Corporate Governance at Fiat SpA - Insead
Corporate Governance at Fiat SpA - Insead
Corporate Governance at Fiat SpA - Insead
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<strong>Corpor<strong>at</strong>e</strong> <strong>Governance</strong>, Innov<strong>at</strong>ion, and Economic Performance in the EU<br />
(CGEP)<br />
A research project funded by the Targeted Socio-Economic Research (TSER)<br />
Programme of the European Commission (DGXII) under the Fourth Framework<br />
Programme, European Commission (Contract no.: SOE1-CT98-1114; Project no:<br />
053), coordin<strong>at</strong>ed by William Lazonick and Mary O'Sullivan <strong>at</strong> the European Institute<br />
of Business Administr<strong>at</strong>ion (INSEAD).<br />
<strong>Corpor<strong>at</strong>e</strong> <strong>Governance</strong> <strong>at</strong> Fi<strong>at</strong> <strong>SpA</strong><br />
Giuseppe Volp<strong>at</strong>o<br />
Ca’ Foscari University of Venice<br />
Tel. +39.041.2574209 (direct)<br />
Fax. +39.041.2574362<br />
Email : volp<strong>at</strong>o@unive.it
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
The specific traits of Fi<strong>at</strong>’s role in Italy<br />
<strong>Corpor<strong>at</strong>e</strong> <strong>Governance</strong> <strong>at</strong> Fi<strong>at</strong> <strong>SpA</strong><br />
Executive Summary<br />
A proper interpret<strong>at</strong>ion of the current corpor<strong>at</strong>e governance policy in place <strong>at</strong> the Fi<strong>at</strong> <strong>SpA</strong><br />
group requires to keep in mind two elements: on the one hand the extraordinary weight th<strong>at</strong><br />
the company has played within the Italian economic landscape and then the importance th<strong>at</strong><br />
the “external” scenario had (and has) as well for the history of the company; on the other hand<br />
the extraordinary continuity in company management which during its first century of life has<br />
seen only three chairmen: Sen<strong>at</strong>or Giovanni Agnelli, professor Vittorio Valletta and<br />
“Avvoc<strong>at</strong>o” (lawyer) Gianni Agnelli. In other words it is necessary to acknowledge th<strong>at</strong> the<br />
specific traits of the current corpor<strong>at</strong>e governance <strong>at</strong> Fi<strong>at</strong> <strong>SpA</strong> can be fairly interpreted only<br />
through a wide historical perspective which defines its key stages of evolution.<br />
The Fi<strong>at</strong> Group, the main Italian priv<strong>at</strong>e industrial company, during its hundred years of<br />
history has seen a series of stages of fast growth, crises and profound reorganis<strong>at</strong>ions which<br />
have been influenced not only by the evolution of the Italian and intern<strong>at</strong>ional automobile<br />
market, but also, given the economic relevance and the str<strong>at</strong>egic role which the motoris<strong>at</strong>ion<br />
process played in the past, by the socio-political equilibria which unfolded in Italy.<br />
As a consequence, the policy developed by the company management, soon transformed into<br />
a multi-business group, albeit mainly centered upon the manufacturing of cars and<br />
commercial vehicles, mirrored not only the objectives which the top management meant to<br />
achieve, but also the balances gener<strong>at</strong>ed among the subjects holding the controlling shares,<br />
and between them and the other stake-holders.<br />
The Fi<strong>at</strong> Group holds still today a specific role in the Italian economic system, not just due to<br />
its size, but also due to the charism<strong>at</strong>ic role which the “avvoc<strong>at</strong>o” Agnelli still plays with<br />
respect to public opinion in general and with respect to the management of the company,<br />
albeit he is acting as honorary chairman, th<strong>at</strong> is a role apparently without a direct influence<br />
over the company.<br />
The stage of Sen<strong>at</strong>or Agnelli<br />
The stage of Sen<strong>at</strong>or Agnelli stretched from the establishment of the company (1899) until the<br />
end of World War Two. During such period the model of a large company took shape, <strong>at</strong> first<br />
with an almost autocr<strong>at</strong>ic control by him, and then by his family. The undisputed success<br />
achieve by Fi<strong>at</strong> consolid<strong>at</strong>ed the image th<strong>at</strong> a large capital company necessarily had to be<br />
managed by the economic subject in first person (capitalist entrepreneur), who drew towards<br />
his own initi<strong>at</strong>ive the capital of small individuals, based upon a rel<strong>at</strong>ionship of trust for the<br />
capabilities of the company chief to lead the company to growth and prosperity. During such<br />
stage, thanks also to the specific culture of the Sabaudian Piedmont, for which it was easy to<br />
see the role of the industry leader Giovanni Agnelli as a sort of “prince of the economy”, the<br />
Agnelli family as well ended up acquiring the role of a dynasty.<br />
Other specific traits of such stage were:<br />
- the possibility for Sen<strong>at</strong>or Giovanni Agnelli to exert his control over a very large<br />
mass of capital through the cascade-like mechanism of control over the majority stage<br />
of the mother company (a trait which was common to the whole Italian family-driven<br />
capitalism);<br />
- the absence of an autonomous role of the management which felt like (and was<br />
considered as) a direct and almost mechanical expression of the decisions adopted by<br />
the company leader;<br />
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Volp<strong>at</strong>o - Fi<strong>at</strong><br />
- the modest scope of the role played by the Italian financia l system which (on such<br />
aspect see also the essay by Franco Am<strong>at</strong>ori e Andrea Colli, <strong>Corpor<strong>at</strong>e</strong> <strong>Governance</strong>:<br />
the Italian Story, August 2000), due to the modest weight of institutional investors,<br />
could never be able to play a role of control and protection of the interests of stockholders.<br />
- even the role of banks in short- and medium-term financing appeared marginal for the<br />
cash situ<strong>at</strong>ion of the company which usually oper<strong>at</strong>ed in a situ<strong>at</strong>ion of net<br />
availabilities, and who resorted to credit only to offset temporary needs in its<br />
expansion str<strong>at</strong>egy.<br />
The stage of professor Vittorio Valletta<br />
In abstract terms the long stage of presidency by Vittorio Valletta (from 1942 to 1962) could<br />
lead to think of a transitional stage from an autocr<strong>at</strong>ic family-driven capitalis m to a<br />
managerial capitalism. But things were different. Valletta was instead the “priest”, custodian<br />
of the interests of the Agnelli dynasty. From the standpoint of development, these years were<br />
the most impressive for the Turin auto company which in 1955, with the launch of the first<br />
authentically popular car (the “600” model), finally entered a stage of mass motoris<strong>at</strong>ion<br />
which allowed it to exploit in a sort of monopolistic position the strong growth of the “Italian<br />
economic miracle” in the second post-war stage.<br />
It was an extremely large growth (Fi<strong>at</strong> was due to become the leading automaker in Europe),<br />
but also particularly unbalanced, with respect to the problems which are currently rel<strong>at</strong>ed to a<br />
correct corpor<strong>at</strong>e governance. As a m<strong>at</strong>ter of fact the minority shareholders were completely<br />
excluded not just by the management of the company, but also by the possibility to correctly<br />
interpret the str<strong>at</strong>egies and the structure of the Fi<strong>at</strong> “galaxy”, organised as a single company in<br />
which a set of “str<strong>at</strong>egic business units” were coll<strong>at</strong>ed together, managed by an outd<strong>at</strong>ed<br />
functional structure, inevitably slow and opaque to the eyes of financial analysts.<br />
The stage of the “avvoc<strong>at</strong>o” Gianni Agnelli<br />
With the return of an Agnelli in first person to lead group there was no visible change of<br />
direction in terms of <strong>Corpor<strong>at</strong>e</strong> <strong>Governance</strong>. The management of the company was still a<br />
m<strong>at</strong>ter of the family (the brother Umberto Agnelli also took a direct leading role as managing<br />
director for the group), which dict<strong>at</strong>ed the str<strong>at</strong>egic objectives in an exclusive manner, while<br />
the role of the management was still seen as a m<strong>at</strong>ter of loyalty similarly to the role of a<br />
military elite towards its leader. The minority shareholders only received a reasonable<br />
remuner<strong>at</strong>ion of capital, without any influence or protection with respect to the key choices of<br />
the company. Such rel<strong>at</strong>ionship was fully granted by the Italian legisl<strong>at</strong>ion which allowed the<br />
subscription of privileged shares and saving shares, which had a lower decision power in<br />
general assemblies.<br />
In such stage the new element was represented mainly by the emergence of the crisis in the<br />
automobile industry <strong>at</strong> the end of the 1960s and by the stage of strong intern<strong>at</strong>ional infl<strong>at</strong>ion<br />
which followed. For the first time, after the financially troubled stages in the very early years<br />
of Fi<strong>at</strong>, the Agnelli family was in trouble to carry out its own role of key capitalist, and the<br />
Avvoc<strong>at</strong>o Agnelli had to resort to the financial intermedi<strong>at</strong>ion of Mediobanca, the leading<br />
Italian investment bank, to devise a solution in order to supply the necessary capital to<br />
revamp the industrial group, without affecting the hegemony of the family. The solution was<br />
the entry of a “friendly” shareholder played by Lafico (Libyan Arab Foreign Bank), interested<br />
into trading a role of pure economic spect<strong>at</strong>or in the company management board, in<br />
exchange for a political credit to Libya (and to Colonel Gaddafi) in the intern<strong>at</strong>ional<br />
landscape.<br />
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Volp<strong>at</strong>o - Fi<strong>at</strong><br />
Another innov<strong>at</strong>ive aspect of this stage was the effort by Giovanni Agnelli to balance around<br />
his own figure the equilibria of powers in the Agnelli family, which then had grown over the<br />
gener<strong>at</strong>ions to a range of subjects and interests which, if not adequ<strong>at</strong>ely managed, could<br />
thre<strong>at</strong>en the cohesion in the majority shareholder. The solu tion was found in 1987 through the<br />
establishment of the Giovanni Agnelli & C., Società in Accomandita per Azioni (SAPA).<br />
With such a company tool the shares of the family were “concentr<strong>at</strong>ed” and managed by<br />
Gianni Agnelli, also with the objective to ensure the maximum bargaining power of the<br />
family towards partners which joined the majority shareholders (among which some banks,<br />
and Mediobanca).<br />
Towards the Shareholder Value Policy<br />
The economic events, mainly unfavourable, which the company had to face in the 1990s, and<br />
the difficulties encountered by the Agnelli family in design<strong>at</strong>ing a own member capable of<br />
taking over the role of company leader, started to push during the first half of the 1990s<br />
towards a gradual but profound transform<strong>at</strong>ion of the role of management within the<br />
company. It was still Gianni Agnelli who led such transform<strong>at</strong>ion, but the eye of the president<br />
aimed <strong>at</strong> the stage in which his age would force him to a less active and direct role.<br />
A key stage in such transform<strong>at</strong>ion, which partly followed the Anglo-Saxon corpor<strong>at</strong>e<br />
governance approach, began in 1996. The scheme sought after was a media tion between the<br />
powers of the various stakeholders which could play as guarantee of transparency and<br />
efficient management of the economic interests of the shareholders (majority and minority<br />
ones) and of the financial system in general. This meant to build an equilibrium which<br />
continued to privilege the priority role of the majority shareholder, th<strong>at</strong> is the Agnelli family<br />
represented by its financial tool: the Giovanni Agnelli & C. SAPA, which was in charge of<br />
the definition of the key str<strong>at</strong>egic lines of the group, and which remained the guarantee<br />
towards the political power (the Italian Government) of the ownership structure in a stage in<br />
which the concentr<strong>at</strong>ion process which was taking place in the intern<strong>at</strong>ional automobile<br />
industry could lead someone to fear a possible shift to foreign control.<br />
On the oper<strong>at</strong>ional standpoint the role of the management was gradually boosted, a<br />
management which was on the one hand very loyal to the Agnelli family, but <strong>at</strong> the same time<br />
aware of the needs of fairness and transparency towards the intern<strong>at</strong>ional financial community<br />
in particular. Such wide ranging design took shape mainly with the gradual entry of Paolo<br />
Fresco in the company, an Italian manager who had worked in the USA for a long time, in<br />
close contact with Jack Welsh of General Electric. Such American manager can be considered<br />
as one of the most brilliant examples of an approach aiming over a long term to a Shareholder<br />
Value Policy.<br />
The change was driven by a clear perception of Gianni Agnelli and its management th<strong>at</strong> the<br />
new stage which the intern<strong>at</strong>ional economy and the automobile industry were entering called<br />
for a stage of marked globalis<strong>at</strong>ion which no player could refuse if it aimed <strong>at</strong> carrying on<br />
playing an autonomous and dynamic competitive role. It was the dawn of a stage of mergers,<br />
acquisitions and alliances in which not even the most important industry groups (such as<br />
General Motors and Ford) could think of playing their role in autonomy, without cre<strong>at</strong>ing<br />
synergies and forms of competitive integr<strong>at</strong>ion with other partners in the various markets. At<br />
the time, albeit maintaining its own n<strong>at</strong>ure of family-run company, Fi<strong>at</strong> had to be able to<br />
oper<strong>at</strong>e in a way which was not different from th<strong>at</strong> oper<strong>at</strong>ed by companies belonging to most<br />
advanced capitalisms.<br />
However it must be noted th<strong>at</strong> such transition towards a more modern corpor<strong>at</strong>e governance,<br />
in tune with intern<strong>at</strong>ional standards, is hindered by an unfavourable trend in the economic and<br />
financial equilibrium of the company. The auto industry is undergoing a stage of strong<br />
competition and relevant financial commitment which disadvantages mainly the companies<br />
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Volp<strong>at</strong>o - Fi<strong>at</strong><br />
whose manufacturing specialis<strong>at</strong>ion focuses on lower segments, where competition is fierce<br />
and more open to dumping policies oper<strong>at</strong>ed by manufacturers in trouble (such as the Korean<br />
ones).<br />
A further difficulty is due to the fact th<strong>at</strong> the applic<strong>at</strong>ion of a corpor<strong>at</strong>e governance model<br />
based upon the shareholder value policy implies the sale of activities which are not capable of<br />
gener<strong>at</strong>ing value for shareholders, but because the sale of considerable parts of Fi<strong>at</strong> (mainly in<br />
the most critical areas of cars, commercial vehicles and earth moving equipment) could only<br />
happen through foreign hands, one faces a situ<strong>at</strong>ion which is wider than a simple sale. As a<br />
consequence Fi<strong>at</strong> <strong>SpA</strong> albeit flying the flag of value cre<strong>at</strong>ion for all shareholders (and using<br />
methods of investment evalu<strong>at</strong>ion which are in line with such approach) has ended up, for the<br />
last few years, to draw up balance sheets which mainly in the automobile unit (Fi<strong>at</strong> Auto<br />
<strong>SpA</strong>) mark destruction of value for shareholders.<br />
The recent agreement between Fi<strong>at</strong> Auto and General Motors mirrors such delic<strong>at</strong>e<br />
equilibrium. There is a financial oper<strong>at</strong>ion which aims <strong>at</strong> cre<strong>at</strong>ing large cost savings and<br />
relevant industrial synergies, but in such way not to autom<strong>at</strong>ically imply a sale to GM of<br />
something which over time has acquired the n<strong>at</strong>ure of primary symbol of the Italian industry.<br />
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Volp<strong>at</strong>o - Fi<strong>at</strong><br />
<strong>Corpor<strong>at</strong>e</strong> <strong>Governance</strong> <strong>at</strong> Fi<strong>at</strong> <strong>SpA</strong><br />
Contents<br />
1. How Many Capitalism? How Many Concepts? 7<br />
2. Peculiar Aspects of the <strong>Corpor<strong>at</strong>e</strong> <strong>Governance</strong> <strong>at</strong> Fi<strong>at</strong> <strong>SpA</strong> 9<br />
3. The Automotive Filière and Its Importance on Italian Economy 12<br />
3.1. Fiscal contribution<br />
3.2. Employment in the sector<br />
3.3. Import-Export flows<br />
4. Historical Evolution of Fi<strong>at</strong> <strong>Governance</strong> 1899-1979 16<br />
4.1. The incorpor<strong>at</strong>ion of Fi<strong>at</strong> <strong>SpA</strong><br />
4.2. The development of a technically advanced management body<br />
4.3. The “regency” of Vittorio Valletta<br />
4.4. The Valletta culture of monolith<br />
4.5. The management of Agnelli family<br />
4.6. The divisional approach of Umberto Agnelli<br />
4.7. Str<strong>at</strong>egy and Structure<br />
4.8. Tent<strong>at</strong>ive Management by Objectives<br />
4.9. De Benedetti: a meteor<br />
4.10. The incorpor<strong>at</strong>ion of Fi<strong>at</strong> Auto Spa<br />
5. The Fi<strong>at</strong> Group’s Structure 32<br />
5.1. The growth years<br />
5.2. The union crisis and the oil shock<br />
5.3. The “Lafico” oper<strong>at</strong>ion<br />
5.4. Fi<strong>at</strong> <strong>SpA</strong> as a holding<br />
6. Fi<strong>at</strong>’s <strong>Corpor<strong>at</strong>e</strong> <strong>Governance</strong> R<strong>at</strong>ionale 38<br />
6.1. Opening to the market<br />
6.2. Fi<strong>at</strong> as an “integr<strong>at</strong>ed industrial Group”<br />
6.3. Conflicts of interests between majority and minority shareholders<br />
6.4. The establishment of the Giovanni Agnelli & C. S.A.P.A.<br />
7. Fi<strong>at</strong>’s Shareholder Value Policy 46<br />
7.1. Until 1996: the ROI and ROE scheme<br />
7.2. Value Based Management<br />
7.3. E.V.A. as a performance measure<br />
7.4. The adoption of the management model based upon value cre<strong>at</strong>ion<br />
7.5. The incentive tools <strong>at</strong> Fi<strong>at</strong><br />
7.6. Stock Option Systems in Italy<br />
7.7. Stock Option System <strong>at</strong> Fi<strong>at</strong><br />
7.8. Fi<strong>at</strong> Directors’ Compens<strong>at</strong>ion<br />
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Volp<strong>at</strong>o - Fi<strong>at</strong><br />
8. The policy of investment-divestment of the Fi<strong>at</strong> Group 58<br />
8.1. The stage of multidimensional expansion<br />
8.2. The reorganis<strong>at</strong>ion of captive suppliers<br />
8.3. The reorganis<strong>at</strong>ion of the 1980s<br />
8.4. The “re-entry” in the 1990s<br />
8.5. Investments and divestments: the theory of the “competitive weight”<br />
8.6. The role of the financial companies of the Agnelli family IFI and IFIL<br />
9. The Research & Development Policy of Fi<strong>at</strong> 68<br />
9.1. Research activities as a whole<br />
9.2. The Fi<strong>at</strong> Research Centre<br />
9.3. The Elasis Company<br />
9.4. The evolution of Fi<strong>at</strong> R&D investment<br />
10. Fi<strong>at</strong>’s financial trends and stock quot<strong>at</strong>ion 72<br />
10.1. The financial-economic trend of the Group<br />
10.2. Value cre<strong>at</strong>ion<br />
10.3. Dividends, market capitaliz<strong>at</strong>ion and share value<br />
11. The GM-Fi<strong>at</strong> alliance 78<br />
11.1. The objectives of the alliance<br />
11.2. The structure of the agreement<br />
11.3. The juridical and financial aspects of the agreement<br />
11.4. Synergy savings<br />
11.5. Wh<strong>at</strong> effects on corpor<strong>at</strong>e governance<br />
12. Conclusions on Fi<strong>at</strong>’s <strong>Corpor<strong>at</strong>e</strong> governance 85<br />
Appendix No.1 Fi<strong>at</strong> Group’s Relevant Financial Initi<strong>at</strong>ives 86<br />
References 90<br />
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Volp<strong>at</strong>o - Fi<strong>at</strong><br />
1. How Many Capitalisms? How Many Concepts?<br />
The theme of corpor<strong>at</strong>e governance is an issue of gre<strong>at</strong> importance which<br />
invests areas whose relevance is not just economic, but also political and social since<br />
a judgement on the efficiency and desirability of a given corpor<strong>at</strong>e governance<br />
system inevitably leads to raise the question of the efficiency and desirability of a<br />
capitalist system, with all th<strong>at</strong> such a question implies also on the ideological and<br />
evoc<strong>at</strong>ive standpoint. For example the use of the “Capitalism” word in itself raises a<br />
variety of questions since there are more and more scholars believing th<strong>at</strong> the concept<br />
is obsolete, also because on the practical standpoint the other major political and<br />
social system which has traditionally been opposed to it (“Socialism”) appears<br />
gradually dissolving all over the world, albeit with varying forms and reasons in<br />
different countries.<br />
Here we move from the idea th<strong>at</strong> the concept of capitalism is still an<br />
explan<strong>at</strong>ory definition dense with meanings, but <strong>at</strong> the same time there are many<br />
capitalisms which, although sharing a common basis and maintaining if not<br />
reinforcing the mutual economic and social links, still have specific traits which are<br />
highly different. This st<strong>at</strong>ement per se is trivial, and nobody argues with th<strong>at</strong>.<br />
However it is less trivial wh<strong>at</strong> derives from it in a direct and immedi<strong>at</strong>e form,<br />
although it is not always take into account as it would deserve. It is the difficulty of<br />
using conceptual c<strong>at</strong>egories which have historically developed and have been applied<br />
to the study of a given fe<strong>at</strong>ure of the capitalist system, and the comparison to another<br />
capitalist system one.<br />
Moving on to practical issues, as the most important and more studied and<br />
known capitalist system is undoubtedly the US one, then there is a tendency to apply<br />
the conceptual c<strong>at</strong>egories usefully adopted to study and classify US capitalism also in<br />
the study of other capitalisms, such as for example the Italian one. This oper<strong>at</strong>ion per<br />
se has justific<strong>at</strong>ions both on the standpoint of an “economic” use of intellectual<br />
production (why continuously inventing new concepts if there are many already<br />
available) and on th<strong>at</strong>, even more important, linked to the n<strong>at</strong>ure of understanding<br />
itself. To understand a reality means to identify its boundaries both in a positive sense<br />
(wh<strong>at</strong> a given reality is about) and in a neg<strong>at</strong>ive sense (wh<strong>at</strong> a given reality is not), in<br />
