Ladies and Gentlemen,
Good afternoon to you all.
I would like to begin by thanking Albert De Luca, President of the Chamber, for his invitation and the opportunity to share some thoughts on the future of the auto industry and what we are working to achieve through the Fiat-Chrysler partnership.
But before starting, I would like to give you a quick overview of what Fiat and Chrysler make, because I believe it is the best way to understand who we are today.
We make these cars…
…and also these…
…as well as this kind…
…and this kind…
…and here in Canada we make these…
…as well as this kind of minivan…
…and these cars.
We also make this kind of SUV…
…and trucks like these…
…as well as cars like these…
…and like this.
We sell these to the rich…
…and make people rich by asking them to drive these.
I started like this as a way of saying that if you expect a lesson or some kind of magic recipe from me, I am afraid you will be disappointed.
I am neither a professor nor an economist.
My calling is much more humble: I am a man of industry.
What I can share with you today is what we are experiencing in the auto sector and how Fiat and Chrysler are changing, in my view permanently and for the better.
As I was preparing for today’s address, the words “halfway to heaven and just a mile out of hell” from the Bruce Springsteen classic came into my head.
Those words provide a pretty accurate description of the state of the auto industry today.
For a variety of reasons – most of which were directly attributable to the auto industry itself – we found ourselves in the midst of a severe crisis that required a profound rethink of the existing business model for everyone.
Where the problems have been addressed with courage and clearness of purpose and the structural deficiencies have been resolved – as has been done at least on one side of the Atlantic – the industry has demonstrated that it can get back up and move forward on a solid footing and return to creating value.
In Canada and the United States, we saw the remarkable example of all stakeholders – industry, governments and trade unions – working together to overcome the structural impediments that for too long had been dragging the sector down.
Many times over the past two and a half years, I have found myself defending the decision of the Canadian and U.S. governments to intervene.
Both have been severely criticized for lending automakers money from the public coffers to allow them to restructure and survive.
I have always been an advocate of the free market and continue to believe that, in the long term, only market-driven solutions will prevail.
Only a free market can provide the ideal conditions for competition, innovation and economic growth and ensure that everyone is playing on a level field.
But the problem in 2009 – as those of you who work in the world of finance, in particular, know all too well – was that the financial system, which under normal conditions would have been adequately robust to absorb corporate failures, was broken. Without intervention from elsewhere, the almost inevitable collapse of the industrial sector would have been irreversible with obvious consequences for hundreds of thousands of families and the economy as a whole.
The pivotal decision of the Canadian and U.S. governments not only gave Chrysler and GM a second chance, it also provided an opportunity for the industry as a whole to tackle the chronic problem of production overcapacity.
Globally, production capacity is around 96 million vehicles per year, which is at least 20 to 25 million more than the market can realistically digest.
But in Canada and in the U.S. overcapacity is no longer a problem.
We have taken every ounce of unnecessary capacity out of the system.
What happened in North America is an example of what can be done when all parties openly and honestly come to grips with the inefficiency of an economic model and accept that the realities of competition go beyond national borders.
Unfortunately, this example has not been followed in Europe.
Rather than taking the opportunity presented by the crisis to push for a radical restructuring of the auto industry, governments have been allowed to provide direct financial support to national players in a clear and blatant contravention of the Treaty of Rome signed in the 1950s.
In some cases this distorted the market, with factories being kept open on the basis of political rather than financial considerations, further impeding efforts to address overcapacity.
I don’t want to come across as a Eurosceptic. The European auto industry remains a major source of technological innovation and production know-how.
But time is running out for European carmakers. Industrial and political leaders must find the will and courage to address the lack of competitiveness of the system.
In the words of Springsteen, we are just a mile out of hell.
We can’t afford to fool ourselves into believing that it is all downhill from here.
In every region of the world, our industry has given ample demonstration of the wrong way to manage the business.
Over the years, we have tried just about every trick in the book.
We accumulated losses and destroyed value.
