FCA looks to reach 7 mil. global sales in 2018

FCA outlined its five-year financial plan for investors yesterday at a 12-hour marathon meeting held at the Chrysler Group headquarters in Auburn Hills, Michigan (US). IHS Automotive was in attendance to hear details on the company's strategy for product actions, regional goals, and global targets. In this report, we look at the company's financial five-year plan.

With a mind to growing the company's consolidated volumes to 6.3 million units and JV volumes to 0.7 million units, up from 4.4 million units in 2013, the company forecasts Group net revenues will reach EUR132 billion by 2018, reflecting a 9% compound annual growth rate (CAGR) for 2013–18. Earnings before interest and tax (EBIT) are forecast to increase three-fold from EUR3.5 billion (excluding unusual) in 2013 to EUR9 billion in 2018; earnings before interest, tax, depreciation, and amortisation (EBITDA) are forecast to double to EUR17 billion; and margins are forecast to grow from 4.1% to about 7% in 2018, making the company more competitive with other automakers. Net income is projected at EUR5 billion for 2018.

Reaching these targets is dependent on significant share gains, which FCA is supporting with an aggressive product plan, driven by total capex and capitalised R&D (based on IFRS standards) of approximately EUR48 billion for the 2014–18 period, and an average of EUR9.5 billion, which will peak in 2016 at EUR11 billion.

FCA is forecasting that its net industrial debt will peak in 2015 at about EUR11 billion, an increase from EUR9.7 billion at the end of 2013. However, the company believes that as it emerges from a period of intense capex spending to reap the benefits of increased revenues and sales, net industrial debt will fall to EUR0.5–1 billion by the end of 2018. During the Q&A sessions and presentations, CEO Sergio Marchionne reiterated that this plan is fully self-funded, meaning that the company has no expectation of reaching out to capital markets to generate equity. The only tool for generating equity that he considers would be acceptable is mandatory convertible debt, which would maintain pressure as well. Marchionne acknowledged that the net industrial debt level is high, but also sees industrial debt as a motivator, and cause for keeping the company disciplined and focused on executing the plan.

Regional forecasts

FCA has aggressive growth objectives for nearly all of its regions of operation. The company currently breaks the globe into four key regional zones: North American Free Trade Agreement region (NAFTA); Latin America (LATAM); Asia-Pacific including China (APAC); and Europe, Middle East, and Africa (EMEA, which includes the EU28 and EFTA/EU28+EFTA).

APAC

FCA forecasts its APAC regional sales to grow to about 1.1 million units, a 40% CAGR between 2013 and 2018. The company expects to increase its share of the region to 2.3%, with its share of the Chinese market to increase to 2.8%. The APAC region is one of only two that is forecast to see significant increases in manufacturing capacity. In 2014, FCA has 195,000 units of vehicle production capacity at 99% utilisation; engine production capacity of 140,000 units; transmission production capacity of 180,000 units; and about 3,600 employees. In 2018, the company is targeting vehicle production capacity of 775,000 units at 150% utilisation; engine capacity of 820,000 units; transmission production capacity of 700,000 units; and about 13,000 employees. FCA currently has two plants, one platform, two models, one engine, and two transmissions; in 2018, this will grow to three plants, two platforms, eight models, five engines, and three transmissions.

LATAM

The company forecasts the LATAM region will see sales grow from 900,000 units in 2013 to about 1.3 million in 2018, an 8% CAGR. Market share in the region is targeted to increase from 15.8% (21.5% in Brazil) in 2013 to 19.3% (26.6% in Brazil). The increases in LATAM volume will come from a volume increase to 1.1 million for the Fiat brand from 887,000 units in 2013, and about 200,000 units of additional Jeep sales. Jeep sold 27,000 units in the region in 2013. Driving Jeep growth will be local production as Renegade and C SUV production will be added to the new Fiat plant in Pernambuco (Brazil). Along with adding production, the company has plans to develop a dedicated Jeep dealer network in Brazil, and implement a long-term marketing campaign to raise awareness and consideration.

EMEA

FCA's goals for the EMEA region are much more modest. The market share growth plan is to increase from 5.3% to 6.0% in 2018; the EU28+EFTA markets are expected to see market share grow to 7.1%. In volume terms, that means a jump from 1.1 million units in 2013 to about 1.5 million in 2018. FCA sees the EMEA brand walk including 730,000 units from Fiat and Abarth in 2018; 270,000 from Jeep; 150,000 from Alfa Romeo; 80,000 from Dodge, Chrysler, and Ram; and 270,000 from Fiat Professional divisions. In 2013, Fiat Professional delivered 250,000 units and Fiat-Abarth 620,000 units of a 1.1 million total. This EMEA plan includes Jeep growing from a 50,000-unit year in 2013; one common theme to global growth is that Jeep sales are expected to see significant, sometimes heroic gains across the globe.