other words it means to compare different realities. But this is the focal point of<br />
research and scientific knowledge: it is mainly the capability to distinguish.<br />
Therefore to use concept already elabor<strong>at</strong>ed for the “most important”<br />
capitalism works well to study other capitalisms, but given th<strong>at</strong> these concepts are<br />
used not as an arrival points, but r<strong>at</strong>her as a starting point. On the one hand if we<br />
would not use these concepts it would be difficult to compare different capitalisms for<br />
a semantic dishomogeneity which would unusefully make researchers’s task harder,<br />
and could gener<strong>at</strong>e misunderstanding mainly among researchers with a different<br />
cultural heritage. But on the other hand we must keep in mind th<strong>at</strong> these concepts, and<br />
mainly the meanings which go with them, must be adequ<strong>at</strong>ely conjug<strong>at</strong>ed according<br />
to the specific traits of the capitalism considered. Without this “keeping the distance”<br />
from the meaning of a concept in the capitalism system of reference (the US one), the<br />
use of c<strong>at</strong>egories used in it instead of helping to “distinguish” would on the contrary<br />
have a “covering” effect which would prevent from understanding the reality of other<br />
capitalisms.<br />
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Volp<strong>at</strong>o - Fi<strong>at</strong><br />
At this point an example could be useful. If one considers one of the most<br />
recent and complete surveys 1 devoted to the theme of <strong>Corpor<strong>at</strong>e</strong> <strong>Governance</strong> one<br />
would note th<strong>at</strong> it takes as a key problem th<strong>at</strong> of the separ<strong>at</strong>ion between property and<br />
control, hence it mainly focuses on the so-called “Agency Problem”. As a m<strong>at</strong>ter of<br />
fact in Italy one could say th<strong>at</strong> only during the most recent years and in a quite limited<br />
number of companies such problem is beginning to come forward, as the coincidence<br />
of property and control in companies represents the rule (almost without exceptions),<br />
as we will see in the Fi<strong>at</strong> case as well.<br />
A direct consequence of the methodological position which we want to bring<br />
forward is th<strong>at</strong> there are many different capitalisms and as “structurally different” they<br />
cannot be reduced to expressions of different stages of m<strong>at</strong>urity of a single form of<br />
capitalism the most m<strong>at</strong>ure hence the most “perfect” (the US one). Obviously anyone<br />
is free not just to prefer a given kind of capitalism (this is an issue of free political<br />
choice, hence it lies in the “metaphysical” space of individual preferences), but<br />
anyone is also free to believe th<strong>at</strong> a given capitalism is more efficient than another<br />
one. This second issue is properly a scientific issue, but it is so complex and difficult<br />
th<strong>at</strong> it remains confined into a limbo, lying between “physics” and “metaphysics” 2 .<br />
It is possible in the future th<strong>at</strong> following a process of further integr<strong>at</strong>ion among<br />
the different economies and progressive homogeniz<strong>at</strong>ion of the socio-political<br />
systems, the current distinctive kinds of capitalism are bound to disappear to merge<br />
into a single form of capitalism. But for the moment to assume th<strong>at</strong> any capitalism<br />
different from the US one are nothing but “raw” and “imperfect” forms of capitalism,<br />
which can be positioned in terms of “distance” from the most complete and m<strong>at</strong>ure<br />
model, means to adopt a methodological perspective which is superficial and<br />
misleading. This position stems from the fact th<strong>at</strong> the capitalist structure is certainly a<br />
highly significant share of the structure of a society, but it does not absorb the whole<br />
of it. For example, the system of n<strong>at</strong>ural resources – in its wider sense – available to a<br />
society, is left out of it, as well as important parts of the cultural complex of a society<br />
which are certainly influenced by the n<strong>at</strong>ure of the capitalist structure, but are not<br />
wholly determined by it. So these differences influence to a certain extent the way a<br />
given capitalist model works and its social meaning. In other words, as a capitalist<br />
system is also the outcome of wh<strong>at</strong> lies outside the capitalist system of a society, to<br />
adopt the perspective of capitalist systems which differ only in terms of degrees of<br />
m<strong>at</strong>urity with respect to the most m<strong>at</strong>ure one, means to wipe out, from the<br />
methodological horizon of the researcher, all the effects which could derive from th<strong>at</strong><br />
share of society which are not exclusively determined by the capitalist system itself.<br />
1 Shleifer and Vishny [1997]: “<strong>Corpor<strong>at</strong>e</strong> <strong>Governance</strong> deals with the ways in which suppliers of finance<br />
to corpor<strong>at</strong>ions assure themselves of getting a return on their investment. How do the suppliers of<br />
finance get managers to return some of the profits to them? How do they make sure th<strong>at</strong> managers do<br />
not steal the capital they supply or invest it in bad projects? How do suppliers of finance control<br />
managers?” […] “Our perspective on corpor<strong>at</strong>e governance is a straightforward agency perspective,<br />
sometime referred to as separ<strong>at</strong>ion of ownership and control. We want to know how investors get the<br />
managers to give them back their money”.<br />
2 My view on this m<strong>at</strong>ter is th<strong>at</strong> one can try to express an evalu<strong>at</strong>ion on which is the most efficient<br />
model of capitalism, but only with respect to a given socio-economic situ<strong>at</strong>ion, and in a given historical<br />
moment. On the contrary I believe th<strong>at</strong> the idea th<strong>at</strong> one can express a compar<strong>at</strong>ive judgement over<br />
capitalisms with a universal claim (applying anywhere and anytime) is the outcome of a positivistic<br />
ideological bias.<br />
8
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
In order to allow to grasp the implic<strong>at</strong>ions of this position (and those which<br />
would autom<strong>at</strong>ically be elimin<strong>at</strong>ed if we were to adopt the scheme of the single<br />
model, which differs only for degrees of m<strong>at</strong>urity) we can raise the following question<br />
which in the US system appears discrimin<strong>at</strong>ory with respect to the judgement over the<br />
governance of an enterprise: is it managed according to criteria of value cre<strong>at</strong>ion for<br />
shareholders? In the US system this question appears as the most relevant one just<br />
because it is drawn from a situ<strong>at</strong>ion in which the separ<strong>at</strong>ion between property and<br />
control is taken as a typical fe<strong>at</strong>ure of the most part of the company structures.<br />
On the contrary if we raise this kind of question upon the Italian system, both on<br />
small and large priv<strong>at</strong>e companies, the reply (only apparently provoc<strong>at</strong>ive), cannot but<br />
be affirm<strong>at</strong>ive, right because we don’t have the separ<strong>at</strong>ion between property and<br />
control hence the fact th<strong>at</strong> the firm is managed toward the interest of the property (as<br />
expression of the majority share of capital) is not only true but also truistic.<br />
As a consequence in the Italian system the key question lies in the<br />
understanding, in broad terms, whether a system fe<strong>at</strong>uring a limited degree of<br />
development in managerial professionalism (which lies <strong>at</strong> the roots of a gradual<br />
separ<strong>at</strong>ion between property and control) could survive in face of competitive<br />
pressures induced by the competitive globaliz<strong>at</strong>ion process and, in more analytical<br />
terms, whether the protection mechanisms for minority shareholders are effective in<br />
order to cre<strong>at</strong>e the conditions to <strong>at</strong>tract enough financial resources to allow economic<br />
development of firms. The first question is too complex to be dealt with here, while<br />
with respect to the second the trend in the Milan stock exchange during 2000 seems to<br />
eventually show th<strong>at</strong> both Italian entrepreneurs and shareholders are gaining<br />
confidence with the stock market which appears more and more oriented to provide a<br />
marked contribution in cre<strong>at</strong>ing growth opportunities for the economic system.<br />
Over the last 12 months 49 companies have been listed 3 , equal to 16.5% of the<br />
number of companies listed <strong>at</strong> year end (297) which represents an all time high.<br />
Market capitaliz<strong>at</strong>ion has grown to 1,600 trillion lire (800 billion euro) equal to 70.6%<br />
of GDP. With respect to capital supply, in 2000 there have been 48 listings in the<br />
stock market with public offering which have raised 13 billion euro to which 31<br />
capital increases must be added, for an extra 3.8 billion euro.<br />
2. Peculiar Aspects of <strong>Corpor<strong>at</strong>e</strong> <strong>Governance</strong> <strong>at</strong> Fi<strong>at</strong> <strong>SpA</strong><br />
In accordance with the methodological aspects which have been outlined in<br />
the previous paragraph, albeit in a concise way, the analysis of the corpor<strong>at</strong>e<br />
governance model which has evolved over time <strong>at</strong> Fi<strong>at</strong> must be grasped in its specific<br />
traits. The Fi<strong>at</strong> Group, since the leadership of Sen<strong>at</strong>or Giovanni Agnelli has emerged<br />
among founding partners in 1902 4 , has shared with most Italian firms being<br />
expression of a family-driven capitalism, although being up to a few years ago the<br />
3 Companies withdrawals from listing in 2000 were 21, six of which for incorpor<strong>at</strong>ion, and nine for<br />
buyout by a controlling company through a public offering, for a total amount of 23,600 billion lire.<br />
4 At th<strong>at</strong> time Giovanni Agnelli became Chairman of the company, although his dominant position can<br />
be traced back to <strong>at</strong> least one year earlier, when the company was just two years old. In fact in 1901<br />
there was a contrast between the str<strong>at</strong>egic position of Giovanni Agnelli, favorable to rely on<br />
experiences gained outside automobile technology, and Ing. Enrico Faccioli, in charge of vehicle<br />
design, and determined to follow his own personal view. Giovanni Agnelli became chairman of Fi<strong>at</strong> in<br />
1920. See Castronovo [1971].<br />
9
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
largest priv<strong>at</strong>e Italian company. This strong and perme<strong>at</strong>ing presence of the family<br />
view 5 , capable of aggreg<strong>at</strong>e “friendly” investors around it, ensuring to the family the<br />
share of capital necessary in order to lead the company without uncertainty on the<br />
financial control standpoint, has developed along a set of elements, some of which are<br />
still in place. This applies also over most recent years, during which there are signs of<br />
a transform<strong>at</strong>ion which seems bound to mark the separ<strong>at</strong>ion between property and<br />
control, but which for the time being is not completed.<br />
As a m<strong>at</strong>ter of fact if on the one hand it could be said th<strong>at</strong> the process of<br />
separ<strong>at</strong>ion between property and control started symbolically with the move of Gianni<br />
Agnelli from President of the Board of Fi<strong>at</strong> <strong>SpA</strong> to honorary President, on the other<br />
hand one must consider th<strong>at</strong> the process is just starting, for a set of reasons:<br />
a) The “Avvoc<strong>at</strong>o” Agnelli seems determined to keep on dealing with the<br />
Company. This means th<strong>at</strong>, although not directly involved in the range of<br />
relevant issues associ<strong>at</strong>ed to the management of a multifaceted and complex<br />
group as today’s Fi<strong>at</strong>, he cannot be seen as an owner stranger to managing,<br />
and who evalu<strong>at</strong>es ex post choices expressed by a professional management<br />
according to financial results. In reality he keeps on acting as a key reference<br />
point for most relevant choices.<br />
b) Another aspect which characterizes the maintaining of a link between property<br />
and control, in the current company structure as well, is rel<strong>at</strong>ed to the fact th<strong>at</strong><br />
Umberto Agnelli too, Gianni Agnelli’s brother, and for many years chairman<br />
of Fi<strong>at</strong> <strong>SpA</strong> 6 , keeps on being an “active” holder of a significant share of<br />
capital, both for his share on the “special” company controlling the majority<br />
stake in Fi<strong>at</strong> <strong>SpA</strong> (the Società in Accomandita per Azioni Giovanni Agnelli &<br />
C.), and as Chairman of the Istituto Finanziario Italiano (I.F.I.), which<br />
represents the financial company which groups most stakes in various<br />
companies belonging to the Agnelli family, whose activities continuously<br />
interplay with the Fi<strong>at</strong> Group str<strong>at</strong>egies. Therefore Umberto Agnelli as well,<br />
similarly to his brother Gianni, stands out as a direct manager r<strong>at</strong>her than a<br />
side observer and owner of a capitalist rent.<br />
c) This view is relevant also in oper<strong>at</strong>ional terms if one considers th<strong>at</strong> Fi<strong>at</strong> in the<br />
Italian landscape (but even more in the Piedmont and Turin area), cannot be<br />
compared to any other firm, be it large and important. It represents and entity<br />
which goes beyond the mere economic n<strong>at</strong>ure of any firm. In order to<br />
5 As it is known, after World War II the Agnelli family was formally stripped of the property of the<br />
company: This was motiv<strong>at</strong>ed by alleg<strong>at</strong>ions over fascism support of Giovanni Agnelli. But this stage<br />
is rel<strong>at</strong>ed to extraordinary reasons of political n<strong>at</strong>ure, and not derived by to financial issues. Moreover,<br />
one should note th<strong>at</strong> the strength of the link between the company and the Agnelli family is confirmed<br />
by the ease and speed with which the family, reintegr<strong>at</strong>ed in the property, took back management<br />
control in tune with the past. A highly relevant role in this continuity has certainly been played by<br />
Vittorio Valletta buying into the Weltanschauung developed over time by Giovanni Agnelli. Valletta,<br />
working with him since 1921, become Managing Director in 1928, then Chairman from 1946 to 1966,<br />
cannot be considered as a “professional manager” in a true sense but r<strong>at</strong>her an interpreter of the<br />
interests of Fi<strong>at</strong> and the Agnelli family, regarded as a single entity, up to the time in which family<br />
control ceases being exerted through an intermediary, with an Agnelli returning to the position of<br />
Chairman. See Bair<strong>at</strong>i [1983].<br />
6 Umberto Agnelli was managing director of Fi<strong>at</strong> Spa from 1970 to 1980 and then chairman of Fi<strong>at</strong><br />
Auto <strong>SpA</strong> and vice-chairman of Fi<strong>at</strong> <strong>SpA</strong> until 1992, when he left the board of Fi<strong>at</strong> <strong>SpA</strong>. In the same<br />
year Giovanni Alberto Agnelli, son of Umberto, joined the board of Fi<strong>at</strong> <strong>SpA</strong>.<br />
10
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
understand the meaning of Fi<strong>at</strong>, particularly within the Piedmont milieu, one<br />
must interpret the company as a sort of kingdom in which the Agnelli family<br />
holds all the traits of a dynasty and its managers must be regarded as a<br />
priestlike caste who tends to come together with the family dynastic interests.<br />
In reality this has been more true in the past than now, when many<br />
transform<strong>at</strong>ions have pushed towards a laiciz<strong>at</strong>ion of management and against<br />
the maintaining of such feeling within the company. Until recently also <strong>at</strong><br />
middle management levels to be employed <strong>at</strong> Fi<strong>at</strong> meant to hold a sort of<br />
nobility and with it a sense of identific<strong>at</strong>ion and loyalty to the family and to<br />
the charism<strong>at</strong>ic lead of Avvoc<strong>at</strong>o Agnelli. Even blue collar workers, who in<br />
some instances could manifest conflictual expressions with the company and<br />
the management hierarchy, were anyway agreeing in feeling part of a bluecollar<br />
aristocracy. Fi<strong>at</strong>, in such sense, was not a company but “The Company”,<br />
a true symbol of Italy’s efficiency and of its capacity to compete in<br />
intern<strong>at</strong>ional markets.<br />
d) At higher managerial levels this marked sense of belonging is like to the<br />
Piedmont tradition of loyalty and affection to the monarchy and to the Savoia<br />
family 7 . For a Fi<strong>at</strong> manager loyalty to the Agnelli family could not be<br />
interpreted as mere proof of acceptance of a contractual rel<strong>at</strong>ionship between<br />
“employer” and “worker”, but r<strong>at</strong>her as a higher expression of loyalty which<br />
could be compared to one between a feudal vassal to his landlord. Moreover<br />
the tendency to lifetime employment of Fi<strong>at</strong> contributed significantly to<br />
reinforce these aspects and it is not by chance th<strong>at</strong> careers up to highest<br />
hierarchical levels in the company did take place (as it currently does) almost<br />
exclusively through “internal” routes, without the introduction of manager 8<br />
who have grown in other contexts and therefore less sensible to this process of<br />
identific<strong>at</strong>ion with the company and the family which represented it.<br />
The anecdotes which could help highlighting this reality, which appears<br />
different from other company contexts and therefore could not even be imagined<br />
elsewhere, are many. Here we would just point out one of them, directly drawn by the<br />
writer during a company interview with a former Fi<strong>at</strong> manger, who then moved on to<br />
another car company. At Fi<strong>at</strong> it was always felt right for a manager to stay on and<br />
work beyond normal working hours, and spend part of the Sunday <strong>at</strong> the office, even<br />
when this did not imply any incentive. Clearly, for some young manager who was<br />
fond of the mountain this represented a major sacrifice, particularly during winter<br />
times. Hence the interviewed manager developed the habit, when the call of the<br />
mountain was irresistible, of wearing a wide h<strong>at</strong> with a cloth covering up his face, to<br />
prevent getting tanned, in order not to make his “scarce dedic<strong>at</strong>ion” to the company<br />
visible <strong>at</strong> a quick glimpse on the following Monday 9 .<br />
7 The Savoia family is the family of the Kings of Italy.<br />
8 There are very few exceptions to this rule, the first d<strong>at</strong>ing back to 1974 which coincided to the call of<br />
Cesare Romiti to the position of financial manager for the group. Another one, even more important,<br />
was th<strong>at</strong> of Paolo Fresco to the position of chairman of the board of the holding company in 1999. The<br />
other “insertions” quantit<strong>at</strong>ively limited for a group which <strong>at</strong> some times had over 300,000 employees,<br />
had a limited lifespan just due to the specific company environment <strong>at</strong> Fi<strong>at</strong>. One could think of the so<br />
called “100 days” of ing. Carlo De Benedetti as chairman in 1976 besides Umberto Agnelli and Cesare<br />
Romiti.<br />
9 See Volp<strong>at</strong>o [1996].<br />
11
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
Clearly such a priestlike view of the duties of the Fi<strong>at</strong> manager has gradually<br />
softened, but there is no doubt th<strong>at</strong> for a significant share of the employees, and<br />
particularly for those coming from Piedmont and Turin, such a sense of belonging is<br />
partly still present. Therefore it would be completely misleading, in order to<br />
understand the model of corpor<strong>at</strong>e governance <strong>at</strong> Fi<strong>at</strong>, to adopt a view which is<br />
exclusively based upon aspects linked to the share of capital held by the Agnelli<br />
family and by the number of family members directly involved in managerial<br />
responsibilities. Just to quote an example, there is no doubt th<strong>at</strong> the share of financial<br />
control of the Quandt family over Bayerische Motoren Werke (BMW) is largely<br />
higher than th<strong>at</strong> of the Agnelli family over Fi<strong>at</strong>, but while in the first case the<br />
separ<strong>at</strong>ion between property and control is an acquired and undisputable fact, one<br />
cannot say the same about the second case. To some extent, the link between property<br />
and control which currently stands <strong>at</strong> Fi<strong>at</strong> appears even more solid than in a smaller<br />
company where, although a member of the family stands in the top position, there<br />
isn’t such a form of identific<strong>at</strong>ion as the one previously mentioned.<br />
3. The Automotive Filière and Its Importance on Italian Economy<br />
3.1. The fiscal contribution of the automobile world<br />
Before moving on to analyze more closely the specific traits of the <strong>Corpor<strong>at</strong>e</strong><br />
<strong>Governance</strong> model <strong>at</strong> Fi<strong>at</strong> it is worth providing some inform<strong>at</strong>ion which helps<br />
understanding the role of the Fi<strong>at</strong> Group in the Italian economy. As it will be showed<br />
in more detail l<strong>at</strong>er one, car manufacturing and the complex of activities linked to<br />
vehicle manufacturing represent only a share of the activities of the Fi<strong>at</strong> Group, which<br />
encompasses also activities in the fields of Manufacturing Systems with the firms<br />
Comau Sistemi di Produzione and Pico, of Avi<strong>at</strong>ion (Fi<strong>at</strong> Avio), of communic<strong>at</strong>ion<br />
(Itedi), of insurance (Toro). However the weight represented by the complex of<br />
activities linked to vehicle manufacturing in general is so high th<strong>at</strong> for convenience<br />
reasons in this stage we will refer just to these.<br />
A first important element is the contribution of the “automobile world” to the<br />
Italian economy. It is a complex phenomenon which cannot be summed up in a few<br />
figures, but one could get an idea of the importance of the automobile in daily lives of<br />
Italian citizens by noting th<strong>at</strong> over 18% of the whole fiscal revenue stems from<br />
economic activities revolving around the automobile world (Fig. 1).<br />
Fig.1 - Automotive Industry’s Contribution to Italian Tax Revenue<br />
(Billion Lire - 1999)<br />
Excise and Value-Added Taxes on Fuels 53,700<br />
Excise and Value-Added Taxes on Lubricants 1.800<br />
Value-Added Tax on Vehicle purchases and Repair 26,000<br />
Value-Added Tax on Purchases of Spare Parts 3,850<br />
Value-Added Tax on car radios & Phone 700<br />
Value-Added Tax on Vehicle Towing Charges 2,400<br />
Value-Added Tax on Road Tolls 1,600<br />
Provincial Registr<strong>at</strong>ion Tax (IPT) 2,000<br />
