler last? “Most analysts – she wrote – do not expect to be long, given that their super secret surprise scheme for turning everything around is to have Chrysler sell retooled Fiats to a country with one-seventh the population density and almost twice the birthrate of Italy”.

But what if Fiats become so fashionable that to squeeze into them Americans will finally shed some weight?

Fiat, the anti-obesity car!
 

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