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New Fiat Chrysler plan to put Marchionne to the test

Fiat Chief Executive Sergio Marchionne poses during a visit at the carmaker's Sevelsud plant in Atessa, central Italy, July 9, 2013. REUTERS
Fiat Chief Executive Sergio Marchionne poses during a visit at the carmaker's Sevelsud plant in Atessa, central Italy, July 9, 2013. REUTERS

By Agnieszka Flak

MILAN (Reuters) - Newly-merged Fiat Chrysler will unveil its long-awaited five-year plan on Tuesday, with chief executive Sergio Marchionne under pressure to show he can translate years of canny dealmaking into a thriving global autos business.

The 61-year-old has been at the helm of Italian carmaker Fiat for a decade, during which time he has won praise for a string of deals, including securing $2 billion from General Motors in 2005 for cancelling an option arrangement, and helping to rescue U.S. rival Chrysler from bankruptcy in 2009.

This year, he struck an agreement for Fiat to take full control of the now profitable Chrysler, creating the world's No. 7 carmaker and a platform for challenging industry leaders.

But amid all the dealmaking, Fiat has repeatedly missed sales targets as it delayed investments and made some bad design choices, and has seen its main European business lose share and plunge into losses during a six-year market slump.

Marchionne wants Fiat Chrysler to follow bigger rivals such as Volkswagen by building global brands and strengthening its position in the fast-growing and high-margin market for premium cars.

He plans to revamp the luxury Maserati and upmarket Alfa Romeo marques, while building on the success of Chrysler's Jeep, and use all three brands to expand in Asia - the fastest-growing global car market, but a blind spot for Fiat Chrysler right now.

Investors are optimistic, sending Fiat shares up around 50 percent over the last six months to levels last seen in 2007, and boding well for the upcoming move of the merged group's primary listing to New York from Milan later this year.

There have been some early signs of success with the premium car strategy, and Marchionne has removed uncertainty over his future by extending his contract until at least 2017.

But the challenges are huge, from finding the money to fund the plan to implementing it in a cut-throat industry where demand is still subdued in Europe and is now flagging in some major emerging markets such as Brazil. And so far, Marchionne has not shown the operational flair to match his dealmaking.

"Marchionne is capable, but there have been too many changes to his plans," said Stephanie Brinley, a senior analyst at researchers IHS Automotive. "Execution for some projects has been weak and disjointed, there are some holes to be filled."

IHS forecasts Fiat Chrysler sales will reach just over 5 million cars by 2018, up from 4.4 million last year, but below the 6 million or more Marchionne has talked about for 2018.

FINDING THE MONEY

Analysts expect the plan is likely to require capital spending of at least 8 billion euros ($11 billion) a year - a big burden for a group with 9.8 billion euros of net debt.

Marchionne has ruled out listing or selling a stake in luxury brands Ferrari or Maserati for now, but other options to raise money including a convertible bond remain "on the table".

Analysts have also said a share sale by Fiat Chrysler should not be ruled out, especially after Exor , the holding company of Italy's Agnelli family which controls the group via a 30 percent stake, said it would be willing to provide more funds.

Hanging over Marchionne's strategy is the persistent weakness of the car market in Europe, which while recovering is still a long way below pre-crisis levels, and headwinds in emerging markets such as Brazil, which could affect the margin boost expected from a new plant to be opened there next year.

Then there's the strategy itself.

Jeep, with ready products and a globally recognized brand in the fast-growing sport utility vehicle (SUV) market, is seen as Fiat Chrysler's biggest opportunity, especially in Asia.

But the plans for Maserati and Alfa may prove harder to deliver. Marchionne will build new models in Italy, Fiat's home for 115 years, to fill plants, boost jobs, and vindicate his belief that "Italians know how to build great cars".

Maserati's trading profit tripled last year and analysts say a sales target of 50,000 by 2015 is not completely out of reach, also raising expectations for the relaunch of Alfa.

Even rivals argue Alfa is an under-utilized asset within the Fiat Chrysler family. But considerable time and billions of euros will be needed to erase the weak quality reputation of a brand that has been kept on life support for years.

"Alfa Romeos are beautiful Italian machines," said Jane Nakagawa, managing director at Portia Consulting. "But it is like that really good-looking boyfriend, when you're not quite sure if he is cheating on you or not."

Fiat bought Alfa in 1986, but several attempts at reviving the brand have stalled, leaving just three models. Since Marchionne took the helm at Fiat in 2004, sales of Alfas have dropped by more than half to 74,000 cars last year, far below a 500,000 target he envisaged for 2014 in a 2010 turnaround plan.

Fiat Chrysler is expected to promise at least six new Alfa models, including premium-priced sedans and SUVs, with the first to hit the market late 2015 or early 2016. Each model will seek to combine Italian style with raw engine power, drawing on sister brand Ferrari's engineering expertise.

Alfa will use Fiat Chrysler's now combined dealership network to penetrate markets quickly and use its economies of scale in purchasing and production. It will also test new car architectures as the group hopes to produce more models from fewer underlying sets of platforms, also shared between brands.

($1 = 0.7212 Euros)

(Additional reporting by Stefano Rebaudo in Milan and Bernie Woodall in Detroit; Editing by Mark Potter)

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