Vehicle Ownership Tax 10,300<br />
Vehicle Registr<strong>at</strong>ion Fees 1,300<br />
Tax on Vehicle Insurance 5,700<br />
Total Vehicle Taxes 109,350<br />
% on Total Domestic Tax Revenue 18,6%<br />
Source: Anfia<br />
12
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
3.2. Employment in the filière<br />
Total employment worldwide of the Fi<strong>at</strong> Group <strong>at</strong> the end of 1999 was<br />
221,319 units, of which 163,432 in the range of industries linked to vehicles<br />
(Automobiles, Commercial Vehicles, Agricultural and Construction Equipment,<br />
Automotive Components), which in turn divide between 53.55% in Italy and 46.45%<br />
abroad. Therefore one could say th<strong>at</strong> the 87,519 employees in Italy represent a<br />
majority share of the Italian vehicle filière, albeit it can be hardly quantified.<br />
Estim<strong>at</strong>es suggest th<strong>at</strong> the automobile filière, defined as the set of industrial activities<br />
ranging from manufacturing of components which are specific to the automotive<br />
industry to the assembly of cars and commercial vehicles, accounts for about 10% of<br />
Italian industrial employment, with a total employment of 130,000 units. It is a rough<br />
estim<strong>at</strong>e since there are no official st<strong>at</strong>istics on the subject. Clearly employment is<br />
significantly higher than 110,000 units since only the 110 firms associ<strong>at</strong>ed to the<br />
Associazione Nazionale Fra Industrie Automobilistiche 10 (ANFIA) accounted for<br />
109,200 workers in 1998. Hence this measurement cannot grasp all the small-medium<br />
firms which, although specialized in whole or in parts in vehicle component<br />
manufacturing, are not interested in joining ANFIA. They are believed to be about<br />
800 since estim<strong>at</strong>es suggest th<strong>at</strong> firms mainly specialized in vehicle component<br />
manufacturing are about 900 units.<br />
Employment in the filière tends anyway to decrease in a marked way, along<br />
with the process of globaliz<strong>at</strong>ion of automobile manufacturing which is replacing<br />
vehicle export flows from more industrialized areas to less industrialized areas,<br />
through the development of manufacturing activities in countries with a growing<br />
motoriz<strong>at</strong>ion process. Over the last ten years industrial employment recorded by<br />
companies joining ANFIA (Fig. 2) has reduced by 50%, from 205,009 to 109,200<br />
employees.<br />
Fig. 2 - People Employed in the Italian Automotive Filière<br />
Year Blue Collars White Collars Total<br />
1989 157,491 47,518 205,009<br />
1990 154,094 49,215 203,309<br />
1991 138,009 44,481 182,490<br />
1992 133,972 42,182 176,154<br />
1993 112,480 35,520 148,000<br />
1994 102,600 32,400 135,000<br />
1995 98,600 31,400 130,000<br />
1996 94,000 29,500 123,500<br />
1997 89,000 27,000 116,000<br />
1998 83,700 25,500 109,200<br />
Source: ANFIA<br />
Note: People employed in firms associ<strong>at</strong>ed to Anfia: Automobiles,<br />
Commercial Vehicles, Sport and Special Cars, Body Manufacturers for<br />
Industrial and multipurpose vehicles, Automotive Components Manufacturers<br />
(Tyre Manufacturers included).<br />
10 It stands for N<strong>at</strong>ional Associ<strong>at</strong>ion of Automobile Industries<br />
13
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
3.3. Import-Export <strong>at</strong> Fi<strong>at</strong> Group<br />
The intern<strong>at</strong>ionalis<strong>at</strong>ion process <strong>at</strong> Fi<strong>at</strong> has led to gradually increase both<br />
foreign revenues for the group and export flows. With respect to the former, Fig. 3<br />
shows th<strong>at</strong> in 1990 a major share of the group turnover was achieved in Italy (83%).<br />
In 1998 it still mainly comes from Italy but some rebalancing took place, since 38%<br />
of revenues come from activities loc<strong>at</strong>ed in Europe (excluding Italy) or the rest of the<br />
world. In 1999 there is another small move towards an intern<strong>at</strong>ional presence since<br />
the share in value of products manufactured in Italy decreases to 61%. However it is<br />
worth noting th<strong>at</strong> the rooting of activities in Italy took place in tune with the whole<br />
growth of the group, hence the loss in percentage weight of Italian turnover is linked<br />
to a r<strong>at</strong>her constant absolute value produced in the domestic market.<br />
This means th<strong>at</strong> the reduction in employment levels for the group in Italy is<br />
due to a productivity gain and not to relocaliz<strong>at</strong>ion of activities which have reduced<br />
internal employment levels.<br />
If one moves on to analyze revenues by country of destin<strong>at</strong>ion (Fig. 4) it is<br />
easy to see how Fi<strong>at</strong> has maintained over time a r<strong>at</strong>her constant volume of sales in the<br />
Italian market, and growth took place in a first stage in Europe and l<strong>at</strong>er on mainly in<br />
the rest of the world, where turnover represents one fourth of total.<br />
In terms of vehicles exported one can provide a detailed numerical example.<br />
With respect to cars, units exported by the Fi<strong>at</strong> Group in 1999 were 609,012, equal to<br />
42.2% of manufactured units. For commercial vehicles, instead, units exported were<br />
203,378, th<strong>at</strong> is 70% of domestic production.<br />
60,0<br />
50,0<br />
40,0<br />
30,0<br />
20,0<br />
10,0<br />
0,0<br />
29,5 bn €<br />
3,8<br />
24,5<br />
Fig. 3 - Fi<strong>at</strong> Group Turnover by Origin<br />
1,2<br />
45,8 bn €<br />
14<br />
8,7<br />
8,7<br />
48,1 bn €<br />
8,2<br />
10,6<br />
28,4 29,3<br />
1990 1998 1999<br />
Italy Rest of Europe Rest of the World
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
60,0<br />
50,0<br />
40,0<br />
30,0<br />
20,0<br />
10,0<br />
0,0<br />
29,5 bn €<br />
10,3<br />
Fig. 4 - Fi<strong>at</strong> Group Turn Over by Destin<strong>at</strong>ion<br />
2,7<br />
16,5 16,9 18,3<br />
15<br />
45,8 bn €<br />
11,5<br />
17,4<br />
10,1<br />
19,7<br />
1990 1998 1999<br />
Italy Rest of Europe Rest of the World<br />
48,1 bn €
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
4. Historical Evolution of Fi<strong>at</strong> <strong>Governance</strong><br />
4.1. The establishment of a Public Limited Company<br />
Fi<strong>at</strong> was born in 1899 as a public limited company with an equity of 800,000<br />
lire, subscribed by nine founding partners, each of whom had an equal number of<br />
shares (150). However the managerial role of partners soon started to differenti<strong>at</strong>e,<br />
with the emergence of the position and personal commitment of Giovanni Agnelli,<br />
who became chairman of the company in 1902. With the first commercial successes<br />
for Fi<strong>at</strong> 11 there were also considerable changes in equity shares, mainly with the<br />
admission to the stock exchange market in 1904. Three of the nine founding partners<br />
(Giovanni Agnelli, Luigi Damevino and Ludovico Scarfiotti) started to acquire large<br />
numbers of shares, making stock values grow.<br />
Facing the promising market scenario, it was key to increase capital in order to<br />
finance the investments required by manufacturing expansion. Hence in 1906 it was<br />
decided, not without dissent among partners and opposition by a number of minority<br />
shareholders, to liquid<strong>at</strong>e the company and to establish a new one bound to acquire its<br />
activities, with a capital of 9 million lire, divided in 90,000 shares. In the new<br />
company the trio Agnelli, Damevino and Scarfiotti had 71.7% of shares, with Agnelli<br />
as the major shareholder.<br />
But during the following year there was a downward economic trend, which<br />
slowed sales, to which Agnelli did not <strong>at</strong>tribute importance, believing it was a<br />
temporary decrease in sales, and continuing in expanding manufacturing. Soon there<br />
was a considerable financial tension, which caused serious difficulties to the three key<br />
shareholders, who were also accused of poor company management. This delic<strong>at</strong>e<br />
stage of crisis led in July 1908 to the resign<strong>at</strong>ion by all members of the Board of<br />
Directors. However the managerial role played by Agnelli was believed (mainly by<br />
creditor banks) too important for the overcoming of the difficulties, and he was<br />
renamed Chairman in April 1909. With this change the dominant position of Giovanni<br />
Agnelli was finally consolid<strong>at</strong>ed, both on the equity side and on the managerial one.<br />
During the following years there was a strong development of the automobile<br />
market and of Fi<strong>at</strong>, whose capital was strengthened <strong>at</strong> many stages with increases<br />
which expanded capital from 12 million in 1909, to 14 in 1910, to 17 in 1912.<br />
During World War One Fi<strong>at</strong> kept on growing rapidly, with large distribution<br />
of profits, growth of share prices, and high compens<strong>at</strong>ion for board members, which<br />
allowed Giovanni Agnelli to keep on maintaining control of the company in the light<br />
of many considerable capital increases.<br />
Another delic<strong>at</strong>e passage on the property side took place in the 1917-1919<br />
period. During those years there was:<br />
a) The purchasing by Fi<strong>at</strong> of a group of companies controlled by the holding<br />
called “Gruppo Piemontese”,<br />
b) Giovanni Agnelli entering the controlling group of shares in the Banca<br />
Commerciale Italiana (Comit), who in turn was the first bank financing<br />
Fi<strong>at</strong>, and who had a considerable number of shares of the company;<br />
c) Two subsequent and considerable capital increases, half of which assigned<br />
to shareholders as option. They were complex and reckless actions, judged<br />
11 In 1903 company profits were particularly high.<br />
16
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
harmful to the interests of minority shareholders, but aimed <strong>at</strong> fighting<br />
back a takeover effort of Fi<strong>at</strong> moved by the Ansaldo company.<br />
The year 1919 closed with the establishment of the Società Generale<br />
Finanziaria (Sgf) whose capital was subscribed for 50% by Fi<strong>at</strong> and for 50% by a<br />
group of shareholders, with Giovanni Agnelli in a leading position. The task of Sgf<br />
was to manage Fi<strong>at</strong> shares and the whole stock portfolio of Fi<strong>at</strong> holdings. The next<br />
year Giovanni Agnelli became President of Fi<strong>at</strong>.<br />
During the 1920s Agnelli’s position as head of financial control was ultim<strong>at</strong>ely<br />
enshrined. In 1922 Sgf was winded up and in 1924 there was a gigantic capital<br />
increase given in option to shareholders. Fi<strong>at</strong> equity grew from 200 to 400 million lire<br />
and in such increase subscriptions by a syndic<strong>at</strong>e led by Agnelli and Comit were<br />
particularly relevant. Further dominance by Agnelli became official in 1926 with the<br />
appointment of his son Edoardo as vice-president.<br />
Soon after Agnelli called off the control syndic<strong>at</strong>e made with Comit and on<br />
24th july 1927 he announced the establishment of a financial company called Istituto<br />
Finanziario Industriale (Ifi). The key shareholders of Ifi were Giovanni and Edoardo<br />
Agnelli and some companies controlled by Fi<strong>at</strong>, but there were small share portions<br />
held by two key families in the Italian industrial landscape: Pirelli and Borletti. Ifi,<br />
with a company capital of 10 million lire, had the task of stabilizing stock values of<br />
Fi<strong>at</strong> shares, constituting a majority block through a control syndic<strong>at</strong>e capable of<br />
drawing other shareholders, using Fi<strong>at</strong> shares for carry over oper<strong>at</strong>ions through which<br />
to finance Fi<strong>at</strong> itself, and acquire a range of holdings. After its cre<strong>at</strong>ion Ifi continued<br />
to acquire holdings and increase the share of Fi<strong>at</strong> shares controlled, reaching in 1932<br />
the control of absolute majority. In the same year some norms were established by the<br />
council of Ifi, aimed <strong>at</strong> maintaining shared of the founding partners, prescribing the<br />
need for board authoriz<strong>at</strong>ion in case of transfer. Ifi then acquired the role of safe for<br />
the Agnelli family, role which maintained until 1987 when Fi<strong>at</strong> shares will be<br />
conferred to the “Società in accomandita per azioni Giovanni Agnelli & C”. The<br />
Agnelli family was also owner of the RIV company, specialized in the manufacturing<br />
of ball bearings. It had Edoardo Agnelli as chairman from 1921 onwards.<br />
4.2. The development of an advanced technical management<br />
One of Giovanni Agnelli’s worries, since his appointment to chairman in<br />
1902, was to favour the growth of managers skilled on the technical standpoint. This<br />
objective was mainly pursued through frequent contacts with the US industrial<br />
world 12 . The key reference point for Giovanni Agnelli was the study of the fordist<br />
experience, although with the smart aim of not imit<strong>at</strong>ing in a mechanic way solutions<br />
adopted overseas, but to absorb mass production ideas and studying solutions which<br />
were suitable for the specific traits of the economic and social environment of Italy <strong>at</strong><br />
th<strong>at</strong> time.<br />
The specific skill of Giovanni Agnelli was to manage to tie together the<br />
management of the company, still maintaining and stimul<strong>at</strong>ing forms of<br />
competitiveness and antagonism across different company functions, in particular<br />
between vehicle design and the production side, which were seen as the building<br />
12 See Bigazzi [1999] and Volp<strong>at</strong>o [2000].<br />
17
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
blocks of the company, r<strong>at</strong>her than the administr<strong>at</strong>ive functions 13 . This st<strong>at</strong>e of<br />
identific<strong>at</strong>ion of management with the objectives of development of Fi<strong>at</strong>, linked to a<br />
l<strong>at</strong>ent antagonism between managerial functions, had a twofold advantage. On the one<br />
side the situ<strong>at</strong>ion manifested through a strong cohesion of managers around the<br />
company top leaders, represented by the chairman Giovanni Agnelli and general<br />
manager Vittorio Valletta, appointed to such position since 1928. At the same time<br />
since only the top leaders (these two people) had complete inform<strong>at</strong>ion over the<br />
different managerial aspects, the whole str<strong>at</strong>egic elabor<strong>at</strong>ion of the company was<br />
centered and taken away from any form of evalu<strong>at</strong>ion based upon consensus with<br />
functional managers.<br />
The situ<strong>at</strong>ion fe<strong>at</strong>ured evident inefficiencies which however did not seriously<br />
affect the company which had acquired for some time a position of absolute<br />
competitive dominance in the n<strong>at</strong>ional market, and considerable economic and<br />
political weight in the Italian economy.<br />
The mechanisms through which Giovanni Agnelli will build such absolute<br />
loyalty of his managers without having to call them to share str<strong>at</strong>egic choices, are<br />
many and subtle, and for a gre<strong>at</strong> extent linked to the fact th<strong>at</strong> in Italy and even more in<br />
Piedmont, to work <strong>at</strong> Fi<strong>at</strong> represented a st<strong>at</strong>us symbol of gre<strong>at</strong> significance. It was<br />
certainly the most successful firm in Italy, oper<strong>at</strong>ing in industries which were among<br />
the most technologically advanced <strong>at</strong> th<strong>at</strong> time, hence among the most important:<br />
automobiles, industrial vehicles, aeronautics, marine engines, etc. Fi<strong>at</strong> was among the<br />
few firms which could compete with the intern<strong>at</strong>ional industries of countries which<br />
were far more advanced than Italy. Among these mechanisms of identific<strong>at</strong>ion<br />
between individual and company there were the methods merit-based selection based<br />
almost exclusively on the internal career. In such way the merit-based system tended<br />
inevitably to marry the loyalty principle, as it was the boss to select growth of his<br />
collabor<strong>at</strong>ors, hence it does not surprise th<strong>at</strong> merit and loyalty to positions expressed<br />
by the boss tended to come together, if not to merge.<br />
At the highest levels this mechanism of internal progression in the company<br />
had its maximum expression in the rule th<strong>at</strong>, in case of de<strong>at</strong>h or resign<strong>at</strong>ion by one of<br />
the board members <strong>at</strong> Fi<strong>at</strong>, the replacement took place with people coming from the<br />
firm top management 14 . The analysis of the composition of the board since the 1920s<br />
shows this aspect with gre<strong>at</strong> evidence, given the almost exclusive presence of<br />
members of the Agnelli family, such as Giovanni Agnelli’s nephew, Giancarlo<br />
Camerana, elected board secretary in 1927, and company managers.<br />
13 Castronovo [1999] points out th<strong>at</strong> “In the company production engineers were important, or <strong>at</strong> least<br />
they believed to carry out roles which were predominant over any other one. According to them the<br />
success of the company depended only upon the design and good oper<strong>at</strong>ion of plants, independently<br />
from the validity of administr<strong>at</strong>ive and financial methods”.<br />
14 This st<strong>at</strong>utory change was due also to worries to prevent insertion in the board of political<br />
represent<strong>at</strong>ives associ<strong>at</strong>ed to Fascism. See Castronovo [1999].<br />
18
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
4.3. Valletta’s “Supplenza”<br />
In 1945 with the end of World Was Two it is the N<strong>at</strong>ional Liber<strong>at</strong>ion<br />
Committee (CNL) of the Piedmont Region to acquire control of the City of Turin and<br />
of Fi<strong>at</strong>. The CNL soon takes a decision of temporary purge against Agnelli, Valletta,<br />
Camerana, accused of cooper<strong>at</strong>ion with the nazi-fascism, and the appointment of four<br />
commissaries in charge of managing the company. There was hence a dichotomy<br />
were on the one side there were the four commissaries and on the other the majority<br />
shareholders, th<strong>at</strong> is the Ifi and the Agnelli family, hit by a seizure concerning the<br />
personal properties of Giovanni Agnelli due to the purge alleg<strong>at</strong>ion. None of the two<br />
parties was in the condition to autonomously carry out the massive reorganiz<strong>at</strong>ion of<br />
Fi<strong>at</strong> in the delic<strong>at</strong>e stage of reconstruction. Hence there was a stage of stalem<strong>at</strong>e,<br />
where the Communist Party proposed a n<strong>at</strong>iona liz<strong>at</strong>ion of the company, similar to the<br />
one carried out in France for Renault, while Allies pushed to the appointment of a<br />
single Commissary, and for the return of control to the property.<br />
During such impasse it became evident th<strong>at</strong> Fi<strong>at</strong>, seriously damaged on the<br />
manufacturing side by warfare destructions, was exposed to very serious risks, as it<br />
needed a clear reorganiz<strong>at</strong>ion program, huge finance interventions, and large supplies<br />
of m<strong>at</strong>erials and energy to start its own recovery. The stalem<strong>at</strong>e became even more<br />
dram<strong>at</strong>ic with the de<strong>at</strong>h of Giovanni Agnelli on 16th December 1945, little before th<strong>at</strong><br />
the judicial proceedings concerning the alleg<strong>at</strong>ions of cooper<strong>at</strong>ion with Fascism was<br />
closed, with the cancell<strong>at</strong>ion.<br />
At the de<strong>at</strong>h of Giovanni Agnelli his properties (including Ifi) were divided<br />
among the eleven nephews: the six sons of Edoardo and the five sons of Tina Agnelli<br />
and Giovanni Nasi. All nephews received an equal share of Fi<strong>at</strong> excluding Gianni<br />
Agnelli, son of Edoardo, who received a double share. Clearly this fragment<strong>at</strong>ion of<br />
shareholders made the uncertainty clim<strong>at</strong>e around the company grow, along with the<br />
problems of its survival.<br />
The stalem<strong>at</strong>e situ<strong>at</strong>ion was overcome <strong>at</strong> the beginning of 1946 when the CNL<br />
accepted an agreement which restored the position of control by the shareholders, and<br />
instituted some Management Councils with consulting power. Valletta, who had<br />
negoti<strong>at</strong>ed on behalf of the Agnelli family such agreement, regained in practice the<br />
lead of the company, and his position became official in June 1946 with his<br />
appointment to general director and chairman. His lead on Fi<strong>at</strong> lasted without<br />
interruptions until 1966 with the complete support 15 of the Agnelli family and with<br />
Gianni Agnelli as vice-president.<br />
A long period of growth hence begins for Fi<strong>at</strong>, in tune with an exceptional<br />
development of the domestic automobile market, and a robust growth in the n<strong>at</strong>ional<br />
economy. During post-war years, the management style of Vittorio Valletta tended to<br />
a degree of centraliz<strong>at</strong>ion, whenever possible, which was even gre<strong>at</strong>er than Giovanni<br />
Agnelli 16 . It was common practice th<strong>at</strong> during meetings of the Executive Committee<br />
on Thursdays, the highest and most restricted decisional organ for Fi<strong>at</strong>, made with 5-6<br />
people including Valletta and Gaudenzio Bono, the general manager, almost Valletta<br />
alone spoke to express his guidelines 17 . It was not hard to imagine th<strong>at</strong> such practice<br />
15 During the long period with Valletta <strong>at</strong> the helm of Fi<strong>at</strong> there were some rumors on frictions between<br />
Valletta and the Agnelli family, albeit these were just rumors, without a precise record.<br />
16 On these aspects see the book by Giacosa [1988].<br />
17 See Pochna [1989].<br />
19
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
was going to produce serious difficulties, which however emerged only much l<strong>at</strong>er, <strong>at</strong><br />
the end of the 1960s, thanks to a favorable economic trend. A single figure is enough<br />
in order to clarify the long growth season enjoyed by Fi<strong>at</strong> up to 1969: in 1949 the<br />
company manufactured 70,800 vehicles, much more than the all time high of 1937,<br />
with little less than 55,000 units. From th<strong>at</strong> year production grew steadily until 1968,<br />
when all-time high was reached with 1,751,400 vehicles, equal to twenty-five times<br />
the starting point.<br />
4.4. The Valletta “monolith-like” culture<br />
Under the lead of Giovanni Agnelli the company had developed during its first<br />
forty years of age, according to the organiz<strong>at</strong>ional culture of th<strong>at</strong> time, through a<br />
typically hierarchical and centralized scheme. On the contrary in the USA, starting<br />
from the 1920s, there gradually emerges a scheme which favors a process of<br />
decentraliz<strong>at</strong>ion of decisional responsibilities, under the name of “divisionaliz<strong>at</strong>ion”.<br />
Each economic area of activity which can be specialized according to variables such<br />
as market, production process, technology, makes up a “division” of the gre<strong>at</strong>er firm<br />