We sold financial services, we bought financial services.
We sold off suppliers, we brought them back in-house again.
Our industry has embarked on M&A sprees and excursions into other sectors.
We consolidated brands and consolidated companies and consolidated the consolidations.
Yet most of these efforts were geared toward size alone, which is why they so often failed.
They made automakers into rambling ranch houses onto which one room after another was added with no rational architecture uniting the whole.
And so the question now is: are we capable of managing the business the right way?
Doing it the right way means understanding two key truths of the industry.
The first is that ours is a very capital intensive industry.
Development of a new platform means investing at least $1 billion.
And that means you can’t afford to fail.
Every individual decision relating to architecture, style, components and engines has to be evaluated very carefully, because there is an absolute minimum margin for error.
If the vehicles don’t sell, you face a $1 billion dollar write-off.
Two, three, four of those and you find yourself back in hell.
The second truth is that this business is highly sensitive to operating leverage.
There’s a point at which I bleed – and if I do bleed, I bleed profusely.
It’s easy to make large amounts of money when operating leverage is high and it’s also relatively easy to lose large amounts of money when your breakeven point is at the wrong end of the curve.
Our business requires large economies of scale and continuous investment in developing products and markets.
In my view, 6 million vehicles per year represents the minimum critical mass threshold needed for an auto group to generate an economic profit.
More important than the absolute number of cars, however, is the volume produced per architecture.
Given the level of investment it takes to develop a mass platform, a minimum volume of at least a million vehicles is needed to achieve an adequate return.
Mass producers – which is what we are – need to adopt a rigorous, disciplined and penny-conscious approach to development and production, while at the same time ensuring they provide customers adequate choice and diversity.
We have to accept that a new business model is required, that this sector needs a complete transformation and that unfettered, uncoordinated independence is no longer tenable.
Given these essential prerequisites, we are bound to see the elimination of marginal players going forward.
I believe we will end up with five global players whose success will be based on optimizing investment through sharing of architectures and powertrains at the global level and maximizing operating leverage through coordinated global management.
Our operating and strategic decisions have all been aimed at ensuring Fiat and Chrysler are in that group of global players by leveraging the technical know-how, expanding the geographic reach of both and, in the end, delivering what customers want.
Long-term, neither Fiat nor Chrysler would have made it on their own.
In the early part of 2009, Chrysler was losing almost $1 billion a month: a situation that clearly was unsustainable.
And Fiat was too small and too handicapped by an inadequate business model in Europe to have any hope of a future.
Together, we’re going to sell nearly 4.2 million cars this year, making us the fifth largest automaker in the world.
By 2014, we expect to reach 5.9 million units.
And we will have just three main architectures that drive over 80% of total volumes.
We are creating a single global automaker, with sharing of best practice in manufacturing, engineering and design, quality and management.
And by leveraging each other’s strengths, Fiat and Chrysler will both have the most extensive possible product offer, with Fiat bridging the gap in medium and large segment cars and Chrysler in smaller, fuel-efficient models.
By joining forces Fiat and Chrysler can both expand their distribution to be more balanced geographically and better leverage their combined production capacity through the optimization of new product allocation.
The alliance is also enabling both to better address the challenge of reducing dependence on oil.
I know this is particularly topical here in Quebec where there is a strong political will to convert a large percentage of public transport to electric. You are leading the way and making a significant contribution to the national and North American efforts to develop the use of fuel-efficient technologies, including electrics.
I am also aware you are developing an extensive charging infrastructure that is becoming a model internationally.
Personally, I believe electric propulsion is one of the most promising long-term solutions.
Over the years, Chrysler has developed significant know-how and remains committed to innovation and development in this area. Next year, we will be bringing out a new version of the Fiat 500 with an all-electric drivetrain developed by Chrysler engineers.
But the electric alternative also requires vision and the right measure of realism.
Experts internationally share the view that even 10 years from now electric vehicles won’t account for more than 5% of the market.