NAFTA

Growth for the NAFTA region is also fairly ambitious. In a region where automakers scrap for tenths of a percent in share, FCA forecasts a gain from 11.5% in 2013 to 15.5% in 2018. US sales, which make up the bulk of the region, are forecast to grow from 11.4% to 15.8%. FCA is coming off having also met equally daunting targets set in 2009 when the NAFTA target was to increase sales by 75%, which FCA beat by 7%. From 2009–13, the group gained 2.3 points of market share in the region. The company is looking for an increase of 4 points between 2013 and 2018 without the tailwinds enabled by a (slowly) rebounding overall market. In volume terms, this includes a gain of 1 million units to 3.1 million in 2018. FCA sees NAFTA growth driven by high capacity utilisation, a robust dealer network, broad market coverage, strong unique brands, and world-class products. In NAFTA, FCA will execute a plan that moves Chrysler into the role of the mainstream brand, taking on Toyota, GM, Ford, Honda, and Volkswagen, while Dodge will move forward with a tighter product lineup focused on performance "for those who still like to drive". Fiat will remain a smaller-volume, 500-family brand. FCA has ambitious goals for Alfa Romeo in the region, which is expected to grow to 150,000 units by 2018.

Brand forecasts

To reach these levels of ambitious regional sales, the company needs to have the product to back it up, of course. Key to most of the company's aggressive forecasts is an increase in global Jeep sales from 0.7 million units in 2013 to 1.9 million in 2018, which reflects a 22% CAGR – slightly lower than the 24% CAGR Jeep reports for 2009–14 sales growth. The majority of the Jeep brand's sales growth for 2009–14 was in the NAFTA region, with international sales growing from 60,000 units to 240,000 units, while NAFTA sales grew from 270,000 units to 770,000 units over the same period. However, for 2014–18, Jeep forecasts 50% CAGR for LATAM, 45% for APAC, 35% for EMEA, and less than 10% CAGR for NAFTA. Of the 1.1 million units of growth Jeep expects over the next five years, the company says 700,000 units will be a result of localisation in production "from five nameplates built in one country to six nameplates in six countries", with new production in China and Brazil – both markets very hungry for SUV entries. The plan also includes an additional product in the Grand Wagoneer, which Marchionne said during the Q&A would be targeting the Range Rover market.

FCA forecasts Chrysler brand sales growth as dramatic as that of the Jeep, growing from 350,000 units in 2013 to 800,000 in 2018. The brand last saw sales that high in 2005 – a year that was still in the high-incentive days and well before Fiat ownership. FCA says there has been a long-running turf war between the Chrysler and Dodge brands for the "right to win the volume mainstream customer", but it has moved past this by choosing to give Chrysler the volume position and relegating Dodge to a "performance" brand. Chrysler will look to become the company that offers a full line of "exceptional and attainable" vehicles for the mainstream market. By putting new products under the Chrysler umbrella, the company will increase segment coverage in NAFTA from three to six, adding a compact car (100), mid-size SUV, and full-size utility vehicle to the minivan, full-size car, and mid-size car already in the showroom. During Q&A, Marchionne hinted that the Chrysler minivan may also give up the Town & Country name in favour of "Caravan". This model conveniently leaves pick-ups for Ram, off-road vehicles for Jeep, and performance cars for Dodge. It is also within the Chrysler brand that FCA will direct its hybrid intentions, with a PHEV version of the next minivan and a full-size crossover.

Dodge, with its new performance attitude vision, is forecast to effectively see flat sales over the plan period, with a dip in 2014 over the loss of the Avenger and most of its new-product activity not arriving until early 2018, while Dodge will revive its ambitions for a B-sedan/hatch product. The brand will also gain the SRT family, which will no longer stand on its own. The Dart will also see SRT treatment, as will the D SUV replacement for the Journey. The Durango and Viper are both expected to continue through this current product plan. Under the new formula, it is unlikely that Chrysler will continue to offer an SRT 8 with the next 300.