structure, to which it grants an adequ<strong>at</strong>e oper<strong>at</strong>ional autonomy.<br />
The most typical example of this approach lies in General Motors, which<br />
under the lead of Alfred P. Sloan had an organiz<strong>at</strong>ion based upon individual brands of<br />
cars, in order to fully exploit the innov<strong>at</strong>ion potential of the divisional structure, and<br />
seize the growing propensity of the US market for products which were more and<br />
more targeted to specific market segments. In General Motors such reorganiz<strong>at</strong>ion<br />
around divisions represented a somewh<strong>at</strong> n<strong>at</strong>ural solutions, because differently from<br />
other US and European car makers, it was born as a grouping of previously<br />
independent firms, and r<strong>at</strong>her differenti<strong>at</strong>ed in terms of market orient<strong>at</strong>ion. At the<br />
beginning, given the scarce degree of coordin<strong>at</strong>ion of the six brands merged into<br />
General Motors 18 , the heterogeneity was a weakness compared to the str<strong>at</strong>egy of<br />
radical standardiz<strong>at</strong>ion of Ford. It will be Alfred P. Sloan, who became chairman of<br />
General Motors in 1923, to grasp the profound change taking place in the US market,<br />
and to transform such weakness of the previous stage into a sustainable competitive<br />
advantage in the new stage which began in the 1920s. Such competitive advantage<br />
was perfectly summed up in the slogan made for General Motors: A car for every<br />
purse and purpose 19 .<br />
However the Fi<strong>at</strong> case was <strong>at</strong> the end of the 1960s a twofold centralized<br />
reality, both on the horizontal side (since only the very top management was in charge<br />
of overseeing the multitude of industrial and technical activities carried on by the<br />
company), and on the vertical side (since there wasn’t any significant division of tasks<br />
along the continuum which linked decisions which had prevalent str<strong>at</strong>egic content to<br />
those which had prevalent oper<strong>at</strong>ional content. Such situ<strong>at</strong>ion, as shown in the<br />
organiz<strong>at</strong>ion chart no.1, was due to the fact th<strong>at</strong> Vittorio Valletta grouped in himself<br />
both the role of single chairman and the role of general manager, directly in charge of<br />
leading all the departments from procurement to sales. It is not by chance th<strong>at</strong> in the<br />
official organiz<strong>at</strong>ion chart of Fi<strong>at</strong> there were the unusual figures of “Assistant<br />
18 They were: Chevrolet; Oakland (l<strong>at</strong>er on renamed as Pontiac); Oldsmo bile; Scripps-Booth and<br />
Sheridan whose makes were l<strong>at</strong>er on elimin<strong>at</strong>ed; Buick and Cadillac.<br />
19 See Sloan [1963].<br />
20
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
Managers to the General Manager”. They were roles placed in a staff position with<br />
respect to the line of authority of the General Manager.<br />
Comit<strong>at</strong>o<br />
Direttivo<br />
Enti con funzioni<br />
aziendali centrali<br />
Funzioni organizz<strong>at</strong>ive,<br />
amministr<strong>at</strong>ive, finanziarie<br />
e tecniche<br />
Organigramma n.1<br />
Struttura organizz<strong>at</strong>iva Fi<strong>at</strong> <strong>SpA</strong> – 1966<br />
Amministr<strong>at</strong>ore Deleg<strong>at</strong>o Unico<br />
e Direttore Generale<br />
(Vittorio Valletta)<br />
Facing the growth in size and complexity after World War II, the management<br />
of the Vittorio Valletta tended to further enhance such approach, even though his<br />
gre<strong>at</strong> dynamic <strong>at</strong>titude and charisma made, in the short terms, the risks of such<br />
organiz<strong>at</strong>ional involution less evident. At the beginning of the 1960s Fi<strong>at</strong> appeared as<br />
a massive conglomer<strong>at</strong>e of industrial activities revolving around vehicle manuacturing.<br />
The degree of vertical integr<strong>at</strong>ion was very high, not only in production<br />
terms, but also on the juridical and company standpoint, since the majority of<br />
activities were included in Fi<strong>at</strong> <strong>SpA</strong>. It was the outcome of the policy of wildfire<br />
21<br />
Vicepresidente<br />
Direttori Assistenti<br />
Alla Dir. Generale<br />
Comparti di<br />
produzione e vendita<br />
Automobili e Veicoli Industriali<br />
Ferrotramviario, Aviazione<br />
Siderurgia, Marina
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
expansion on vehicle component manufacturing 20 and in rel<strong>at</strong>ed activities and by<br />
fiscal policies which <strong>at</strong> th<strong>at</strong> time affected the sale and not the added value.<br />
4.5. The management of the Agnelli family in first person<br />
Gianni Agnelli after the appointment to vice-president of Fi<strong>at</strong> did not seem<br />
interested into committing to managing the firm. He usually showed up to Fi<strong>at</strong><br />
headquarters in Corso Marconi in Turin only for board and committee meetings. He<br />
preferred dividing himself between managing RIV 21 , being mayor of Villar Perosa,<br />
and more mundane things. However over the following years he started a long<br />
training stage towards the appointment to the role to which he was pre-destined: th<strong>at</strong><br />
of chairman of Fi<strong>at</strong>. One step towards this direction took place in 1959 with the<br />
presidency of Ifi and, l<strong>at</strong>er one, with a stronger commitment in managing the firm<br />
particularly in legal aspects and issues rel<strong>at</strong>ed to the firm intern<strong>at</strong>ional rel<strong>at</strong>ionships.<br />
At the beginning of the 1960s in the entourage of the Agnelli family there<br />
m<strong>at</strong>ured the idea th<strong>at</strong> the time of a change <strong>at</strong> the helm of the company had come.<br />
However the company was performing so well th<strong>at</strong> only a specific will of Valletta in<br />
this direction would have made room to the appointment of Giovanni Agnelli without<br />
frictions and consequences. On the contrary Valletta was clearly determined to extend<br />
to the limit its role of chairman. Moreover, his will was for Gaudenzio Bono to be<br />
general manager and chairman, a person in many instances similar to Valletta, taking<br />
his place <strong>at</strong> the helm of Fi<strong>at</strong>.<br />
The shift m<strong>at</strong>ured in 1966, due to a series of events: on the one side the<br />
physical decline of Valletta, on the other side the emergence of some str<strong>at</strong>egic<br />
mistakes in the management of the company such as the development of the new<br />
Rivalta plant, near Turin, which <strong>at</strong>tracted a huge flow of workers from other parts of<br />
Italy, mainly from the South and from Veneto. Turin and its surroundings were not<br />
capable of absorbing such inflow without a serious unease which l<strong>at</strong>er on led to flashy<br />
forms of social degrad<strong>at</strong>ion and political unrest.<br />
Thinking of a “normal” company, the years ranging from 1946 to 1966 could<br />
be seen as a typical example of separ<strong>at</strong>ion between property and control, but this<br />
would be a superficial perspective, which would not take into account neither the<br />
specific personality of Vittorio Valletta, nor the specific traits of a firm like Fi<strong>at</strong>,<br />
fe<strong>at</strong>uring a managerial culture made of peculiar rituals. On the one side there is no<br />
doubt th<strong>at</strong> Valletta had always managed Fi<strong>at</strong> on behalf of the primary interest of the<br />
Agnelli family, as Giovanni Agnelli would have done, linking centraliz<strong>at</strong>ion to a<br />
marked degree of p<strong>at</strong>ernalism towards employees. On the other hand it would have<br />
been unn<strong>at</strong>ural to imagine the loss of confidence by the Agnelli family towards<br />
Valletta, both because he was seen as the only one capable of leading the company<br />
with a firm hand, and for the sacred consider<strong>at</strong>ion of command living in Fi<strong>at</strong><br />
managers and in the Agnelli family, so th<strong>at</strong> any form of contrast against the leadership<br />
of Valletta would have looked like a “palace plot”, something which would have been<br />
destabilizing for the company.<br />
20 For an analysis of the reasons which favored internal component production compared to external<br />
purchase see Volp<strong>at</strong>o [1983].<br />
21 Company specialized in the manufacturing of ball bearings, wholly owned by the Agnelli family.<br />
22
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
In such sense we believe th<strong>at</strong> the two decades with Valletta leading the<br />
company are an extension of the previous period of complete identific<strong>at</strong>ion between<br />
property and control. If one would distinguish the lead of Giovanni Agnelli by th<strong>at</strong> of<br />
Vittorio Valletta, he would have to talk about a period of “management without<br />
control by property”, meaning th<strong>at</strong> Valletta had received a sort of formal investiture<br />
and he exerted it with an extreme consistency evoked by a sacerdotal role and outside<br />
any personal interest.<br />
I believe th<strong>at</strong> one can talk about an extension of the rel<strong>at</strong>ionship between<br />
property and control during the Valletta stage, as he takes the role of “regent” who<br />
interprets the interest of the Agnelli family on the basis of a commitment taken for<br />
affection and respect towards Giovanni Agnelli. Therefore Valletta behaved like a<br />
loyal feudal vassal would have done, in charge of preserving the fief of his landlord in<br />
order to pass it on to the heir, one he reached the right age. In such sense Valletta did<br />
not feel controlled by the Agnelli family, and there are many small anecdotes<br />
highlighting how he decided with gre<strong>at</strong> freedom, led by the will to pursue the interest<br />
of the Agnelli family just as he perceived such interest 22 hence without really<br />
consulting with Gianni Agnelli.<br />
4.6. The divisional approach by Umberto Agnelli<br />
With the shift in presidency from Vittorio Valletta to Gianni Agnelli in 1966,<br />
there was a profound and burdensome reorganiz<strong>at</strong>ion process, which received another<br />
push with the appointment of Umberto Agnelli as chairman in 1970. Umberto Agnelli<br />
was particularly receptive towards the cultural wave m<strong>at</strong>ured in the USA on<br />
managerial themes. He was responsible, among other things, for the development of<br />
the Institute for Organis<strong>at</strong>ional Development (ISVOR), aimed <strong>at</strong> developing training<br />
for managers of Fi<strong>at</strong>. The institution was placed under the Personnel and Social<br />
Rel<strong>at</strong>ions management, and started its activities in the middle of 1972. Umberto<br />
Agnelli realized th<strong>at</strong> the drive for growth expressed by Vittorio Valletta, and the<br />
virtual absence of competition in the domestic car market, had determined an<br />
organiz<strong>at</strong>ional structure which was inadequ<strong>at</strong>e. He then decided to start a deep<br />
evalu<strong>at</strong>ion of the company structure, which was mand<strong>at</strong>ed to a US consulting<br />
company. Such step was the starting point for a moderniz<strong>at</strong>ion project of the whole<br />
organiz<strong>at</strong>ional and decisional structure. It was a hard task, mainly because a specific<br />
decisional structure ends up exerting a people selection process, in charge of different<br />
roles, with fe<strong>at</strong>ures which are consistent with the structure itself. A centralized<br />
structure, which rewards mainly the loyalty to bosses 23 , inevitably tends to get rid of<br />
all intermedi<strong>at</strong>e managers with <strong>at</strong>titudes which are “dissonant”, but, even more so, a<br />
too centralized structure does not allow the m<strong>at</strong>ur<strong>at</strong>ion of entrepreneurial experiences<br />
adequ<strong>at</strong>e to cre<strong>at</strong>e the next managerial élite. As a consequence, when it is time to<br />
intervene and redesign the organiz<strong>at</strong>ion it is not enough to change the structure roles.<br />
People must be changed as well, since they did not have a chance to achieve the<br />
training-on-the-job required to adequ<strong>at</strong>ely carry out the new roles.<br />
Some documents with the first ideas of reorganiz<strong>at</strong>ion of the company<br />
structure started to spread in Fi<strong>at</strong> since 1967, but the definition of a new organiz<strong>at</strong>ion<br />
22 On this aspect see Bair<strong>at</strong>i [1983] and Pochna [1989].<br />
23 This is recorded , both for managerial cadres and for Fi<strong>at</strong> “bosses”, by Rieser [1985].<br />
23
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
chart began to take shape only in April 1970. The objectives to achieve through the<br />
reorganiz<strong>at</strong>ion were l<strong>at</strong>er on underlined by a study developed by Alberto Mosconi,<br />
then working in the Studies, Planning and Control Head Office of Fi<strong>at</strong> <strong>SpA</strong>:<br />
a) To develop a more manageable structure;<br />
b) To acquire a more flexible company structure, also with respect to sales<br />
and acquisitions;<br />
c) To ease financial constraints to the development of the group activities.<br />
The general problem of “manageability” is summed up by Mosconi as follows:<br />
"To make the system more manageable it means for Fi<strong>at</strong>, in those years, to<br />
bring out the identity of each industrial activity, to verify one by one its capability to<br />
compete in the intern<strong>at</strong>ional markets, to diagnose any situ<strong>at</strong>ions of dependence of<br />
even parasitic to the leading industries of the group, to draw the str<strong>at</strong>egic directions<br />
which were more suitable for each product line and, even more, to develop a<br />
management capable of carrying out such process, a management which would<br />
identify himself with each reality by developing in a smaller scale a complete<br />
entrepreneurial vision" 24 .<br />
For any large company with old traditions any profound reorganiz<strong>at</strong>ion brings<br />
considerable problems, as any change compared to the past implies an implicit<br />
critique to the previous organiz<strong>at</strong>ion and to the people who managed it. It is therefore<br />
inevitable th<strong>at</strong> any reorganiz<strong>at</strong>ion implies not only a redistribution in responsibilities<br />
and power of management <strong>at</strong> different levels, but also turnover in people. Hence the<br />
need for a transform<strong>at</strong>ion which is gradually smoothed over time, so th<strong>at</strong> the<br />
unavoidable traum<strong>at</strong>ic aspects of the process do not reach such intensity to destabilize<br />
previous equilibria, before the new company structure is capable of developing new<br />
ones.<br />
The first step towards a new structure <strong>at</strong> Fi<strong>at</strong> was not a true divisional structure<br />
(organiz<strong>at</strong>ion chart no. 2), but represented an intermedi<strong>at</strong>e stage, with the<br />
establishment of “Oper<strong>at</strong>ion Groups” and “Head Directions”. The Oper<strong>at</strong>ion Groups<br />
were instituted as entities fe<strong>at</strong>uring autonomy on the field of design, manufacturing,<br />
administr<strong>at</strong>ive and marketing, with full responsibility of the global economic result,<br />
and they represented the stage of “decentraliz<strong>at</strong>ion”. Instead the “Head Directions”<br />
represented the stage of “coordin<strong>at</strong>ion” <strong>at</strong> the holding level. The Oper<strong>at</strong>ion Groups<br />
which came out of this restructuring included still highly different entities. They were<br />
just three: the “Automobiles” group, the “Industrial Vehicles” group, and the<br />
“Diversified Activities” one. The Head Directions were eight: Finance, Administr<strong>at</strong>ion<br />
and Control, Research and Development, Personnel and Social Rel<strong>at</strong>ions,<br />
Organiz<strong>at</strong>ion and Additional functions, Intern<strong>at</strong>ional industrial developments;<br />
External rel<strong>at</strong>ions, Marketing and development.<br />
The possible overlappings of competences and duplic<strong>at</strong>ions of functions and<br />
structures in such scheme are very evident. It represented a compromise between the<br />
various drives and counter-drives which were gener<strong>at</strong>ed during its development.<br />
However the development of the new organiz<strong>at</strong>ion chart stimul<strong>at</strong>ed the process of<br />
selecting the right <strong>at</strong>titudes of managers and highlighted the professional competences<br />
which were not available within the company and had to be sought after outside.<br />
Albeit with these elements of caution the personnel turnover was undoubtedly<br />
24 See Mosconi and Rullani [1978].<br />
24
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
“bloody”. The previous approach, which had lasted for so long had accumul<strong>at</strong>ed such<br />
a delay with respect to emerging needs, was so deep to make gradual solutions<br />
ineffective.<br />
25
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
Vicepresidente<br />
G. Bono<br />
Veicoli<br />
Industriali<br />
Organigramma n.2<br />
Struttura organizz<strong>at</strong>iva Fi<strong>at</strong> <strong>SpA</strong> – 1973<br />
Direzioni Centrali<br />
E Gruppi Oper<strong>at</strong>ivi<br />
Consiglio di Amministrazione<br />
Automobili Attività<br />
Diversific<strong>at</strong>e<br />
Presidente G.Agnelli<br />
Amministr<strong>at</strong>ore<br />
Deleg<strong>at</strong>o<br />
U. Agnelli<br />
Direzione Generale<br />
N. Gioia – F. Rota<br />
26<br />
Comit<strong>at</strong>o<br />
Finanza<br />
Comit<strong>at</strong>o<br />
Pianificazione<br />
Vicedirettori<br />
Generali<br />
Comit<strong>at</strong>o<br />
Direttivo<br />
Comit<strong>at</strong>o<br />
Personale<br />
Comit<strong>at</strong>o<br />
Prodotti<br />
Comit<strong>at</strong>o<br />
Di Direzione
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
4.7. Str<strong>at</strong>egy and structure<br />
It is important to ask ourselves which were the reasons behind this long<br />
organiz<strong>at</strong>ional crystalliz<strong>at</strong>ion which was in clear contrast with the image and the<br />
results of a company of intern<strong>at</strong>ional st<strong>at</strong>ure, oper<strong>at</strong>ing in technologically advanced<br />
industries, linked to intern<strong>at</strong>ional interests and with frequent contacts with industrial<br />
and financial US and European contexts, more exposed to needs of changing<br />
management criteria. As usual, the reasons were many. Clearly the centralizing<br />
<strong>at</strong>titude of Vittorio Valletta played a role, and the fact th<strong>at</strong> this <strong>at</strong>titude transl<strong>at</strong>ed into<br />
a selection of his closest collabor<strong>at</strong>ors according to criteria which were suitable to<br />
reproduce this kind of behavior. Certainly also the “Piedmont style” represented a<br />
favorable environment to this managerial approach. But there is no doubt th<strong>at</strong> the<br />
“environmental conditions” played a significant role mainly in those linked to the<br />
n<strong>at</strong>ure of the competitive confront<strong>at</strong>ion during those years.<br />
In order to clarify the terms of the issue it is worthwhile distinguish between the<br />
managerial need to define the company str<strong>at</strong>egy to be put in place (wh<strong>at</strong> is referred to<br />
as str<strong>at</strong>egy in the Anglo-Saxon contexts), and the need to transl<strong>at</strong>e such str<strong>at</strong>egy in a<br />
set of timed actions leading to the achievement of objectives (planning). The more<br />
uncertain and complex the definition of the company objectives, the more necessary<br />
to have a strong inform<strong>at</strong>ion and evalu<strong>at</strong>ion integr<strong>at</strong>ion of top management, if one<br />
wants to prevent a too centralized lead from excessively restraining the range of<br />
options which are actually considered before the decision. Once the str<strong>at</strong>egy is<br />
defined, through a strong inform<strong>at</strong>ion interaction among roles and the subjects who<br />
are the keepers of the different professional skills, a centralized management can<br />
regain a functional validity, given th<strong>at</strong> the implement<strong>at</strong>ion does not have too many<br />
problems. In other words, as many studies have documented 25 , the achievement of<br />
high efficiency standards requires th<strong>at</strong> some rel<strong>at</strong>ionship is maintained between the<br />
complexity of the task which a firm organiz<strong>at</strong>ion has to face and the degree of<br />
“organic” interaction among those who make up the decision staff. If the definition of<br />
the str<strong>at</strong>egy does not raise specific problems, as the objectives are evident, without<br />
altern<strong>at</strong>ives and shared, there is no doubt th<strong>at</strong> a centralized management has the<br />
advantage (<strong>at</strong> least in theory) of a higher decision speed and a complete focus of the<br />
planning initi<strong>at</strong>ives.<br />
One can say th<strong>at</strong>, after the move of Fi<strong>at</strong> to mass production in the 1950s which<br />
represents clearly the critical choice upon which Valletta put the whole future of Fi<strong>at</strong><br />
<strong>at</strong> stake, there was a problem of efficient achievement of this objective, but up to the<br />
end of the 1960s there are no more situ<strong>at</strong>ions of gre<strong>at</strong> problems in company choices.<br />
Clearly this does not mean th<strong>at</strong> those years were “st<strong>at</strong>ic”, on the other hand on the<br />
quantit<strong>at</strong>ive standpoint they were years of deep change, but it was an extrapol<strong>at</strong>ive<br />
change, which moved in a form of continuity of the scenario and the competitive<br />
positions.<br />
With the takeoff of the Italian automobile market Fi<strong>at</strong> had to move with decision<br />
and speed along a r<strong>at</strong>her straight road. There were no n<strong>at</strong>ional competitors capable of<br />
disturbing it and intern<strong>at</strong>ional competition was restrained until 1968 by intra-EEC<br />
tariff barriers. Even l<strong>at</strong>er, however, until the oil crisis in 1973, it was a competition<br />
which was softened by the fact th<strong>at</strong> all major markets were expanding. The main<br />
25 Among the first researches in this field see these of Burns and Stalker [1961], Chandler [1962] and<br />
Woodward [1965].<br />
27
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
worry of car makers was the long waiting time between ordering and delivery of the<br />
cars. In such a situ<strong>at</strong>ion competition was formally present, but in practice frozen,<br />
mainly among competitors of different countries, since demand was capable of supers<strong>at</strong>ur<strong>at</strong>ing<br />
supply and car makers had no interest in engaging in price wars. Hence<br />
even a vehicle model which was compar<strong>at</strong>ively less successful found its way into the<br />
market, since the desire for motoriz<strong>at</strong>ion was such th<strong>at</strong> a too long waiting time shifted<br />
demand towards less required models. As a m<strong>at</strong>ter of fact in the 1960s even<br />
companies who were less competitive on the cost standpoint had a chance to grow:<br />