To be successful, development will have to be collaborative – and unhindered by misguided legislation – and, in the meantime, will require solutions that work together with other technologies, both conventional and alternative.
I have never hidden my bewilderment at the fact that the regulatory focus, particularly in Europe, seems to be increasingly centered on electricity as the only solution.
If regulators promote this solution alone, the result will be more investment and cost with no immediate or tangible benefit.
There are still numerous obstacles to widespread use of this technology.
The cost of electricity is still way too high, significant work is needed to develop the charging infrastructure, battery capacity is too limited and charging times still too long.
What is being done here in Quebec is quite unique.
Automakers are not being forced by law to convert rapidly to electricity or bear the responsibility for resolving the problem.
Instead, a rational and balanced approach is being taken and all parties are contributing, with the public sector leading the way.
I believe such an approach is the only way to achieve a successful result.
Also in the area of alternative propulsion, some of you will be familiar with Iveco Irisbus which – following the demerger of Fiat’s capital goods activities at the beginning of this year – is now part of Fiat Industrial.
Iveco Irisbus has quite a good relationship with the city of Montreal and discussions are underway with the public transport authority ATV relating to the testing and field assessment of hybrid buses that would provide both partners the opportunity to take significant steps in the further development of hybrid technology for public transport.
I was also asked to share my thoughts on what it means to integrate two groups, one Italian and one American, that come from two very different cultures.
Just a few moments ago there was a slide showing the perfectly complementary fit between the two groups that could give someone the impression this is all quite easy.
In reality, we are confronted with a variety of regulatory barriers to the transfer of some of our architectures that make the job incredibly difficult.
Let me just give you a couple of examples.
The design of most American cars today would not meet the pedestrian impact requirements in the European Union.
The bizarre implication is that European pedestrians are somehow different than American pedestrians.
But the absurdities don’t stop there.
A set of headlights used in the United States cannot be used in Europe, because the direction of the beam is not exactly the same as required on the other side of the Atlantic.
This is absolute nonsense. Cars all look in the same direction and, to the best of my knowledge, Europeans don’t have any particular optical problems.
Maybe in how they look at finance, but certainly not when it comes to driving cars.
But beyond the technical issues, there is a factor that goes far deeper and I believe is extremely important to the success of our partnership and that is cultural integration.
Any attempt to dominate the culture of another organization would stifle creativity.
But Fiat didn’t come to America to conquer or dominate Chrysler.
If we had tried to impose a Fiat view of the world on Chrysler, we would have failed abysmally.
The reason we have succeeded thus far is that we recognize Chrysler is first and foremost an American car company and that its character needs to be preserved.
We are working to align Fiat and Chrysler without discarding the strengths of two different cultures.
Both groups have proud heritages and distinctive identities that will continue to be reflected in the products we deliver.
There is a philosophy at work here in Canada, part of the culture that you all live, that I believe is a good parallel of how we have approached our partnership and integration.
Americans have long subscribed to the notion of their country being a melting pot, where immigrants assimilate into the mainstream culture and largely leave behind the way of life and culture they came from.
But the Canadian approach to diversity has been somewhat different.
Instead of a culture forged from a melting pot, it has been crafted more like a mosaic, where individual pieces contribute to a harmonious whole while retaining their own distinct character and attributes.
Although immigrants to Canada are expected to learn and respect the mainstream culture and rules, more value is given to their cultural heritage and to preserving it.
Such an approach encourages individuals to celebrate the unique perspective and strength their culture can contribute and, at the same time, to accept and appreciate the cultures of others.
In our alliance, we have applied the same philosophy of mutual respect for one another’s differences.
And we have also seen the positive creative effect of the meeting of the two cultures, which has functioned as a catalyst in the innovation process.
After all, innovation is nothing more than that fine line that separates order from chaos. Creativity thrives on chaos while product development is fueled by ordered processes.
I am not suggesting that order or disorder is specific to one culture or the other, but the symbiosis between Fiat and Chrysler has most certainly generated a highly productive engine of ordered creativity.