Fiat's forward product plan involves a two-pronged approach: feed the brand's functional side by clarifying the way it tackles the lower end, and feed "dealers and devoted customers while protecting for a sustainable business", while also leveraging the 500 family to expand the brand's position in the upper mainstream markets. Brazil will remain a second home for Fiat, where investment is being made in an all-new plant. Fiat is happy with the brand's overall image in Latin America, and has a full product plant scheduled for the region. Indicative of the Fiat brand being strongest in the weakest markets, growth for Fiat is forecast from only 400,000 units to 1.9 million units for 2013–18.

Alfa Romeo is also forecast to gain nearly 400,000 units, but this is in comparison to only 100,000 in 2013. The Alfa Romeo turnaround hinges on returning to brand values not displayed by its products in 30 years, except its reputation for classic Italian style. The company has identified five key attributes: advanced, innovative engines; perfect 50:50 weight distribution; class exclusive power-to-weight ratio; and a groundbreaking and distinctly Italian design. Alfa created a skunkworks charged with creating the right products for the brand, to sit on a new RWD/AWD architecture capable of supporting C to E segments, including SUVs, with eight products to be launched by the end of 2018. Most products will not come until 2016, and Fiat has committed EUR5 billion to the Alfa revival.

The new product plans did not change the outlook for Maserati or Ferrari notably from what we've previously known. Marchionne reiterated that the Ferrari brand is not for sale, but belongs to the Fiat shareholders and will not budge.

Outlook and implications

FCA outlined a plan that Marchionne admits requires "near-perfect execution" in most markets to achieve; however, the company's launches of late have been anything but "near perfect". During the Q&A sessions, Marchionne also indicated a strong willingness to put the brakes on this development if progress does not move to plan. Support for the growth – for which the company has earmarked capex and R&D spending of nearly EUR50 billion for 2014–18 – is forecast to be self-funded if the sales targets are met. Given Marchionne's stated willingness to pull back if the plan doesn't go as expected, and its dependence on new markets and products that do not arrive until the second half of the plan's outlook, among other potential issues, there seem to be obstacles in the way of reaching 7 million upa.

The plan as outlined does not included raising production past the already-announced Chinese localised capacity and the investment in the new Brazilian plant; in North America in particular, it depends on sustained utilisation rates of around 125%, according to IHS North American production forecast analyst Joe Langley.

The Chrysler and Dodge brand-clarification plans do seem to fit well with the historic views of each, despite occasional forays into the premium territory by Chrysler. Shifting the volume to Chrysler supports current consumer trends towards demanding higher content and better interior materials, as well as being willing to pay for them. Moving Dodge into a performance-oriented area builds on the irreverent, aggressive, and unapologetic attitude the brand has always had. However, several of the new products are expected in 2016 and 2017 when we forecast the US market will level off. Chrysler will need to gain share aggressively from competitors and find ways to ensure consumers think of the brand for segments in which Chrysler has not consistently played. The brand repositioning being undertaken for Chrysler and Dodge are described in this five-year plan, but in reality brand repositioning can take much longer than five years; in these terms, we hope this is only the beginning salvo, to be followed by long-range support for the change in direction.

The expansion of the Jeep brand, which is heavily dependent on emerging markets, should coincide with a global increase in demand for SUVs of all sizes. Jeep has delivered a consistent, iconic brand for decades, and the new products promise to continue this. The pace of growth is extremely aggressive; our most recent sales forecasts saw Jeep reaching only 1.0 million units in this same timeframe. Jeep is well positioned, and has brand and product strength at its disposal. While the group was able to meet the aggressive targets set for the 2009–14 timeframe, it was helped greatly by the gains made in the North American market overall. Jeep is now looking to make greater gains in markets growing at a more moderate pace.

The plan for Alfa Romeo holds promise in recognising the missing elements in the brand's DNA and in the capital support behind it. However, specific strategies for earning its way back to a volume of 400,000 upa remains to be seen. With a 400,000-upa global goal, and a much smaller product lineup than the BMW, Mercedes, and Audi competition it is eyeing, the brand will need to get just as aggressive about reaching consumers and taking share from the established brands, but given that most of the Alfa products do not arrive until 2016 and later, the timeframe is optimistic.

Overall, the plan positions brands logically and consistently within each brand's history and context. Global resources are leveraged, and markets are well-researched and being met with market-appropriate solutions. There is capital support for product development, and a clear strategy for the best ways to leverage global architecture and uncovering cost-efficiencies. However, as Marchionne knows, it all comes down to execution, which has not been the case with FCA's most recent launches. Marchionne's willingness to put the brakes on the programme rather than invest capital poorly could serve to keep the company healthy, but it also means that this aggressive plan could see delays in execution and may not meet the aggressive sales targets as quickly as outlined.