one can think about Alfa Romeo in Italy, Simca in France, NSU in Germany, British<br />
Motor Co. in England, DAF in the Netherlands.<br />
As a consequence the centralized structure of Fi<strong>at</strong> did not visibly contrast with<br />
the need of decisional functionalities which the situ<strong>at</strong>ion required. Clearly such<br />
situ<strong>at</strong>ion determined less managerial upd<strong>at</strong>ing for management cadres and some delay<br />
in the evolution of the organiz<strong>at</strong>ional structure and the decisional procedures, but they<br />
were aspects which did not emerge from the outside of a structure which grew larger<br />
and stronger without interruptions. A higher degree of exposure on this field would<br />
have allowed to trigger processes of gradual moderniz<strong>at</strong>ion, with a twofold advantage<br />
of being able to better tune the pace of transform<strong>at</strong>ion and with the peace of mind th<strong>at</strong><br />
the favorable moment would allow also to “make mistakes”.<br />
However if one <strong>at</strong>tempts a parallel with other European car makers one cannot<br />
see marked differences. They were as well particularly centralized. But it must be said<br />
th<strong>at</strong> for them this form of organiz<strong>at</strong>ional obsolescence was less visible for many<br />
reasons. Firstly they were firms who were almost exclusively oriented to vehicle<br />
production without the degree of diversific<strong>at</strong>ion of Fi<strong>at</strong>. In the case of Volkswagen<br />
there was just one model (the “Beetle”), but even when the range was richer, the<br />
scope of the business extended just to industrial vehicles, like Renault. Moreover,<br />
even though it was a typical “manufacturer’s market”, the presence of a number of<br />
n<strong>at</strong>ional makers, of comparable size, which played along the same market segments,<br />
exerted anyway a competitive stimulus which had to be taken into consider<strong>at</strong>ion. In<br />
France, where there was the gre<strong>at</strong> tradition of the Grandes Écoles and where the St<strong>at</strong>e<br />
controlled, but did not intervene in the management of the Régie Renault, the chances<br />
of managerial turnover were far more frequent.<br />
Probably if there had been no oil crisis with effects of worsening and anticip<strong>at</strong>ion<br />
of the foreseeable phenomena of industry transform<strong>at</strong>ion, such as the change of<br />
demand from prevalent first motoriz<strong>at</strong>ion to prevalent replacement, the changes in the<br />
organiz<strong>at</strong>ion <strong>at</strong> Fi<strong>at</strong> could have taken place in a framework of routine evolution. On<br />
the contrary, its actual position within a stage of particular turbulence, made change a<br />
highly critical phenomenon, as we will see l<strong>at</strong>er on.<br />
4.8. An <strong>at</strong>tempt of Management by Objectives<br />
From the standpoint of the whole group management there were three<br />
problems to face: one of managerial n<strong>at</strong>ure to complete the process of decentraliz<strong>at</strong>ion<br />
of responsibilities within the group, one of str<strong>at</strong>egic n<strong>at</strong>ure lying in the making of a<br />
firm str<strong>at</strong>egy for the whole of the industries, mainly for cars, and one of financial<br />
n<strong>at</strong>ure aimed <strong>at</strong> acquiring the resources needed for the group expansion. Clearly the<br />
three problems were highly inter-rel<strong>at</strong>ed. The managerial one was the first issue to<br />
deal with, since the difficulties facing the company were a highly different scenario<br />
28
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
compared to the past, and they required the insertion of new ideas and managerial<br />
methods within a framework which maintained some stable reference points<br />
represented by the property and by the commitment of Gianni and Umberto Agnelli.<br />
In 1974 Nicola Tufarelli was appointed Director of the Automobile Group<br />
and his task was to reorganize the automobile structure and define a response str<strong>at</strong>egy<br />
to the disorient<strong>at</strong>ion caused by the oil crisis, which had dram<strong>at</strong>ically worsened the<br />
outlook for the industry. Mister Tufarelli came from Olivetti and joined Fi<strong>at</strong> two years<br />
before as Head Director of Finance, Planning and Control. Already as Head Director<br />
Tufarelli had started a deep process of reorganiz<strong>at</strong>ion in control procedures, mainly<br />
with respect to industrial accounting and m<strong>at</strong>erial management. The insertion of an<br />
“external” element like Tufarelli in a key position as the Direction of the Automobile<br />
Group was a small shock for the managerial environment of Fi<strong>at</strong>. In the past the<br />
advancement of management for “internal” lines represented a rule with no<br />
exceptions. But when in October of the same year Mr Cesare Romiti was appointed<br />
Head Director in the place formerly held by Tufarelli, the impression was even<br />
gre<strong>at</strong>er, also because the initi<strong>at</strong>ives adopted by Romiti put considerable pressure on<br />
the financial habits of Fi<strong>at</strong>, which was sleepy after a long period of management<br />
without financial tensions, but which now required dram<strong>at</strong>ic choices to face a heavy<br />
situ<strong>at</strong>ion. As Cesare Romiti himself pointed out in the interview-book edited by<br />
Giampaolo Pansa, the strong salary increases during the previous years, the infl<strong>at</strong>ion<br />
due to marked rise in oil-rel<strong>at</strong>ed products, the building up of unsold stocks and the<br />
investments put in place for the Fi<strong>at</strong> plant in Brazil, had gener<strong>at</strong>ed a situ<strong>at</strong>ion of<br />
particularly dangerous debt.<br />
Fi<strong>at</strong> in a few years moved from a creditor position towards the banking system<br />
for thousands of billions, to a debtor position, for a similar amount. It is significant to<br />
note th<strong>at</strong> such situ<strong>at</strong>ion was so unusual for internal management <strong>at</strong> Fi<strong>at</strong>, used to be<br />
courted by the financial system, th<strong>at</strong> it tended to gener<strong>at</strong>e a sort of paralysis. The<br />
insertion of an “external and resolute” figure like Cesare Romiti represented a right<br />
move. On the one hand he did not bear any responsibility for the previous paralysis of<br />
the financial management, and he could then move with gre<strong>at</strong>er freedom rejuven<strong>at</strong>ing<br />
the management through the insertion of new figures, more aggressive and skilled; on<br />
the other hand the real difficulties of Fi<strong>at</strong> were not yet perceived from the outside in<br />
their whole scope, and Romiti managed, through a series of quick moves, to take<br />
advantage of the influence of Fi<strong>at</strong> towards the banking system.<br />
Tufarelli tried to renov<strong>at</strong>e the decisional structure of the Automobile Group as<br />
well. Given the situ<strong>at</strong>ion of high uncertainty of the automobile scenario, and as an<br />
antidote to the previous organiz<strong>at</strong>ion, wholly vertical, he developed a “m<strong>at</strong>rix-like”<br />
structure, where the traditional vertical lines of command, which reflect the specific<br />
traits of functions, are crossed with a system of horizontal coordin<strong>at</strong>ion focused upon<br />
objectives. In theory it was a quite advanced organiz<strong>at</strong>ional design, which had the<br />
merit of highlighting the support by external consultants. However, in order to make<br />
the structure of Management By Objectives (MBO) work, objectives must be clear<br />
and shared. On the contrary, this was just wh<strong>at</strong> was missing, both because the<br />
situ<strong>at</strong>ion was quite difficult, and because in the top management of the automobile<br />
sector there was no convergence of views about the forms through which to actively<br />
face the crisis, hence the m<strong>at</strong>rix-like structure, instead of producing synergies, tended<br />
to enhance mutual contrasts gener<strong>at</strong>ed by the multiplic<strong>at</strong>ion of “Management<br />
Committees” and by contrasts among different functional areas. Not to count th<strong>at</strong> a<br />
29
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
m<strong>at</strong>rix-like decisional structure requires a long learning period to gradually define<br />
roles and mutual responsibilities.<br />
4.9. The “meteor” De Benedetti<br />
However the situ<strong>at</strong>ion did not show margins for fine-tuning oper<strong>at</strong>ions. On the<br />
contrary there was a need for precise directives and strong figures, with capabilities to<br />
galvanize into action the company staff. Fi<strong>at</strong> already had a charism<strong>at</strong>ic figure like the<br />
“Avvoc<strong>at</strong>o” Gianni Agnelli, and the commitment of the Agnelli family was reinforced<br />
also by Umberto Agnelli, as Vice-president and chairman. However both brothers<br />
thought th<strong>at</strong> they could consolid<strong>at</strong>e the group position further in the Italian economic<br />
scenario through a public post. In May of 1974 Gianni Agnelli became President of<br />
the Confindustria and, given his symp<strong>at</strong>hies were with the Republican Party, he was<br />
continuously asked to actively enter politics, while Umberto was courted by the<br />
Christian Democr<strong>at</strong>s (Democrazia Cristiana) 26 . At the same time the stage was so<br />
delic<strong>at</strong>e th<strong>at</strong> in case of failure a complete oper<strong>at</strong>ional involvement of the Agnelli<br />
family would have caused risks in the shareholder equilibrium.<br />
Hence came the idea to have somebody from the “outside” leading the group<br />
oper<strong>at</strong>ions, somebody who by temper and culture could have an entrepreneurial<br />
flavor. In Turin <strong>at</strong> th<strong>at</strong> time mister Carlo De Benedetti was emerging, both as owner<br />
of Gilardini, a company specialized in vehicle and industrial component<br />
manufacturing, and as President of the Entrepreneur Associ<strong>at</strong>ion (Unione Industriale)<br />
of Turin. Carlo De Benedetti, friend of Umberto Agnelli and sharing his same age,<br />
had all the fe<strong>at</strong>ures to exert the leadership which Fi<strong>at</strong> needed. In March 1976 the new<br />
top structure of Fi<strong>at</strong> <strong>SpA</strong> was cre<strong>at</strong>ed, with three managing directors: Umberto<br />
Agnelli, Carlo De Benedetti and Cesare Romiti. But the insertion of De Benedetti<br />
lasted only for three months. The reasons were differently commented by the<br />
protagonists 27 .<br />
Here wh<strong>at</strong> is m<strong>at</strong>ters is th<strong>at</strong> the short interlude of De Benedetti made the car<br />
situ<strong>at</strong>ion worse on the management standpoint. The few months of the De Benedetti<br />
initi<strong>at</strong>ive were used by the new chairman to evalu<strong>at</strong>e the situ<strong>at</strong>ion and to “scare” the<br />
old management with strong sentences on the need to cut a lot of heads. De Benedetti<br />
spoke also about the need to develop new models, which is a fact which in the<br />
company is taken for granted, since anybody knew th<strong>at</strong> Fi<strong>at</strong> survival was linked to<br />
such initi<strong>at</strong>ives. The problems lay however in correctly deciding product and process<br />
investments to be carried out, but on these crucial aspects there was no agreement <strong>at</strong><br />
top management level and the clim<strong>at</strong>e was tense: both for <strong>at</strong>titude differences among<br />
protagonists, and for rumors on a design by De Benedetti to buyout Fi<strong>at</strong>. However<br />
they were issues which did not become known to the most part of the company<br />
structure, and the decision of De Benedetti to leave Fi<strong>at</strong> was the typical lightning in a<br />
clear sky.<br />
26 In July 1976 Gianni Agnelli leaves the presidency of Confindustria and there are growing rumors<br />
th<strong>at</strong> he is going to enter the political scene. Instead it will be Umberto Agnelli to take a se<strong>at</strong> in the<br />
Christian Democr<strong>at</strong>s for an experience which will l<strong>at</strong>er on disappoint him.<br />
27 See Romiti [1988] and the interview to Carlo De Benedetti by Mario La Ferla for “l'Espresso” in<br />
October 1976.<br />
30
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
Tufarelli was then reinserted <strong>at</strong> the head of the Automobile Group in a hurry,<br />
but it is easy to imagine the further disorient<strong>at</strong>ion which the even gener<strong>at</strong>ed among<br />
top managers and cadres, although the product renov<strong>at</strong>ion program had restarted.<br />
4.10. The establishment of Fi<strong>at</strong> Auto <strong>SpA</strong><br />
Luckily the project of organiz<strong>at</strong>ional and financial decentraliz<strong>at</strong>ion of Fi<strong>at</strong>,<br />
started in 1972, was going on. The objective was to achieve an actual<br />
divisionaliz<strong>at</strong>ion of the group by product lines (business units). At the beginning it<br />
was not clear whether such oper<strong>at</strong>ion should end by maintaining a tight company<br />
structure (as for General Motors), or a true disassembly of companies in entities<br />
which were autonomous on the juridical standpoint, but coordin<strong>at</strong>ed by Fi<strong>at</strong> <strong>SpA</strong> as<br />
the main holding. It was gradually this second option which became true, and this<br />
eased the distribution of decisional responsibilities. In 1979 the new structure was<br />
launched. Fi<strong>at</strong> <strong>SpA</strong> became a holding which controlled, both on the shareholding and<br />
financial standpoint, a range of industrial companies with autonomy in each<br />
individual market. Within the holding company the oper<strong>at</strong>ional responsibilities were<br />
assigned to Umberto Agnelli, on whose side were placed two other managing<br />
directors: Cesare Romiti in charge of finance and control and Nicola Tufarelli in<br />
charge of intern<strong>at</strong>ional rel<strong>at</strong>ions. The Avvoc<strong>at</strong>o Gianni Agnelli remained <strong>at</strong> the<br />
presidency of the group and he was in charge of str<strong>at</strong>egic decisions, which required<br />
approval of the board and executive committee.<br />
With the establishment of Fi<strong>at</strong> Auto <strong>SpA</strong>, which was officially born on 1 st<br />
January 1979, the process of establishing the different industrial areas where Fi<strong>at</strong> was<br />
oper<strong>at</strong>ing was completed. The cre<strong>at</strong>ion of Fi<strong>at</strong> Auto finally allowed to provide a<br />
precise structure to decisional responsibilities of the automobile industry, through the<br />
appointment of Vittorio Ghidella as chairman. His initi<strong>at</strong>ive moved mainly along two<br />
directions. One marked acceler<strong>at</strong>ion of investments aimed <strong>at</strong> process autom<strong>at</strong>ion and a<br />
new organiz<strong>at</strong>ional concept aimed <strong>at</strong> an intermedi<strong>at</strong>e position between the traditional<br />
functional structure of the Valletta period and the “m<strong>at</strong>rix-like” interaction of<br />
Tufarelli. Ghidella decided to bet upon “product managers”, whose task was to<br />
coordin<strong>at</strong>e work of traditional functions (design, purchasing, manufacturing,<br />
marketing, etc.), who kept on representing the ribs along which the company structure<br />
of Fi<strong>at</strong> Auto was based.<br />
Ghidella launched a new work pace, helped by a profound knowledge of the<br />
product and of process technologies, and this allowed him to step in for most critical<br />
decisions. Certainly during this stage he was also helped by the <strong>at</strong>mosphere of “last<br />
resort” which had origin<strong>at</strong>ed in the company, where everybody knew they were<br />
betting their last chances, besides the ample mand<strong>at</strong>e which he received by Gianni<br />
Agnelli. In a short time many managers were replaced by younger and more<br />
motiv<strong>at</strong>ed personnel. The new managers felt they have to commit deeply, because if<br />
the new organiz<strong>at</strong>ional chart did not work out the risks for the survival of Fi<strong>at</strong> Auto,<br />
and with it of the whole Fi<strong>at</strong> group, would have been quite high.<br />
31
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
5. The Fi<strong>at</strong> Group’s Structure 1899-1979<br />
5.1. The growth years<br />
Fi<strong>at</strong> was established with the aim of manufacturing automobiles, but it enjoyed<br />
a development process in other industries since its early years. The r<strong>at</strong>io of such<br />
development moved along two lines:<br />
a) To achieve a process of vertical integr<strong>at</strong>ion;<br />
b) To carry out a process of manufacturing diversific<strong>at</strong>ion through<br />
transferring to other industries the technological and organiz<strong>at</strong>ional<br />
knowledge accumul<strong>at</strong>ed in vehicle manufacturing.<br />
Vertical integr<strong>at</strong>ion was led by the will to carry out autonomously a significant<br />
share of m<strong>at</strong>erials required by vehicle manufacturing. This need stemmed from two<br />
reasons. The first was the need to manufacture vehicle components, which the Italian<br />
mechanic industry, quite backward <strong>at</strong> th<strong>at</strong> time, was not capable of making,<br />
differently from the United Kingdom, France and Germany. The second was the need<br />
to replace purchasing of intermedi<strong>at</strong>e m<strong>at</strong>erial which could be found in the domestic<br />
market with own production, since they could be carried out internally with a higher<br />
degree of efficiency. In fact Fi<strong>at</strong> had a technical know-how which was far superior to<br />
the majority of firms supplying it, and internal production allowed a r<strong>at</strong>ionaliz<strong>at</strong>ion of<br />
logistics which made the whole flow of activities more programmable and efficient.<br />
Instead diversific<strong>at</strong>ion meant the aim to widen investments to other industries,<br />
similar by technology but different from the automobile one, in order to achieve a<br />
diversific<strong>at</strong>ion of risk and a mechanism of compens<strong>at</strong>ion between different economic<br />
cycles of various industries.<br />
Hence since its early years much of the cash flow gener<strong>at</strong>ed by the company<br />
was constantly used in oper<strong>at</strong>ions of vertical integr<strong>at</strong>ion and diversific<strong>at</strong>ion. Industrial<br />
vehicles were added in 1903, diesel marine engines in 1907, avi<strong>at</strong>ion engines in 1908,<br />
airplanes in 1915, agricultural tractors in 1919, railway cars in 1931, electronics in<br />
1957, ground moving machines in 1958. The fact th<strong>at</strong> a high share of activities was<br />
carried out within Fi<strong>at</strong> <strong>SpA</strong> did not allow a detailed separ<strong>at</strong>ion of the weights of<br />
different sectors. However according to our estim<strong>at</strong>es in 1960 total turnover came for<br />
70% from automobiles, for 9% from commercial and industrial vehicles, for 5% from<br />
tractors and ground moving machines, and the remaining 16% from other sectors.<br />
However such division tends to reduce the importance of primary production (steel,<br />
cast iron, rolled products, etc.) and of intermedi<strong>at</strong>e productions since they, although<br />
absorbing high amounts of investments and employees, produced goods which were<br />
reutilized in downward production stages without reaching the market.<br />
In general expansion was financed by cash flow gener<strong>at</strong>ed by internal<br />
activities, and only in some specific times of crisis there was a high degree of<br />
financial exposure towards bankc, while it was during the stages of highest production<br />
expansion th<strong>at</strong> capital increases necessary to finance such programs were carried out.<br />
The most important oper<strong>at</strong>ions on this standpoint (Fig.5) were carried out between<br />
1910 and 1912, between 1917 and 1919, and during the reconstruction years 1947-48.<br />
The analysis of company balance sheets showed an important element of<br />
novelty starting in the middle 1960s th<strong>at</strong> is the strengthening of the financial activities<br />
which were going to be reinforced over the coming years. During those years Fi<strong>at</strong><br />
financed its expansion for 60%-70% throuh self financing, and the rest through non<br />
32
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
financial debts (debts towards suppliers). Short terms debts with the banking system<br />
were almost nonexistent, while also medium and long term financial debts were quite<br />
modest. Such structure of the financial sources is not different from th<strong>at</strong> of other<br />
European car makers who during the 1960s managed to completely support the<br />
growth effort with their own means and through self-financing 28 .<br />
Fig.5 – Fi<strong>at</strong> capital 1899-1960<br />
Years Capital<br />
(million ITL)<br />
Years Capital<br />
33<br />
(million ITL)<br />
Years Capital<br />
(million ITL)<br />
1899 0.8 1904 0.8 1906 9<br />
1908 9 1909 12 1910 14<br />
1912 17 1915 25.5 1916 34<br />
1917 50 1918 125 1919 200<br />
1924 400 1947 4,000 1948 12,000<br />
1950 21,000 1951 36,000 1953 57,000<br />
1956 76,000 1957 100,000 1960 115,000<br />
Source: Fi<strong>at</strong><br />
5.2. The union crisis and the oil shock<br />
During the 1960s Fi<strong>at</strong> had achieved very high profits which allowed it to gain<br />
a net creditor position with the financial system. One must consider th<strong>at</strong> Fi<strong>at</strong> <strong>SpA</strong><br />
during those years achieved a level of profit after tax which was ranging between 2%<br />
and 3% of turnover. But already in 1969, along with the effects of the “hot autumn”,<br />
production losses due to conflictual rel<strong>at</strong>ions and lower productivity of labor had<br />
reduced such source of self-financing. In 1969 net profit decreased below 1%, and in<br />
1973 profits came down to zero. In ordinary situ<strong>at</strong>ions reserves would have allowed to<br />
deal with the situ<strong>at</strong>ion. However during those years there was a marked growth in the<br />
financial needs which led the company to a critical situ<strong>at</strong>ion already in 1974. In fact <strong>at</strong><br />
the beginning of the 1970s Fi<strong>at</strong> had launched an important investment program for the<br />
South of Italy (Cassino, Termoli, Sulmona), which, although supported by St<strong>at</strong>e aids<br />
(low r<strong>at</strong>e financing and capital contributions), required a considerable amount of<br />
resources. Also the establishment of the subsidiary company Fi<strong>at</strong> Automoveis exerted<br />
a considerable financial pressure to which one had to add the launch of the autom<strong>at</strong>ion<br />
program for the production process.<br />
Hence the need to borrow capitals in a massive way. The total of financial<br />
debts started to grow very rapidly. In 1973 it amounted to 168 billion and reached 651<br />
billion in the following year, and 764 billion in 1976. Clearly, given the fast growth,<br />
the financial needs had to be covered through short term debts, whose cost is higher<br />
than medium-long term ones. In 1972 the weight of short term debts was below 1% of<br />
