US embassy cable - 03ROME1409

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 
 
PAGE 02        ROME  01409  01 OF 03  031346Z 
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. 
 
--------------------------------------------- ------------ 
HOW DID THIS HAPPEN? 
--------------------------------------------- ------------ 
                       UNCLASSIFIED 
 
PAGE 03        ROME  01409  01 OF 03  031346Z 
 
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 
                       UNCLASSIFIED 
 
PAGE 04        ROME  01409  01 OF 03  031346Z 
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. 
 
--------------------------------------------- ------------ 
FOCUSSING ON THE CORE BUSINESS 
--------------------------------------------- ------------ 
 
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 
 
                           UNCLASSIFIED     PTQ0790 
 
PAGE 01        ROME  01409  02 OF 03  031347Z 
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, IT 
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. 
 
--------------------------------------------- ----------- 
RELATIONSHIP WITH GENERAL MOTORS 
--------------------------------------------- ----------- 
 
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 
                       UNCLASSIFIED 
 
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. 
 
--------------------------------------------- ----------- 
THE FUTURE.."NOT TOO GOOD IN 2003" 
--------------------------------------------- ------------ 
 
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 
                       UNCLASSIFIED 
 
PAGE 04        ROME  01409  02 OF 03  031347Z 
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 
 
PAGE 01        ROME  01409  03 OF 03  031347Z 
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, IT 
SUBJECT:  FIAT: AN UPDATE 
 
AGNELLI FAMILY WILL BRING NEW LIFE TO FIAT. 
 
--------------------------------------------- ---------- 
EMPLOYMENT LEVELS 
--------------------------------------------- ---------- 
 
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. 
 
--------------------------------------------- --------- 
COMMENT 
--------------------------------------------- --------- 
 
                       UNCLASSIFIED 
 
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