I would like to show you the new TV commercial for the 500 Cabrio that starts airing throughout North America within the next few days.
The spot, which features Jennifer Lopez, delivers a message that goes right to the heart of our organization.
Whatever we do and whatever we achieve, it is important that we remember where we have come from and what our values are.
It is important that we remember the course we have taken and the many hurdles we had to overcome along the way.
These things, after all, are what define us as individuals and remind us that no success is ever final – we have to keep working at it every single day.
I have been asked numerous times to explain the essential ingredient in the turnaround at Fiat, which began in 2004, and then Chrysler, in 2009.
I don’t believe there is a single recipe for every business.
However, there is a common approach that can be applied to resolving even the most difficult situations and that is to recognize the central role of people and those who lead them.
Quality people are essential to a successful organization – and an organization is, after all, nothing more than a vehicle for the collective will and aspirations of the people within it.
And that is why the results achieved by Chrysler in such a short time – the return to profitability, renewal of almost the entire product portfolio, consistent gains in market share and regaining credibility – are attributable to the extraordinary commitment and resilience of the people at Chrysler who believed in themselves and in each other.
On May 24th this year, when we repaid all government loans in full – six years early and with interest – we had buttons made saying “PAID” which we distributed to everyone at Chrysler in North America.
This was by no means an expression of arrogance but rather of the immense gratitude that we have and will always have to both governments for providing the means to begin the work that needed to be done and to taxpayers for giving us the opportunity to demonstrate what we are capable of.
They are also a reminder for everyone at Chrysler of what can be achieved by hard work and determination, by not giving in when the going is tough, but rather finding the strength to get back on one’s feet and move forward.
The people at Chrysler demonstrated that, if confronted with courage and tenacity, no obstacle is insurmountable.
Through their determination to restore it to its rightful place, they demonstrated the level of pride that exists within Chrysler.
This incredible transformation has taken place because the organization began to regain faith in itself and view the future as an extraordinary opportunity.
Because it adopted a culture of change as necessity, responded to uncertainty as a challenge, and began measuring itself daily against its competitors and the market.
Exactly as Fiat had done 7 years previously.
What binds our two groups even closer to each other is that they have both been to hell and back.
The hardest, most difficult moments in life – when we feel lost and beyond hope – are often the most meaningful and character-forming. They can change us forever.
Those who survive, who find the strength and courage to stand and fight, will never be as before.
Survivors are different people, special people.
My colleagues and I are survivors.
We found within ourselves the strength to fight the death sentence hanging over us.
We found the courage to act and reverse our fate.
And now we live each day with the benefit of what we learned from that experience.
We learned to look at the future in a different way than before, in a different way than others.
We gained a rare and precious understanding of the world.
We gained an appreciation of each moment in this new life that has been granted us.
We treasure what the experience has given us, just as we cherish the opportunities ahead of us.
Such experiences not only empower us to be our best professionally, they also impact on our personal lives and make us better people.
They forge those who survive into stronger and more capable leaders. They leave an indelible mark. They change us forever.
We have changed forever, because we now know that ultimately, regardless of circumstances, we have the power to refuse our consent.
And with that power, we also have an obligation to refuse our consent to decay, to disengage from competition, to industrial neglect, to wasteful activities – because ultimately, consenting to these things would not only be a denial of our own right to life but also of our duty to protect the welfare of our people.
As Winston Churchill said, after the British won an important victory in World War II, “Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning”.
Chrysler is in its infancy.
Most of the paint is still on the palette and we have to put every effort now in order to complete this momentous integration, with humility, determination and rigor.
But I am confident about our future because we are moving forward with clarity of purpose and we share, with our new lifetime partner Fiat the same vision and aspiration as to what we would like our company to become.
Not the biggest, just the best.
Thank you all.
Hawke Fracassa covers the auto industry from Detroit for TN. Reach him at [email protected] or follow him on Twitter @HawkeFracassa.
Image source: Patrick Rall, TN