28 See Comito [1982].
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
financial exposure, while in 1974 it accounted for little more than 60%. These<br />
changes in the financial structure of the company were quite serious, as they triggered<br />
a vicious circle which was quite hard to deal with. The growth in debts meant lower<br />
coverage of investments by own company resources (capital and reserves), and this<br />
increased the risk factor for creditors, who had to be boosted with growing interest<br />
r<strong>at</strong>es, which in turn reduced oper<strong>at</strong>ing margins.<br />
Stock valu<strong>at</strong>ions for Fi<strong>at</strong> shares were also affected, both for the dark<br />
perspectives which many cast on the automobile industry in general (some were even<br />
foreseeing its demise), and for the specific situ<strong>at</strong>ion of the Turin company. It is<br />
enough to say th<strong>at</strong> the r<strong>at</strong>io between market capitaliz<strong>at</strong>ion of Fi<strong>at</strong> and net equity (as of<br />
the balance sheet), which in 1972 was larger than one (1.6), decreased below one in<br />
1974 (0.6) and even reached 0.2 in 1979. In other words the stock market evalu<strong>at</strong>ed<br />
the Turin group as a modest share of the subscribed capital and reserves accumul<strong>at</strong>ed<br />
over time, notwithstanding Fi<strong>at</strong> was keeping on distributing dividends, coming from<br />
reserves, in a measure which exceeded achieved profits.<br />
5.3. The “Lafico” oper<strong>at</strong>ion<br />
As a consequence a broad financial restructuring was urgently needed, aimed a<br />
achieving an equilibrium between sources and investments. A complex oper<strong>at</strong>ion<br />
which implied initi<strong>at</strong>ives on many tables, and which will be completed only in the<br />
middle 1980s. It can be divided in two periods: from 1974 to 1980 and from 1981 to<br />
1985. The first stage was an intervention aimed <strong>at</strong> tamponing and acquiring the<br />
financial means necessary for the firm survival and for the completion of oper<strong>at</strong>ions<br />
initi<strong>at</strong>ed before the oil shock. In the second stage (1981-1985) there was a strong debt<br />
for the company as well, but linked to the program of reorganiz<strong>at</strong>ion and turnaround.<br />
It was hence a piloted debt, which undoubtedly mirrors a situ<strong>at</strong>ion of a risk which<br />
was still high, but which assumes a different outlook than before.<br />
The most part of the tampon stage was carried out through a massive capital<br />
increase through the entry of Lafico, the Libyan Arab Foreign Bank. It was an<br />
initi<strong>at</strong>ive which <strong>at</strong> th<strong>at</strong> time represented a true coup de théâtre and raised much<br />
criticism, mainly from abroad 29 , but this oper<strong>at</strong>ion, seen from the top helm of Fi<strong>at</strong>,<br />
had no altern<strong>at</strong>ive routes. There was no doubt th<strong>at</strong> the Turin group needed a<br />
considerable injection of capital. The fact was th<strong>at</strong> such capital was not available<br />
through “normal” financial channels. On the one hand the Agnelli family was not<br />
capable of joining a large capital increase, and in such situ<strong>at</strong>ion a significant issue of<br />
new stock would have meant a corresponding reduction in the share of control On the<br />
other hand, even overlooking the risks of such oper<strong>at</strong>ion for the unity of company<br />
politics, the largest question rel<strong>at</strong>ed to the actual possibility of finding subjects willing<br />
to invest high amounts of capital in an industrial group in clear troubled w<strong>at</strong>ers, and<br />
committed to a large extent in industries in crisis, as the automobile and industrial<br />
vehicles ones.<br />
For these reasons the particip<strong>at</strong>ion of the Libyan Arab Foreign Bank<br />
represented a highly <strong>at</strong>tractive solution. On the one hand it joined the property <strong>at</strong> all<br />
effects, through a large injection of capital and with two represent<strong>at</strong>ives <strong>at</strong> board<br />
level, of which one in the restricted and powerful executive committee, but on the<br />
29 See on th<strong>at</strong> Friedman [1988].<br />
34
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
other hand there was an agreement not to interfere in any way with the str<strong>at</strong>egic<br />
objectives of the shareholder with rel<strong>at</strong>ive majority. Hence it was a relevant<br />
particip<strong>at</strong>ion on the economic standpoint, but “frozen” on the oper<strong>at</strong>ional one.<br />
The oper<strong>at</strong>ion was engineered in order to have 360 billion lire flow into Fi<strong>at</strong><br />
cash, of which however only half directly in shares. A first part of the agreement<br />
entailed the subscription by the Libyan bank of thirty million new shares with a<br />
nominal value of 500 lire, of which 20 million common shared (with a total growing<br />
from 200 to 220 million) and 10 million privileged shares (from 100 to 110 million).<br />
The peculiar aspect of this part of the oper<strong>at</strong>ion was th<strong>at</strong> the Lafico particip<strong>at</strong>ion<br />
evalu<strong>at</strong>ed Fi<strong>at</strong> shares with a surplus of about 5,500 lira per share: a gre<strong>at</strong> surplus,<br />
since <strong>at</strong> the end of 1976 common Fi<strong>at</strong> shares were traded in the stock market <strong>at</strong> about<br />
2,000 lire and the privileged ones <strong>at</strong> 1,300 lire.<br />
The second part of the agreement entailed the issuing by Fi<strong>at</strong> of a convertible<br />
bond for 90 billion <strong>at</strong> an annual r<strong>at</strong>e of 9.50%. Lafico had the right to convert, as it<br />
actually did, bonds starting from 30th June 1978, with two common and one<br />
privileged for 18 bonds worth 1,000 lire, since in this case as well there was the high<br />
surplus paid for the direct share purchase.<br />
Finally the Libyan bank granted Fi<strong>at</strong> a loan of 104 million dollars (90 billion<br />
lira) linked to the Libor r<strong>at</strong>e. Such loan (with a ten year dur<strong>at</strong>ion) had a<br />
reimbursement plan starting from the end of the third year following the agreement.<br />
As one can see it was a highly advantageous agreement for Fi<strong>at</strong>. It left the Turin<br />
company some rooms for maneuver if cohabit<strong>at</strong>ion with represent<strong>at</strong>ives of Colonel<br />
Gaddafi turned out to be difficult. This did not happen, since the role of Lafico<br />
remained limited to th<strong>at</strong> of pure finance provider up to the expir<strong>at</strong>ion of the agreement<br />
in 1986. There is no doubt th<strong>at</strong> this oper<strong>at</strong>ion has significantly contributed to draw<br />
Fi<strong>at</strong> out of a very delic<strong>at</strong>e position. And <strong>at</strong> the end Lafico as well closed the oper<strong>at</strong>ion<br />
with a positive balance, since in 1986 it cashed 3 billion dollars given the high growth<br />
of market capitaliz<strong>at</strong>ion of Fi<strong>at</strong> shares which took place in the period 30 and to other<br />
subscriptions which took place after 1977.<br />
5.4. Fi<strong>at</strong> <strong>SpA</strong> as a holding<br />
At the end of the 1970s the stage of reorganiz<strong>at</strong>ion of the whole group which<br />
initi<strong>at</strong>ed in the 1970s ended. In 1976 the group organiz<strong>at</strong>ional chart is a divisional<br />
structure with eleven business units. Fi<strong>at</strong> <strong>SpA</strong> acquired before the n<strong>at</strong>ure of “mixed”<br />
holding as it keeps on managing directly automobile and steel activities, and l<strong>at</strong>er on<br />
the n<strong>at</strong>ure of “pure” holding with the sale of steel activities and the incorpor<strong>at</strong>ion Fi<strong>at</strong><br />
Auto (1979):<br />
"The Fi<strong>at</strong> Holding manages and coordin<strong>at</strong>es only functions of primary<br />
importance for the Fi<strong>at</strong> Group: the whole image of the company towards the external<br />
environment, the development, management and alloc<strong>at</strong>ion of financial resources,<br />
30 Unfortun<strong>at</strong>ely the liquid<strong>at</strong>ion of Lafico did not yield positive returns for everyone. Small Fi<strong>at</strong><br />
shareholders were particularly hurt, since values fell after the market placement of two thirds of shares<br />
held by Lafico. The consortium of banks led by Deutsche Bank and Mediobanca encountered gre<strong>at</strong><br />
difficulties in the subsequent placement of shares, since the market was reluctant to absorb such a gre<strong>at</strong><br />
stock volume, and this drove down prices. On this m<strong>at</strong>ter see critical points raised by Giampaolo Pansa<br />
and the replies by Cesare Romiti [1988].<br />
35
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
planning and management control, meant as management control on objectives and<br />
results for the sectors, problems deriving from development policies” 31 .<br />
This transform<strong>at</strong>ion does not rel<strong>at</strong>e only to the organiz<strong>at</strong>ion of the company<br />
but also to financial aspects since the crisis of automobile-rel<strong>at</strong>ed activities in general<br />
and of the automobile in particular pushes Fi<strong>at</strong> and the Agnelli family (Ifi) to evalu<strong>at</strong>e<br />
the opportunity to increase the role of non-automotive activities, previously<br />
considered as ancillary. Hence there was a range of sales, de-merging and acquisitions<br />
aimed <strong>at</strong> leaning and strengthening the automotive 32 sector and to reinforce other<br />
sectors which could, in case of a durable crisis in automobile activities, represent a<br />
viable altern<strong>at</strong>ive.<br />
The leaning of the automobile sector was carried out mainly through the exit<br />
from the Spanish company Se<strong>at</strong>, the sale of most siderurgical activities, and a<br />
profound reorganiz<strong>at</strong>ion of the automotive component sector. In the past transfer<br />
prices between group companies had privileged the profits objectives of final<br />
activities represented by automobiles 33 , but they also played as a “safety net” when<br />
captive productions were less competitive than those made by independent<br />
suppliers 34 . With the new situ<strong>at</strong>ion it was clear th<strong>at</strong> such policy on the one hand had<br />
played against the development of innov<strong>at</strong>ive capabilities of “s<strong>at</strong>ellite” activities,<br />
which now had to be highly stimul<strong>at</strong>ed, and on the other hand had taken transparency<br />
away from management control and from differences in performance which then had<br />
to emerge in order to stimul<strong>at</strong>e adequ<strong>at</strong>e reorganiz<strong>at</strong>ion efforts.<br />
In tune with such policy of realignment to the market the holding company<br />
tried to highly incentive, by controlled firms, supply to other automobile<br />
manufacturers and to the parts market in general. Just to this respect in the middle of<br />
1976 it was decided th<strong>at</strong> component manufacturing companies utilized own makes<br />
and own distribution networks for the aftermarket sales: for example in 1987<br />
distribution companies for Magneti Marelli in Italy, France, Spain and Germany were<br />
made oper<strong>at</strong>ional.<br />
On the diversific<strong>at</strong>ion standpoint Fi<strong>at</strong> reorganized the activities it already<br />
owned which, in the structure by sector, acquired a higher degree of oper<strong>at</strong>ional<br />
dynamism, and entered new areas which were believed to have high growth potential.<br />
The most important area was the telecommunic<strong>at</strong>ions one which had started in 1968<br />
with the purchase of 35% of Telettra <strong>SpA</strong> and consolid<strong>at</strong>ed in 1976 with a total<br />
control of capital.<br />
After these oper<strong>at</strong>ions the specific weight of automobiles was quite reduced,<br />
from 70% in 1960 to 65% in 1970 and to 40% in 1976 (Fig.6,7,8).<br />
31 See Mosconi and Rullani [1978].<br />
32 The automotive sector encompasses: automobiles, industrial and commercial vehicles, tractors and<br />
ground mo ving equipment.<br />
33 See Comito [1982].<br />
34 Captive production refer to components manufactured by firms controlled by automobile companies.<br />
36
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
Fig.6 - Fi<strong>at</strong>'s Turnover Break Down for per sector - 1960<br />
17%<br />
7%<br />
12%<br />
6%<br />
3%<br />
3%<br />
1%<br />
4%<br />
Tab.7 - Fi<strong>at</strong>'s Turnover Break Down - 1970<br />
4%<br />
2%2%<br />
4%<br />
70%<br />
37<br />
65%<br />
Auto<br />
V.I.<br />
Tr<strong>at</strong>tori e MMT<br />
Ingegneria e Territorio<br />
Siderurgia<br />
Componenti<br />
Altri settori<br />
Auto<br />
V.I.<br />
Tr<strong>at</strong>tori e MMT<br />
Ingegneria e Territorio<br />
Siderurgia<br />
Componenti<br />
Altri settori
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
6. Fi<strong>at</strong>’s <strong>Corpor<strong>at</strong>e</strong> <strong>Governance</strong> R<strong>at</strong>ionale 1980-2000<br />
6.1. Opening to the market<br />
Fig.8 - Fi<strong>at</strong>'s Turnover Break Down per sector - 1976<br />
9%<br />
11%<br />
5%<br />
4% 6%<br />
25%<br />
As shown in the previous period the str<strong>at</strong>egic posture of Fi<strong>at</strong> was th<strong>at</strong> of a<br />
highly integr<strong>at</strong>ed and diversified group, albeit basically grounded upon the<br />
automobile business. Clearly the selection criterion for investments and divestments<br />
was the search for profit maximiz<strong>at</strong>ion over the long term, but with some significant<br />
traits:<br />
a) The core business was considered to be the automobile one and in particular<br />
cars, hence many coll<strong>at</strong>eral activities were meant to reinforce the core business<br />
(safety in supplies, lower acquisition costs, production planning given the final<br />
production stages, etc.);<br />
b) Secondly these coll<strong>at</strong>eral activities did not oper<strong>at</strong>e on the supply market, but<br />
had as almost exclusive customer end oper<strong>at</strong>ions <strong>at</strong> Fi<strong>at</strong> (captive productions);<br />
c) This meant th<strong>at</strong> profitability which was constantly monitored was th<strong>at</strong> of<br />
automobile production, also because it was Fi<strong>at</strong> <strong>SpA</strong> to be publicly traded, and<br />
all other activities were: either internal divisions of Fi<strong>at</strong> (and therefore it was<br />
superfluous to distinguish their profitability for the sake of an evalu<strong>at</strong>ion of a<br />
total profitability for Fi<strong>at</strong> <strong>SpA</strong>), or they were autonomous companies, deriving<br />
from acquisitions by Fi<strong>at</strong> after their establishment, but wholly controlled and<br />
not traded;<br />
d) As a consequence even minority shareholders of Fi<strong>at</strong> could not actually exert a<br />
conditioning power over str<strong>at</strong>egic choices of the company, and they were<br />
considered by the majority shareholders as long term shareholders (cassettisti)<br />
38<br />
40%<br />
Auto<br />
V.I.<br />
Tr<strong>at</strong>tori e MMT<br />
Ingegneria e Territorio<br />
Siderurgia<br />
Componenti<br />
Altri settori
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
whose major interest was to earn a “reasonable” dividend and to see the stock<br />
value grow.<br />
Therefore if one neglects the period from the first years of the XX century,<br />
when reasons of contrast and b<strong>at</strong>tle among majority and minority shareholders had<br />
been frequent and long-ranging, in the following stage Fi<strong>at</strong> had known a long period<br />
of economic development which had allowed a dividend policy which was adequ<strong>at</strong>e<br />
to the expect<strong>at</strong>ions of all shareholders, also because the growth in the members of the<br />
“Agnelli Family” over new gener<strong>at</strong>ions had led to the cre<strong>at</strong>ion of a large number of<br />
people owning fractions of capital and not directly involved in the management of the<br />
company which remained in the hands of Gianni and Umberto Agnelli. The interest of<br />
such extended family was then th<strong>at</strong> of rentiers mainly interested to receive good<br />
annual dividends and see the market value of their stock protected 35 . In other words<br />
the gre<strong>at</strong> majority of components of the extended Agnelli family had interests which<br />
could be compared to those of the “cassettisti”.<br />
As a consequence one can say th<strong>at</strong> the company actually developed a general<br />
str<strong>at</strong>egic posture which was not diverging from the interest of minority shareholders.<br />
It oper<strong>at</strong>ed in a framework which in case of contrast would not have offered<br />
significant protection to minority shareholders, however such circumstance thanks to<br />
favorable economic conditions did not turn out to happen. For example even after the<br />
first years of crisis derived from the “hot autumn” the company kept on distributing<br />
dividends even with losses in balance sheets, drawing resources from profits which<br />
were previously accumul<strong>at</strong>ed, both to maintain stock values and to make the crisis<br />
situ<strong>at</strong>ion “softer” to the eyes of external observers, and because a large share of the<br />
extended property expected a congruous dividend distribution.<br />
With the divisionaliz<strong>at</strong>ion of internal activities in Fi<strong>at</strong> and its transform<strong>at</strong>ion in<br />
pure financial holding there is a new stage in which even without gre<strong>at</strong><br />
transform<strong>at</strong>ions in the corpor<strong>at</strong>e governance of the Group there are important changes<br />
in the str<strong>at</strong>egic posture. The new competitive framework which had m<strong>at</strong>ured in the<br />
second half of the 1970s unmistakably showed th<strong>at</strong> it is not enough to look <strong>at</strong> the<br />
whole efficiency of Fi<strong>at</strong>, as this observ<strong>at</strong>ion point was inadequ<strong>at</strong>e not only in order to<br />
highlight areas of inefficiency within the company, but also and mostly to provide<br />
organiz<strong>at</strong>ional guidance for the response str<strong>at</strong>egies to market challenges. On the one<br />
hand the economic and financial trend of the company showed times of gre<strong>at</strong><br />
difficulties which required firm and profound actions, on the other hand the<br />
administr<strong>at</strong>ive structure of control showed considerable difficulties in highlighting,<br />
given the complexity and the interplay of managing actions, the real causes of<br />
inefficiency, but mostly it is the command structure of the company which does not<br />
have, due to the distance between loc<strong>at</strong>ions where difficulties arise and one must<br />
intervene and those in which lies the actual decision power, of oper<strong>at</strong>ional levers<br />
fe<strong>at</strong>uring the necessary power and flexibility of action.<br />
35 Such “demographic” transform<strong>at</strong>ion in the Agnelli family was a key factor within the ownership of<br />
the majority share which, as it will be discussed l<strong>at</strong>er on, led to the establishment of the Società in<br />
Accomandita per Azioni Giovanni Agnelli & C. with the specific objective of maintaining internal<br />
cohesion within property.<br />
39
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
6.2. Fi<strong>at</strong> as an “integr<strong>at</strong>ed industrial Group”<br />
The str<strong>at</strong>egic posture which played a reference for the Fi<strong>at</strong> Group since the<br />
1980s refers more and more to the framework expressed by Porter 36 . Each individual<br />
section of the group configured as a profit center must directly confront with the<br />
market giving its contribution to the company value chain. Fi<strong>at</strong>, as a multi-business<br />
company, had to oper<strong>at</strong>e in such a way to enhance competitive advantages deriving<br />
from its structure. The global efficiency of the group required as a key pre-requisite<br />
the efficiency of each individual part (business unit), but it was from sinergies<br />
deriving from being a group th<strong>at</strong> a defendable competitive advantage could and had to<br />
be obtained.<br />
As Clemente Signoroni 37 , head of the “Development, coordin<strong>at</strong>ion and<br />
control” function <strong>at</strong> Fi<strong>at</strong>, had clearly said a few years l<strong>at</strong>er, <strong>at</strong> the beginning of the<br />
1980s the company chose the “establishment of an industrial group which although<br />
oper<strong>at</strong>ing in different businesses, with different competitors and markets, meant to<br />
keep a high degree of internal coordin<strong>at</strong>ion”. In theory one could have chosen a<br />
conglomer<strong>at</strong>e model in which the different majority shares belonging to the<br />
controlling holding were considered as a portfolio of activities to be independently<br />
maximized, by minimizing risks deriving from simultaneous industry crises, but it<br />
was the history of Fi<strong>at</strong> itself to rule out such kind of solution. The issue was instead to<br />
establish an organic set of businesses by achieving a hard but fundamental<br />
equilibrium between a flexible and entrepreneurial management of each individual<br />
unit and a whole coordin<strong>at</strong>ion of str<strong>at</strong>egies capable of gener<strong>at</strong>ing competitive<br />
advantages through sharing of products, technologies, distribution networks, etc. “The<br />
group value must hence be larger than the sum of the values of the individual units”.<br />
Still, according to Signoroni, the achievement of such outcome is conditioned<br />
by the following elements:<br />
1. adequ<strong>at</strong>e competitive size of each business unit;<br />
2. strong correl<strong>at</strong>ion of the different activities, th<strong>at</strong> is by pursuing clear sharing of<br />
product/market/technology which can be developed in an integr<strong>at</strong>ed<br />
framework with synergic results for each individual activity;<br />
3. diversific<strong>at</strong>ion carried out a competitive entry cost, frequently achieved<br />
through l<strong>at</strong>eral internal development;<br />
4. managerial system capable of maintaining a vision of the whole, and to<br />
develop adequ<strong>at</strong>e tools for horizontal coordin<strong>at</strong>ion.<br />
However <strong>at</strong> the beginning of the 1980s such design had yet to be achieved.<br />
Fi<strong>at</strong> was still trying to grant an entrepreneurial function to each business unit. It was<br />
just the efficiency of each activity with respect to the market which had to be verified<br />
first, and then strengthened. It was the beginning of a decade with considerable<br />
actions on the group structure, linked to relevant oper<strong>at</strong>ions on the financial<br />
standpoint.<br />
With respect to vehicles in general, the company aimed towards a growth in<br />
size intended as a necessary condition to obtain the relevant scale economies which<br />
the industry implies. In the new framework in the development stage the “relevant<br />
size” was not in first instance the manufacturing size, seen as a necessary condition to<br />
36 See Porter [1980, 1985].<br />
37 See Signoroni [1987].<br />
40
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
achieve a fordist reorganiz<strong>at</strong>ion of a mass production system. Such stage had already<br />
been acquired in the 1960s with the full development of smaller vehicles. The new<br />
“relevant size” was th<strong>at</strong> of market share. Hence there were acquisitions and alliances 38<br />
and <strong>at</strong> the same time m<strong>at</strong>erial and component manufacturing activities were sold<br />
reducing the degree of vertical integr<strong>at</strong>ion in all activities which seemed not have the<br />
technological and commercial resources to concretely exit a st<strong>at</strong>us of captive activity,<br />
mainly aimed <strong>at</strong> internal supply, and agreements and mergers were sought for<br />
activities which had promising competitive developments 39 .<br />
6.3. Conflicts of interests between majority and minority shareholders<br />
It was during the energetic reorganiz<strong>at</strong>ion stage of the Fi<strong>at</strong> group in the 1980s<br />
th<strong>at</strong> there were actual situ<strong>at</strong>ions of contrast between the majority and minority<br />
shareholders, and probably also within the majority shareholders, th<strong>at</strong> is within the<br />
Agnelli family.<br />
One case is represented by the concluding stage in the Lafico oper<strong>at</strong>ion. The<br />
launch of the oper<strong>at</strong>ion had achieved wide consensus among minority shareholders,<br />
much more worried about the urgency of a strong capital injection for the company,<br />
capital which was needed in order to strengthen Fi<strong>at</strong> competitiveness on many fields,<br />
and less fearful, as Gianni Agnelli was, of any future neg<strong>at</strong>ive effects from the US<br />
government for the political moves towards the Libyan government, accused of<br />
supporting terrorist groups. In fact if on the one hand it was true th<strong>at</strong> the public and<br />
with it minority shareholders did not have a clear picture of the crisis, this did not rule<br />
out th<strong>at</strong> the anxiety among shareholders was quite high. It is enough saying th<strong>at</strong> in<br />
1979 the r<strong>at</strong>io between market capitaliz<strong>at</strong>ion of Fi<strong>at</strong> stock and net equity from balance<br />
sheets recorded a value which was one fourth of th<strong>at</strong> of 1974.<br />
Instead the liquid<strong>at</strong>ion of the Lafico share had gener<strong>at</strong>ed marked unhappiness.<br />
In particular those holding Fi<strong>at</strong> shares had been hurt, as stock values fell after the<br />
market placement of two thirds of shares held by Lafico. The consortium of banks led<br />
by Deutsche Bank and Mediobanca, in charge of the public placement of shares,<br />
encountered many difficulties, since the market was reluctant to absorb such a large<br />
amount of shares, and this drove down values 40 . Also, this drove Deutsche Bank to<br />
38 In automobiles Alfa Romeo and then Innocenti are acquired; in Industrial Vehicles there was a joint-<br />
venture with Ford UK.<br />
39 The completion of the Fi<strong>at</strong> component reorganiz<strong>at</strong>ion was achieved through a process of sale of some<br />
activities for which the opportunities for internal development were inadequ<strong>at</strong>e, and the acquisition of<br />
control stakes in firms with high technological specializ<strong>at</strong>ion. Among these initi<strong>at</strong>ives there was the<br />
agreement sealed in 1986 with the French group M<strong>at</strong>ra through the establishment of the Ufima<br />
company (60% Fi<strong>at</strong>). In 1987 the structure of the Fi<strong>at</strong> component industry was organized around three<br />
gre<strong>at</strong> specialised poles:<br />
- Magneti Marelli, as an industrial holding, with functions of governing the six oper<strong>at</strong>ional<br />
groups: Instruments (36% of turnover), Electromechanics (25%), Engine control (19%), Lighting<br />
(11%), Air Conditioning (6%), Electronics (3%);<br />
- Gilardini, as an industrial holding in charge of overseeing five groups, of which three<br />
oper<strong>at</strong>ing in vehicle components (encompassing five divisions: rubber components, mechanical<br />
components, filters, exhausts, accessories) and two specialized in industrial component production<br />
(components for Defense and Energy);<br />
- Teksid, in charge of coordin<strong>at</strong>ing metallurgic production (cast iron and light alloys).<br />
40 See critical observ<strong>at</strong>ions by Giampaolo Pansa and replies by Cesare Romiti. See Romiti [1988].<br />
41
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
retain a considerable amount of shares, and to enter the Board of Fi<strong>at</strong> with its own<br />
represent<strong>at</strong>ive.<br />
Another situ<strong>at</strong>ion of conflict derived form the results of the negoti<strong>at</strong>ion started<br />
with Ford Motor Company for the establishment of an European company merging<br />
Fi<strong>at</strong> and Ford Europe. The project started in 1984 between the top management of<br />
Fi<strong>at</strong> Auto and th<strong>at</strong> of Ford Europe, and, given the convergence of viewpoints on the<br />
key aspects of the initi<strong>at</strong>ive, contacts turned into a true negoti<strong>at</strong>ion to the highest<br />
level. According to estim<strong>at</strong>ed by the two partner companies, joint production of an<br />
automobile vehicle could have allowed savings in manufacturing costs in the order of<br />
10%-15% and this would have configured a competitive lever of gre<strong>at</strong> importance.<br />
Anyway, such restful would have been only a first step compared to the many<br />
opportunities which the agreement would have allowed.<br />
It would have represented a revolutionary event in the intern<strong>at</strong>ional automobile<br />
landscape, not only for the effects which it could have gener<strong>at</strong>ed on the intern<strong>at</strong>ional<br />
competitive equilibrium, but also for the innov<strong>at</strong>ive n<strong>at</strong>ure of the agreement which<br />
would not have any predecessor, both for the industry and for the scope of the<br />
interests <strong>at</strong> stake, and the signs which the press g<strong>at</strong>hered <strong>at</strong> the headquarters of the two<br />
partners were highly encouraging. The most evident proof of the “idyllic” clim<strong>at</strong>e of<br />
the negoti<strong>at</strong>ion, as it was defined by the media, took place during the Geneva motor<br />
show in February 1985. At th<strong>at</strong> time, for the first time, both Bob Lutz, President of<br />
Ford of Europe, and Vittorio Ghidella, provided an official confirm<strong>at</strong>ion of the<br />
negoti<strong>at</strong>ion in place. Moreover the words of the two executives made clear th<strong>at</strong>: if on<br />
the one hand the agreement had to be considered as a normal evolutionary outcome of<br />
the intern<strong>at</strong>ional competitive framework, on the other hand it aimed <strong>at</strong> establishing an<br />
agreement to be carried out <strong>at</strong> the highest level.<br />
As a m<strong>at</strong>ter of fact the competitive potential deriving from a structure capable<br />
of integr<strong>at</strong>ing on the industrial standpoint the two entities, which would have still<br />
retained their market presence through different makes and distribution networks,<br />
would have been quite considerable. Just in 1984 European market shares for Fi<strong>at</strong> and<br />
Ford were topping, with 12.8% and 12.7%, followed by Volkswagen (12.1%),<br />
Peugeot (11.5%), General Motors (11.1%) and Renault (11%). Hence the simple<br />
merger would have origin<strong>at</strong>ed a formidable competitor with a production capacity of<br />
over 3 million units per year, and on a market share of one fourth of the European<br />
market.<br />
But clearly if the integr<strong>at</strong>ion had succeeded in a s<strong>at</strong>isfactory way the<br />
competitive strengths would have multiplied, starting from manufacturing costs then<br />
encompassing other areas of activity. For example Ford would have gained a<br />
privileged access to the new manufacturing technologies where Fi<strong>at</strong> was developing<br />
st<strong>at</strong>e-of-the-art solutions (such as the new Termoli plant), while Fi<strong>at</strong> could have<br />
benefitted from the long experience accumul<strong>at</strong>ed by Ford in the making of vehicles<br />
with low polluting levels. Furthermore, Ford could have brought advantage, thanks to<br />
its Italian partner, of a revitaliz<strong>at</strong>ion in vehicle design, which had been for a while one<br />
of the weaknesses of the make. On the other hand Fi<strong>at</strong> could have used the highly<br />
intern<strong>at</strong>ionalized structure of Ford Europe.<br />
Then, in a l<strong>at</strong>er moment, synergies could have come through a triangul<strong>at</strong>ion<br />
with the USA: both in terms of easing market presence and in terms of designing a<br />
world car, th<strong>at</strong> is a vehicle which with minor adapt<strong>at</strong>ions could have been sold in all<br />
main automobile markets. Gianni Agnelli himself, in an interview carried out in<br />
42
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
September 1985, and published <strong>at</strong> the beginning of the following month, mentioned<br />
such possibility 41 , and he underlined as in the agreement being discussed between Fi<strong>at</strong><br />
and Ford there were, besides immedi<strong>at</strong>e benefits on the automobile industry, also<br />
important perspectives of future cooper<strong>at</strong>ion for many other industries of the Fi<strong>at</strong><br />
group.<br />
It was n<strong>at</strong>ural th<strong>at</strong> facing the importance of the initi<strong>at</strong>ive and the many choices<br />
th<strong>at</strong> the production integr<strong>at</strong>ion process between the two companies would have<br />
required it was crucial to clearly <strong>at</strong>tribute decision powers. According to the press, in<br />
the end Ford proposed to give Fi<strong>at</strong> the management of the company, but for a fixed<br />
period (5 to 7 years), probably until the retirement of Avvoc<strong>at</strong>o Agnelli. L<strong>at</strong>er control<br />
would have been turned to Ford for good. Such solution was not accepted by the<br />
Italian partner and led to the interruption of negoti<strong>at</strong>ions. It was a decision which<br />
yielded some painful consequences. It is said th<strong>at</strong> within the Fi<strong>at</strong> management there<br />
was a clear disparity between the Chairman of Fi<strong>at</strong> Auto, Vittorio Ghidella, highly<br />
favorable to the solution proposed by Ford 42 , also because by any chance he would<br />
have been the one to lead the company during the time of Italian control, while the<br />
chairman of the holding company, Cesare Romiti, was strongly against, also because<br />
he would have lost control of the most relevant company of the Group.<br />
Anyway for the “cassettisti” shareholders the interruption of the negoti<strong>at</strong>ion<br />
represented the vanishing of a gre<strong>at</strong> opportunity of competitive growth, of value<br />
cre<strong>at</strong>ion and of achieving dividends and capital gains, albeit the favorable period for<br />
Fi<strong>at</strong>, who <strong>at</strong> th<strong>at</strong> time enjoyed the highest sales volume in the European automobile<br />
market, yielded a rise of Fi<strong>at</strong> stock values which was not damaged by the project<br />
withdrowal 43 . However there is no doubt th<strong>at</strong> <strong>at</strong> th<strong>at</strong> time there was a contrast between<br />
the interest of company control and the interest of valorizing company capital.<br />
6.4. The establishment of the Giovanni Agnelli & C. S.A.P.A.<br />
The stage of crisis which started <strong>at</strong> the end of the 1970s had some influences<br />
inside the Agnelli family as well. On the one hand Umberto Agnelli believed th<strong>at</strong> is<br />
was better to resign from chairman after the difficulties encountered during those<br />
years. On the other hand the unavoidable reduction in dividends oper<strong>at</strong>ed by the<br />
company had gener<strong>at</strong>ed some fears among the family members who were plain<br />
rentiers. Therefore in line with the growth in the number of family members the<br />
Avvoc<strong>at</strong>o believed it was about time to develop a mechanism capable of “ensuring<br />
unity and continuity in the management” of the controlling share of the financial<br />
41 "During the 1990s the world car will likely happen: a car bound to be manufactured in six digit<br />
figures, a car which will drive along roads all over the world. Who says th<strong>at</strong> such car cannot be<br />
manufactured right here, in Europe?". See Turani [1985].<br />
42 During the interviews <strong>at</strong> the opening of the Frankfurt motor show Vittorio Ghidella had underlined<br />
how the policy of agreements between gre<strong>at</strong> automobile groups was a mand<strong>at</strong>ory choice in the p<strong>at</strong>h of<br />
competitive strengthening.<br />
43 The growth trend of stock values took off <strong>at</strong> the beginning of 1985 with a value above 6,500 for<br />
common shares, and reached 11,600 <strong>at</strong> the time of cancell<strong>at</strong>ion of the proposed merger between Fi<strong>at</strong><br />
Auto and Ford Europe, and maintained a revalu<strong>at</strong>ion stage up to September 1986, when values topped<br />
an all time high of 41,498. Since then a decrease started which will stop in February 1988, after hitting<br />
the 23,945 lira.<br />
43
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
company Ifi of the Agnelli family, hence on the rel<strong>at</strong>ive majority share of Fi<strong>at</strong> <strong>SpA</strong><br />
and the group of companies controlled by it.<br />
The initi<strong>at</strong>ive took place in 1987 through the transform<strong>at</strong>ion of the limited<br />
company Giovanni Agnelli & C. in a “Società in Accomandita per Azioni” (Sapa), (a<br />
special type of company based on a limited partnership), to which all common IFI<br />
shares of the Agnelli family would be conferred. It was a solution which gave<br />
exceptional unity to the stock share of Ifi as the institutional mechanisms entailed in<br />
Sapa centralize decision power not only in one figure (the company chairman) but<br />
also in some people, those playing the role of “Accomand<strong>at</strong>ari” partners 44 (acting<br />
partners). For example the names of the “Accomand<strong>at</strong>ari” partners were inscribed in<br />
the founding act of the company, hence the replacement of chairmen of a Sapa is a<br />
peculiar oper<strong>at</strong>ion which requires a qualified majority of company capital. At the<br />
same time also the insertion of other acting partners is subject to special procedures,<br />
and even tighter restraints are in place for replacing managing director. For example<br />
the appointment of a new managing director must be approved by all managing<br />
directors still in charge. The unity of the decision mechanism of the company stems<br />
also from the fact th<strong>at</strong> according to the st<strong>at</strong>utory books 45 “the Board of Directors has<br />
the highest power of ordinary and extraordinary administr<strong>at</strong>ion and decision,<br />
excluding those which are by law mand<strong>at</strong>ed to the assembly. They exert them with the<br />
favorable vote by all acting partners in charge, less one. However, the same powers,<br />
without exception, are <strong>at</strong>tributed singularly to Giovanni (Gianni) Agnelli […] In any<br />
case any decision over common stock of the Ifi company p.a. which does not leave in<br />
full property of the Giovanni Agnelli & C. s.a.p.a. <strong>at</strong> least 51% of ordinary Ifi capital<br />
must be previously authorized by all acting partners in charge and by the<br />
extraordinary assembly”.<br />
Another significant aspect is th<strong>at</strong> applying to the sale and disposal of shares<br />
which: “cannot be alien<strong>at</strong>ed to subjects other than “consanguineous” of the current<br />
owner, by Group companies and other stock holders, if they are not previously offered<br />
in option to them”.<br />
In substance the establishment of this company ensured a sort of unity of<br />
command to Gianni Agnelli on the control of Ifi (hence of Fi<strong>at</strong> <strong>SpA</strong>) and to those<br />
family members who, after him, are going to become company Chairman.<br />
After the restructuring following the establishment of the Sapa in 1987 the system of<br />
share ownership of the Agnelli family is represented in the figure 9.<br />
44 In the st<strong>at</strong>utory books of the G. Agnelli & C. s.a.p.a. the acting partners were: Giovanni (Gianni)<br />
Agnelli, Umberto Agnelli, Giovanni Nasi, Gianluigi Gambetti and Cesare Romiti, the only one not<br />
belonging to the Agnelli family. Gianni Agnelli and Giovanni Nasi were appointed Chairman and<br />
Vice-chairman of the board of acting partners.<br />
45 Art.11, 1° e 2° c<strong>at</strong>ch of the company’s st<strong>at</strong>ute.<br />
44
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
Fidis<br />
Vittoria Ass.<br />
Gemina<br />
Pirelli<br />
Altri Alle<strong>at</strong>i<br />
Fig.9 –Agnelli Family’s Share Control over Ifi and Fi<strong>at</strong><br />
4%<br />
Fondazione<br />
Giovanni Agnelli<br />
1%<br />
(Principali ramificazioni)<br />
Gianni Agnelli 38%<br />
Giovanni Nasi 12%<br />
Umberto Agnelli 11%<br />
Altri Agnelli 19%<br />
Altri Nasi 20%<br />
Giovanni Agnelli & C.<br />
s.a.p.a.<br />
IFI<br />
28%<br />
75%<br />
FIAT<br />
45<br />
2,5%<br />
IFIL IFILP<br />
Prime<br />
6,7%
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
7. Fi<strong>at</strong>’s Shareholder Value Policy<br />
7.1. Until 1996: the ROI and ROE scheme<br />
The management control applied <strong>at</strong> Fi<strong>at</strong> enjoyed a constant development from<br />
earliest rough methods applied <strong>at</strong> the beginning of the century and based mainly upon<br />
the measure in absolute value of the profit achieved, and of its r<strong>at</strong>io with turnover<br />
(ROS), moving on then to methods based upon the return on investment (ROI) and<br />
return on equity (ROE).<br />
Such a method of analysis was applied in a first stage as evalu<strong>at</strong>ion parameter<br />
ex post in order to assess how good the firm str<strong>at</strong>egy was. In a more recent stage,<br />
along with the retirement of Vittorio Valletta and Umberto Agnelli becoming<br />
managing director (1966), a more articul<strong>at</strong>ed system of management control began to<br />
be developed, which tried to evalu<strong>at</strong>e ex ante the validity of str<strong>at</strong>egic altern<strong>at</strong>ives and<br />
in particular the investments’ profitability. With a process of gradual refinement<br />
during the 1970s a Central Office <strong>at</strong> the “Head of Studies, Planning and Control” was<br />
established, in charge of developing a framework for analysing balance sheets to be<br />
applied both to Fi<strong>at</strong> and to its main competitors, in order to carry out a business<br />
intelligence analysis. L<strong>at</strong>er on the most consolid<strong>at</strong>ed techniques of balance sheet and<br />
financial analysis were introduced in the individual managing activities through the<br />
tool of the annual budget, hence they were used as inform<strong>at</strong>ion support for choices on<br />
more oper<strong>at</strong>ional and lower levels.<br />
7.2. Value Based Management<br />
However from the <strong>Corpor<strong>at</strong>e</strong> <strong>Governance</strong> standpoint the most significant<br />
change occurred <strong>at</strong> the end of 1996 with the adoption of an <strong>at</strong>titude markedly inspired<br />
to cre<strong>at</strong>ion of value defined as “Capability of the firm to gener<strong>at</strong>e a cash return with<br />
on invested capital higher than the cost of capital itself”, and indic<strong>at</strong>ed as Value Based<br />
Management. It was a key choice which was indic<strong>at</strong>ed in the document accompanying<br />
the 1996 balance sheet, presented in June 1997 46 , and defined in detail in a Group 47<br />
document:<br />
46 “An indispensable prerequisite for growth is the internal financing of our activities through a<br />
vigorous effort to increase the profitability of our invested capital and keep it <strong>at</strong> an optimum level.<br />
With this in mind, the Group has made the cre<strong>at</strong>ion of value a criterion of every oper<strong>at</strong>ing decision and<br />
a measure for the progress of the Company.<br />
This is precisely the logic behind the current process of globaliz<strong>at</strong>ion, which is designed to<br />
give the Group a solid position in the markets with the highest growth potential, through strong<br />
synergies amount the various Sectors.<br />
This same objective of increased value is served by the str<strong>at</strong>egic management of our portfolio<br />
of activities, based on a careful appraisal of their potential for profitability and internal financing.<br />
A third essential element of our str<strong>at</strong>egy is the constant reduction of costs through<br />
organiz<strong>at</strong>ional innov<strong>at</strong>ion streamlining of logistics and sales networks, control of working capital,<br />
reduction of vertical integr<strong>at</strong>ion and a steadily increasing partnership with suppliers.<br />
Finally, we intend to proceed with the outsourcing of all non-str<strong>at</strong>egic activities, so th<strong>at</strong> the<br />
Company’s management can concentr<strong>at</strong>e its efforts exclusively on the cre<strong>at</strong>ion of further value. The<br />
main thrust of our policy will therefore be to optimize our existing and future investments and to take<br />
every step th<strong>at</strong> may help to raise the value of the Company”.<br />
46
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
“Value cre<strong>at</strong>ion is the oblig<strong>at</strong>ion we have towards our shareholders. Each of us holds<br />
the responsibility of contributing to the development of the Group hence to hand over to those<br />
who will follow, shareholders and employees, a Company with higher value. All decisions<br />
and actions must respond to the objective of increasing the economic value of the Group as a<br />
whole. Value cre<strong>at</strong>ion is meant and measured as the share of oper<strong>at</strong>ing income exceeding the<br />
cost of capital employed to obtain it”.<br />
“The Core Values of the Company are:<br />
- Cre<strong>at</strong>ion of Shareholder value,<br />
- Customer S<strong>at</strong>isfaction,<br />
- Human Resources Empowerment ” .<br />
“The Guiding Principles of the Company are:<br />
- Globaliz<strong>at</strong>ion,<br />
- Integrity and rigor,<br />
- System<strong>at</strong>ic benchmarking,<br />
- Proactiveness,<br />
- Passion<strong>at</strong>e dedic<strong>at</strong>ion to professional competence,<br />
- Promptness and determin<strong>at</strong>ion in decision-making,<br />
- The will to put team performance ahead of personal consider<strong>at</strong>ions.”<br />
It was an approach which probably already reflected a change inspired by the<br />
entry of Paolo Fresco in the Board of Directors, who will move to presidency in 1999<br />
with the exit of Cesare Romiti.<br />
The reasons for this change of the company str<strong>at</strong>egy <strong>at</strong> the corpor<strong>at</strong>e level can<br />
be found both on the ground of the competitive situ<strong>at</strong>ion which was emerging in the<br />
automobile industry given globalis<strong>at</strong>ion, and on the ground of the need to adjust such<br />
new reality under the ideological and cultural standpoint. On the competitive<br />
standpoint the gradual slowdown in the growth r<strong>at</strong>e of automobile demand in most<br />
advanced countries, which had led the development of the industry since its<br />
establishment, pushed more and more considerably towards the need to establish<br />
production capacity in markets with emerging motoris<strong>at</strong>ion such as L<strong>at</strong>in America,<br />
Eastern European countries, and South-East Asia. Such transform<strong>at</strong>ion implied a huge<br />
amounts of capital which would have been available only if investments were focused<br />
on the activities rel<strong>at</strong>ed to design and final assembly of vehicles and to maximise the<br />
efficiency of use. In other words the challenge of globalis<strong>at</strong>ion implied a leaning of<br />
the degree of vertical integr<strong>at</strong>ion in order to leave, to a car maker such as Fi<strong>at</strong>, only<br />
the oper<strong>at</strong>ions tightly rel<strong>at</strong>ed to the core business and the capability to accur<strong>at</strong>ely<br />
monitor the technical forms of investment in order to maintain the maximum level of<br />
efficiency.<br />
However the amount of capital to be found in order to carry out the<br />
globalis<strong>at</strong>ion project for Fi<strong>at</strong> would have been so relevant th<strong>at</strong> the mere self-financing<br />
would have been insufficient and a massive use of intern<strong>at</strong>ional capital markets would<br />
have been needed. Therefore there was also the need th<strong>at</strong> Fi<strong>at</strong> could stand up in front<br />
of the intern<strong>at</strong>ional financial community as a company led by the same economic<br />
guidelines of th<strong>at</strong> community. In other words, a company defined itself<br />
“intern<strong>at</strong>ional” not only by having a worldwide distribution of its activities, but also<br />
by having a managing culture which warrants the forms of behaviour towards the<br />
main stakeholders and in the first place towards the shareholders. The fact th<strong>at</strong> “value<br />
cre<strong>at</strong>ion” has represented a lead parameter in evalu<strong>at</strong>ing the str<strong>at</strong>egic appropri<strong>at</strong>eness<br />
47 “I Valori del Gruppo Fi<strong>at</strong>” (The Values of the Fi<strong>at</strong> Group), Gruppo Fi<strong>at</strong>, 1998<br />
47
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
of a firm by the intern<strong>at</strong>ional financial community represented by Banks, Institutional<br />
Investors, R<strong>at</strong>ing companies, etc., is a sort of test which no economic agent can avoid.<br />
7.3. E.V.A. as a performance measure<br />
The development of a Value Based Management <strong>at</strong> Fi<strong>at</strong> took place through the<br />
adoption of the Economic Value Added (EVA) approach which has been assumed as a<br />
parameter for measuring performance. As it is known the EVA method is based upon<br />
the measurement of value gener<strong>at</strong>ed (or destroyed) every year by a company<br />
expressed as the difference between the oper<strong>at</strong>ing income after taxes and the notional<br />
cost of capital as the following formula:<br />
EVA = NOPAT – WACC (IC)<br />
NOPAT = Net Oper<strong>at</strong>ing Profit After Taxes<br />
WACC = Weighted Average Cost of Capital<br />
IC = Invested Capital (Debt + Equity)<br />
The indic<strong>at</strong>ive value of the EVA derives from a range of fe<strong>at</strong>ures:<br />
a) It forces the management to evalu<strong>at</strong>e investments and de-investments<br />
according to their capacity to cre<strong>at</strong>e a return of value which is higher than the<br />
amount used;<br />
b) It links capital budgeting to value cre<strong>at</strong>ion for shareholders;<br />
c) It allows to define clear objectives for the management and to evalu<strong>at</strong>e results<br />
ex post;<br />
d) It allows to correl<strong>at</strong>e management compens<strong>at</strong>ion to a overall measure of<br />
performance in pursuing the assigned objective.<br />
Fi<strong>at</strong> has tried to use such indic<strong>at</strong>or by adapting it to the reporting system which<br />
had been applied within the company for a long time, in order to minimise<br />
adjustments required by the new approach. Hence it came the “Fi<strong>at</strong> formula” to<br />
measure cre<strong>at</strong>ed value, as follows:<br />
CV = Cre<strong>at</strong>ed Value<br />
OP = Oper<strong>at</strong>ing Profit (before taxes)<br />
NEC = Net Employed Capital 48<br />
CV = OP – NEC (WACC)<br />
Such formula, partially different from the classic formul<strong>at</strong>ion by Stern &<br />
Steward, is influenced by the following conditions:<br />
1. to make the forms of calcul<strong>at</strong>ion of the measure of value cre<strong>at</strong>ion easy to<br />
understand and to communic<strong>at</strong>e to all members of the organis<strong>at</strong>ion;<br />
2. to have a planning and control tool comp<strong>at</strong>ible with the whole system of<br />
budgeting-planning-reporting;<br />
3. to be able to apply the formula of value cre<strong>at</strong>ion to any business area;<br />
48 The calcul<strong>at</strong>ion of capital cost is one of the most important aspects in measuring value cre<strong>at</strong>ion.<br />
Initially it was decided to use the same weighted cost of capital for all industries, equal to 12%. In a<br />
l<strong>at</strong>er moment the cost of capital was differenti<strong>at</strong>ed according to the risk associ<strong>at</strong>ed to each industry. In<br />
particular, it is provided th<strong>at</strong> investments in the car industry have a weighted average cost of capital<br />
which is half a percentage point higher than for other industries.<br />
48
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
4. to use an internal decisional tool which was comp<strong>at</strong>ible with the logics and the<br />
variables traditionally used in financial analysis 49 .<br />
7.4. The adoption of the management model based upon value cre<strong>at</strong>ion<br />
The process of implement<strong>at</strong>ion of the model based upon value cre<strong>at</strong>ion has<br />
been divided into more separ<strong>at</strong>e stages, although linked to each other, in which it<br />
moved through the definition of the “Fi<strong>at</strong> formula”, its communic<strong>at</strong>ion and the<br />
personnel training activities <strong>at</strong> various levels for a profound transform<strong>at</strong>ion of<br />
managing culture of the Group personnel. It was a wide oper<strong>at</strong>ion, which started in<br />
1997 and ended in 1998 which involved over 450 people in the top management, over<br />
3,500 managers and over 23,000 cadres of all controlled companies.<br />
The objective of the training program named “Cre<strong>at</strong>ing Value” were defined,<br />
in broad terms, in the diffusion of the set of concepts which are <strong>at</strong> the roots of the<br />
social and economic legitim<strong>at</strong>ion of value cre<strong>at</strong>ion and in the focus of <strong>at</strong>tention on the<br />
rel<strong>at</strong>ionship between values in the income st<strong>at</strong>ement and in the balance sheet in<br />
determining and cre<strong>at</strong>ing value. This l<strong>at</strong>ter aspect was particularly underlined in the<br />
training activities targeted to managers and oper<strong>at</strong>ional cadres which usually tend to<br />
focus almost exclusively on values and outcomes of the income st<strong>at</strong>ement.<br />
The training activity has also benefited from a specific software developed for<br />
a wh<strong>at</strong> if analysis which could rapidly and clearly highlight the change of the<br />
influence gener<strong>at</strong>ed by the different variables of the accounting system on value<br />
cre<strong>at</strong>ion. From this training effort came the need to adjust also the system of<br />
management incentives, as it will be discussed l<strong>at</strong>er on.<br />
The <strong>at</strong>tention posed upon cultural growth of management has also suggested<br />
to focus the <strong>at</strong>tention of managing personnel on some important value drivers, mainly<br />
rel<strong>at</strong>ed to the economy in the use of capital employed and its most efficient use<br />
through careful choices of de-investment from activities which are non str<strong>at</strong>egic or<br />
which cannot be carried out with the required standards of excellence and with a more<br />
advanced organis<strong>at</strong>ion of global sourcing. Hence it came:<br />
a) a system<strong>at</strong>ic review of criteria adopted in the selection of investments;<br />
b) the use of an integr<strong>at</strong>ed inform<strong>at</strong>ion system capable of monitoring the relevant<br />
key drivers and of configuring a tableau de bord moved by value cre<strong>at</strong>ion<br />
tailored to each business sector;<br />
c) the activ<strong>at</strong>ion of a system of ex post verific<strong>at</strong>ion of gaps with respect to<br />
hypotheses adopted in the evalu<strong>at</strong>ion of investments, in order to recalibr<strong>at</strong>e the<br />
assumptions towards the correction of str<strong>at</strong>egic plans.<br />
7.5. The incentive tools <strong>at</strong> Fi<strong>at</strong><br />
In order to make the new <strong>at</strong>titude based upon value cre<strong>at</strong>ion fully oper<strong>at</strong>ional<br />
the measure of financial performance has been applied to manager monetary<br />
incentives. It is based upon four tools:<br />
1. salary increases;<br />
49 To this respect Fi<strong>at</strong> has verified for a significant length of time th<strong>at</strong> differences in results which<br />
would have been obtained with a formula slightly different from the standard one could yield similar<br />
results.<br />
49
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
2. discretional annual bonuses;<br />
3. annual bonuses coming from the implement<strong>at</strong>ion of Management by<br />
objectives (MBO) and the Evalu<strong>at</strong>ion of Work Results (Valutazione dei<br />
Risult<strong>at</strong>i di Lavoro - VRL);<br />
4. stock options.<br />
Salary increases are applied annually to a share of managers (about 20% of<br />
total), and are assigned as a recognition of a growth in individual competences.<br />
Discretional annual bonuses are used to specific tasks in which one intends to<br />
reinforce incentives on key qualit<strong>at</strong>ive objectives. Both these tools represent “non<br />
standard” incentive forms which are used also depending upon the variety of company<br />
situ<strong>at</strong>ions which reflect a worldwide group.<br />
Differently, the MBO and VRL incentive programs are tools with system<strong>at</strong>ic<br />
and general usage. Their introduction is anterior (1983) to the value based approach,<br />
but they have been redefined according to the new objectives.<br />
The management pyramid of the Fi<strong>at</strong> Group can be divided into four layers,<br />
which are in turn divided in other levels. At the found<strong>at</strong>ion we find the layer of the<br />
“Cadres” with about 20,000 units, followed by th<strong>at</strong> of “Managers” with about 3,500<br />
managers, then th<strong>at</strong> of “Top Managers” (about 500 people). Inside the Top Managers<br />
layer we can distinguish The “Executive Officers” (about twenty) and inside them the<br />
“Directors” which are member of the “Fi<strong>at</strong> Board of Directors” with eleven units.<br />
The layers of Cadres and Managers are stimul<strong>at</strong>e according to the VRL program<br />
(Evalu<strong>at</strong>ion of Work Results), which has a potential maximum of 25% of average<br />
salary of the corresponding level. The incentives which are individually acquired are<br />
calcul<strong>at</strong>ed differently whether the subject belongs to an industry division or to the<br />
central staff of the holding company 50 . If he or she belongs to an industry division the<br />
result is calcul<strong>at</strong>ed by weighting the value cre<strong>at</strong>ion achieved <strong>at</strong> industry level (20%)<br />
and <strong>at</strong> division level (80%), while for personnel in central staff units the result is<br />
wholly determined by the average performance of the sector.<br />
The people defined “Top managers” oper<strong>at</strong>e instead within the MBO program.<br />
It entails a potential maximum of 30% of average compens<strong>at</strong>ion of the corresponding<br />
level, and according to a more elabor<strong>at</strong>e weighting scheme based upon four Top<br />
managers types (Sector Chief, Division Chief, Head of Function for Central Staff,<br />
Head of Function for Group Staff), as highlighted in fig. 10 and on specific functional<br />
objectives which are additional to the “Value Cre<strong>at</strong>ion” parameter as exemplified for<br />
the three managerial figures in Fig. 11.<br />
50 However one must consider th<strong>at</strong> central staff although loc<strong>at</strong>ed in the holding company are not strictly<br />
centralised as they remain autonomous for any sector, and depend upon sector chiefs.<br />
50
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
Fig. 10 - Weighting of MBO targets<br />
Sector Division<br />
Other<br />
targets<br />
30%<br />
Sector<br />
Value<br />
Cre<strong>at</strong>ion<br />
70%<br />
Sector<br />
Chief<br />
Source: Fi<strong>at</strong><br />
Other<br />
targets<br />
30%<br />
Division<br />
Chief<br />
51<br />
Sector<br />
Central Staff<br />
Other<br />
targets<br />
30%<br />
Sector<br />
Value<br />
Cre<strong>at</strong>ion 30% Sector<br />
Division<br />
Value<br />
Cre<strong>at</strong>ion<br />
40%<br />
Value<br />
Cre<strong>at</strong>ion<br />
70%<br />
Head of<br />
Function<br />
Fig.11 – Weighting of MBO objectives<br />
(Indic<strong>at</strong>ive values)<br />
Chairman Commercial<br />
Director<br />
Group-level<br />
Staff<br />
Other<br />
targets<br />
50%<br />
Sector<br />
Value<br />
Cre<strong>at</strong>ion<br />
50%<br />
Head of<br />
Function<br />
Oper<strong>at</strong>ions<br />
Director<br />
Value cre<strong>at</strong>ion 70% 50% 50%<br />
Market shares 10% 20%<br />
Warranty costs 10% 15%<br />
Product quality 20%<br />
New product development 15%<br />
Product cost 15%<br />
New product penetr<strong>at</strong>ion 10%<br />
Targa Service 15%<br />
Total 100% 100% 100%<br />
Source: Fi<strong>at</strong>
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
7.6. Stock Option Systems in Italy<br />
In Italy as in other countries the introduction of incentive schemes based upon<br />
Stock Options is becoming more frequent 51 . To this respect the d<strong>at</strong>a available from<br />
main consulting companies on the composition of manager compens<strong>at</strong>ion for Italian<br />
companies, and in particular those publicly traded, highlight the more and more<br />
relevant role of the variable component, indic<strong>at</strong>ing a changed <strong>at</strong>titude in the forms of<br />
enterprise management and of the valoris<strong>at</strong>ion of human resources. The process of<br />
competitive globalis<strong>at</strong>ion has provided considerable impulse since it has stimul<strong>at</strong>ed<br />
the comparison between compens<strong>at</strong>ion policies in the Anglo-Saxon areas and in the<br />
European world, more than in the past.<br />
This last aspect become particularly evident in rel<strong>at</strong>ion to the introduction of<br />
incentive schemes based upon Stock Options. However it must be pointed out th<strong>at</strong><br />
such homogenis<strong>at</strong>ion of compens<strong>at</strong>ion policies is less strong than is could seem.<br />
While in the Anglo-Saxon world the introduction of Stock Option plans is born as an<br />
incentive tool and for neutralising managerial behaviors which are not aligned to<br />
value cre<strong>at</strong>ion for shareholders, in continental Europe, where the separ<strong>at</strong>ion between<br />
property and control is less advanced (as for example in Italy) the introduction of<br />
Stock Options mainly stems from the need to apply compens<strong>at</strong>ion models capable of<br />
<strong>at</strong>tracting and retaining managers with new and rare competences, mainly those linked<br />
to e-business and to the new economy, where expect<strong>at</strong>ions for growth in market<br />
capitalis<strong>at</strong>ion of stocks are particularly evident.<br />
Managers compens<strong>at</strong>ed with plans of stock incentives share, with<br />
shareholders, the increase in value of the company, hence they cash their managerial<br />
competences. Compared to a traditional bonus the advantage lies also on the fiscal<br />
side both for the company and for the manager, as for the firm the payment of social<br />
security contributions is waived, and for the manager taxed applied to employed<br />
labour compens<strong>at</strong>ion are waived.<br />
In Italy Stock Option plans aimed <strong>at</strong> top management start to develop in the<br />
early 1990s, but mainly in Italian firms controlled by foreign groups of British or US<br />
origin. According to a study by Towers Perrin 52 on incentive systems in 1995, stock<br />
plans which were oper<strong>at</strong>ional or being studied involved only 11% of Italian<br />
companies with a turnover over € 1 billion, but in 1998 the share grew to 79%.<br />
More detailed inform<strong>at</strong>ion is available through the study conducted by Società<br />
Ricerche & Studi (R&S) involving 218 Italian groups with large turnover in all<br />
industries excluding th<strong>at</strong> rel<strong>at</strong>ed to web activities which, given their recent<br />
establishment, are not yet included in the annual sample monitored by R&S 53 .<br />
According to this study 54 companies (th<strong>at</strong> is 25% of the sample) adopted plans of<br />
stock incentives and 53 of them are publicly traded: 50 in Italy and 3 abroad (Fig.12).<br />
51 Gualtieri [1993].<br />
52 Towers Perrin [1998].<br />
53 R&S [1999].<br />
52
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
An interesting division of the sample is th<strong>at</strong> allowing to segment the analysis<br />
by industry. According to this classific<strong>at</strong>ion one can find a higher diffusion of stock<br />
plans as compens<strong>at</strong>ion and particip<strong>at</strong>ion mechanisms in companies belonging to the<br />
financial, banking and insurance industries, as well as in those competing in global<br />
markets such as the auto and tyre industries (Fig. 13).<br />
Fig.12 – The adoption of Stock Option plans in firms of the R&S sample<br />
Number of firms<br />
Firms with Stock Option<br />
plans<br />
Percentage<br />
Firms publicly traded in Italy 88 50 56.8%<br />
Firms publicly traded abroad 8 3 37.5%<br />
Total publicly traded firms 96 53 55.2%<br />
Non publicly traded firms 122 1 0.8%<br />
Total sample 218 54 24.8%<br />
Source: R&S [1999].<br />
Fig. 13 - Firms with stock plans by industry<br />
Transport-tourism<br />
Textile-clothing<br />
Electromechanical<br />
Construction<br />
Paper-publishing<br />
Source: R&S<br />
Telecoms<br />
Siderurgical<br />
Financial<br />
Chemical<br />
Bank<br />
Auto-tyre<br />
Insurance<br />
Food<br />
0% 20% 40% 60% 80%<br />
53
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
With respect to technical forms of implemented plans, there is a clear<br />
dominance of plans of paid emission (58% of cases), including those with discounted<br />
terms, but with a strong presence of free emissions (32% of cases). In other words the<br />
firms have mainly used capital increases aiming <strong>at</strong> assignments which were free or<br />
discounted (subscription <strong>at</strong> discounted prices). More than with an objective of<br />
incentive, those plans seem carried out with the aim of granting an award for past<br />
outcomes or as a mean to ensure a higher degree of involvement of the management<br />
on the future development of the firm.<br />
7.7. Stock Option System <strong>at</strong> Fi<strong>at</strong><br />
A Stock Option program has been introduced by Fi<strong>at</strong> in 1998. The Board of<br />
Directors has voted a capital increase for a maximum of 36.5 million ordinary shares<br />
with a nominal value of 5 euro, equal to about 1% of capital in this type of shares<br />
reserved to managers of Fi<strong>at</strong> and controlled companies. Its introduction has been<br />
presented by Paolo Fresco, who became during th<strong>at</strong> same year Fi<strong>at</strong> Chairman taking<br />
Cesare Romiti’s place 54 , as a “management tool widely common on an intern<strong>at</strong>ional<br />
scale, useful to develop a culture of confidence in the value growth for the company,<br />
which stock markets eye more and more favourably. The plan which will be carried<br />
out in more stages, entails the distribution of options valid to subscribe three years<br />
after the assignment to a price set as the average of official prices in the Milan Stock<br />
Exchange during the month preceding the assignment.<br />
In March 1999, the Board of Directors of Fi<strong>at</strong> <strong>SpA</strong> adopted a new stock<br />
option plan – The 1999 Plan – whereby the Board may grant options to purchase up to<br />
the aggreg<strong>at</strong>e number of Fi<strong>at</strong> ordinary shares to be issued pursuant to the resolution of<br />
the Board of Directors d<strong>at</strong>ed December 9, 1998 authorizing a capital increase of a<br />
total par value of 18.9 million euro for such purpose. The 1999 Plan authorized the<br />
Board to grant to eligible employees of Fi<strong>at</strong> <strong>SpA</strong> and its Italian and foreign<br />
subsidiaries options in respect of a total of 1,248,000 ordinary shares <strong>at</strong> a purchase<br />
price of 28.45 euro per share. The share purchase price, which is subject to<br />
adjustment in certain circumstances involving a change in Fi<strong>at</strong>’s share capital, was<br />
determined by averaging the official price of Fi<strong>at</strong>’s ordinary shares on the Italian<br />
Stock Exchange during the last twenty daily trading sessions preceding March 29,<br />
1999, the d<strong>at</strong>e of the first grant of options under the 1999 Plan. At such time the<br />
Board approved the grant options in respect of 1,248,000 ordinary shares to<br />
approxim<strong>at</strong>ely 700 managers of the Fi<strong>at</strong> Group.<br />
The 1999 Plan is only open to employees th<strong>at</strong>, on March 29, 1999 are<br />
employees of Fi<strong>at</strong> or of a subsidiary of Fi<strong>at</strong> on an indefinite basis, have the title of<br />
“Direttore 55 ” and have completed all required prob<strong>at</strong>ionary periods. Eligible<br />
employees will be excluded from the 1999 Plan if they have given or received notice<br />
54 Cesare Romiti, after 24 years working with Fi<strong>at</strong>, has enjoyed the largest stock option compens<strong>at</strong>ion<br />
in Italy. The leaving president walked out with a value of ITL 105 billion.<br />
55 In order to avoid confusion it is worth pointing out th<strong>at</strong> the Italian position of “Direttore” (Executive<br />
Officer) differs from the Anglo-Saxon one of “Director”. The “Direttori” carry out their activity <strong>at</strong> the<br />
helm of Fi<strong>at</strong> <strong>SpA</strong> or of subsidiaries. Among them there are in particular Gian Carlo Boschetti, Chief<br />
Executive Officer of Iveco N.V., Luca Cordero di Montezemolo Chief Executive Officer of Ferrari<br />
<strong>SpA</strong>, Jan Pierre Rosso Chief Executive Officer of CNH Global N.V. and Roberto Testore Chief<br />
Executive Officer of Fi<strong>at</strong> Auto. The name “Director” (Amministr<strong>at</strong>ore) refers instead to members of<br />
the Board of Fi<strong>at</strong> <strong>SpA</strong>.<br />
54
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
of their intent to termin<strong>at</strong>e employment, are scheduled to leave the Group in 1999 or<br />
qualify for mand<strong>at</strong>ory age pensions before April 1, 2001. The number of options<br />
offered to each individual grantee has been determined according to certain evalu<strong>at</strong>ion<br />
criteria including the grantee’s level of responsibility and job performance. In<br />
determining the number of options granted under the 1999 Plan, the Board of<br />
Directors considered the results of the Group and of the grantee for the years 1996,<br />
1997 and 1998.<br />
The options granted under the 1999 Plan my be exercised in tranches to be<br />
determined by the grantee from and after the expir<strong>at</strong>ion of the third year following the<br />
grant. The grantee may exercise up to 50% of the total options granted during the<br />
period from April 1, 2001 to April 1, 2002, and the remaining balance from April 1,<br />
2002 until the expir<strong>at</strong>ion of all such options on March 31, 2007. However the options<br />
may not be exercised between January 1 and the d<strong>at</strong>e of which the results of Fi<strong>at</strong> <strong>SpA</strong><br />
for the proceeding year are first publicly announced. Furthermore during the option<br />
period of employment, for or without cause, except for intragroup transfers within<br />
thirty calendar days after termin<strong>at</strong>ion and in the event th<strong>at</strong> the employing company of<br />
the grantee loses its st<strong>at</strong>us as a subsidiary, thirty calendar days after such event.<br />
Options issued under the 1999 Plan which have not become exercisable will be<br />
determined on conditions similar to those for options th<strong>at</strong> have become exercisable.<br />
Options th<strong>at</strong> are exercisable upon the grantee’s de<strong>at</strong>h may be exercisable by a person<br />
entitled to do so under the applicable inheritance laws, however such options must be<br />
exercised not l<strong>at</strong>er than March 31, 2007.<br />
On February 18, 2000 the Board of Directors approved a second stock option<br />
plan – The 2000 Plan – characterized by an extension with respect to the previous<br />
one. The 2000 Plan will be offered to about 850 managers, of the Group’s Italian and<br />
foreign subsidiaries, who are qualified as “Direttore” or have been included in the<br />
Management Development Program for High-Potential Managers 56 . A total of<br />
5,158,000 options have been awarded under this plan, giving holders the right to<br />
purchase an equal number of Fi<strong>at</strong> ordinary shares <strong>at</strong> a price of € 30.63 per share. This<br />
figure corresponds to the average price for the shares on the Italian Stock Exchange<br />
over the 20 trading days immedi<strong>at</strong>ely preceding the d<strong>at</strong>e of the award. These options<br />
my be exercised between February 18, 2001 and February 18,2008. However, during<br />
the first four years of th<strong>at</strong> period, option may only be exercised in cumul<strong>at</strong>ive annual<br />
tranches th<strong>at</strong> do not exceed 25% of the total number awarded. Pursuant to these plans,<br />
a total of 5,506,000 shares, equivalent to 1% of the Fi<strong>at</strong>’s total capital stock and 1,5%<br />
of its ordinary shares, will be issued through a special dedic<strong>at</strong>ed capital increase,<br />
which the Board has already approved. In addition, approxim<strong>at</strong>ely 900,000 treasury<br />
shares will be sold to option holders in accordance with the provisions of the<br />
respective regul<strong>at</strong>ions. The Fig.14 summarizes the d<strong>at</strong>a for all stock options<br />
outstanding <strong>at</strong> December 31, 1999.<br />
56 The Board of Directors has established in 1999 two internal committees: the Audit Committee,<br />
which comprises four non-executive Directors (Gabriele Gal<strong>at</strong>eri di Genola, who chairs the committee,<br />
John P. Elkman, Gianfranco Gutty and Carl L. von Boehm-Bezing), and the Compens<strong>at</strong>ion Committee,<br />
which comprises four Directors, two of whom have executive authority (Paolo Fresco, who chairs the<br />
committee and Paolo Cantarella, as well as including Franzo Grande Stevens and John F. Welch). The<br />
Compens<strong>at</strong>ion Committee develops proposal for approval by the full Board of Directors, mainly with<br />
regard to general and individual compens<strong>at</strong>ion plans for senior employees and the compens<strong>at</strong>ion for<br />
executive directors, including stock option plans, as well as appointments to senior positions within the<br />
Group.<br />
55
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
Fig.14 – Stock Options Situ<strong>at</strong>ion <strong>at</strong> December 31,1999<br />
Options awarded in 1999 not yet exercisable <strong>at</strong> Dec.31, 1999 1,248,000<br />
Average exercise price (euros per share) 28.45<br />
Market price on the award d<strong>at</strong>e (euros per share) 28.45<br />
Market price <strong>at</strong> December 31, 1999 30,09<br />
Exercise period: 624,000 options exercisable between April 1, 2001 and March 31, 2007<br />
Source: Fi<strong>at</strong><br />
7.8. Fi<strong>at</strong> Directors’ Compens<strong>at</strong>ion<br />
624,000 options exercisable between April 1, 2002 and March 31, 2007<br />
The compens<strong>at</strong>ion for some members of the Board of Directors 57 uses a stock<br />
option system as well. According to the prospect published in the Form 20-F required<br />
by the Securities and Exchange Commission referring to Fiscal Year ended on 31st<br />
Dec 1999, Directors’ compens<strong>at</strong>ion has been determined as shown in Fig. 15.<br />
It is worth to note th<strong>at</strong> the annual compens<strong>at</strong>ion for the post of Chairman<br />
(1,181,000 euro is a variable amount equal to the average stock market value for the<br />
months of April and October of 40,000 ordinary Fi<strong>at</strong> shares. The Chairman also has<br />
the right, exercisable between July 1, 2002 and October 30, 2008, to receive an<br />
amount equivalent to the difference between the price of 25.823 euro per share and<br />
the average market price per share in the month this right us exercised, multiplied by<br />
1,000,000 ordinary Fi<strong>at</strong> shares. This right will expire if the employment rel<strong>at</strong>ionship<br />
is termin<strong>at</strong>ed prior to the Stockholders’ Meeting th<strong>at</strong> will approve the financial<br />
st<strong>at</strong>ements <strong>at</strong> December 31,2001.<br />
As far as it concerns the compens<strong>at</strong>ion for the post of Chief Executive Officer<br />
(2,896,000 euro) includes a fixed amount of 1,859,000 euro and a variable portion<br />
equivalent to the average market value in April and October of 32,000 ordinary Fi<strong>at</strong><br />
shares. The CEO has also the right to receive amounts equivalent to the difference<br />
between a predetermined reference price for the ordinary Fi<strong>at</strong> share and the average<br />
market price per share in the month this right is exercised, multiplied by 100,000<br />
shares (reference price 28,45 euro) exercisable between April 1, 2001 and December<br />
31, 2007, and by an additional 100,000 shares (reference price 30.63 euro),<br />
exercisable gradually over the first four years, between February 18, 2002 and<br />
February 18, 2008. If this employment rel<strong>at</strong>ionship is termin<strong>at</strong>ed for any reason other<br />
than just cause before June 30, 2002, the CEO is entitled to receive supplemental<br />
compens<strong>at</strong>ion determined on the basis of his annual salary <strong>at</strong> the time the employment<br />
rel<strong>at</strong>ionship is termin<strong>at</strong>ed, pror<strong>at</strong>ed for the period from the d<strong>at</strong>e of termin<strong>at</strong>ion until<br />
June 30, 2002.<br />
57 The Directors of the Board have a term office of three years. At the annual meeting of shareholders<br />
held on June 23, 1999 the shareholders elected or re-elected each of the Directors for a new term.<br />
Which will expire on the d<strong>at</strong>e of the annual general meeting of shareholders to be held in the year<br />
2002.<br />
56
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
Fig.15 – Fi<strong>at</strong>’s Directors Compens<strong>at</strong>ion – 1999 – (Thousands of euro)<br />
Name Position Compens<strong>at</strong>ion<br />
for office held<br />
(*)<br />
57<br />
Noncash<br />
Benfits<br />
(**)<br />
Paolo Fresco Chairman 1,633 25<br />
Bonuses<br />
and<br />
Other<br />
Incentives<br />
Other<br />
compens<strong>at</strong>i<br />
on<br />
Paolo Cantarella CEO 3,348 12 516 37<br />
Franco Bernabé Director 56 7<br />
John P. Elkan Director 446 7<br />
Gabriele Gal<strong>at</strong>eri di<br />
Genola<br />
Director 452 7 10<br />
Franzo Grande Stevens Secretary 659 7 560<br />
Gianfranco Gutty Director 440 7<br />
Virgilio Marrone Director 59 7<br />
Franck Riboud Director 428 7<br />
Carl L. von Boehm-<br />
Bezing<br />
Director 47 7<br />
John Welch Director 53 7<br />
Henry C. M artin<br />
Bodmer<br />
Gianluigi Gabetti Vice-<br />
Chairman<br />
Director 385 31<br />
Ulrich Weiss Director 391<br />
(*) For Directors, the amount includes the portion of the 1998 net income (338,000 euro per<br />
person), appropri<strong>at</strong>ed as compens<strong>at</strong>ion for the 1999 term of office (pror<strong>at</strong>ed on the basis of<br />
the time served) in the amount determined by the Stockholders’ Meeting, special<br />
compens<strong>at</strong>ion for assignments and functions performed and the balance of compens<strong>at</strong>ion<br />
owed to them for membership in the Intern<strong>at</strong>ional Advisory Board.<br />
(**) Includes pro-r<strong>at</strong>a share of the premiums for the insurance policy approved by<br />
Stockholders’ Meeting (7,350 euro) and the use of transport<strong>at</strong>ion equipment.<br />
At the annual general meeting of shareholders held on June 23, 1999, the<br />
shareholders of Fi<strong>at</strong> <strong>SpA</strong> approved certain amendments to the by-laws th<strong>at</strong> changed<br />
the manner in which compens<strong>at</strong>ion to be paid to the members of the Board of<br />
Directors with respect to their service is calcul<strong>at</strong>ed. Such compens<strong>at</strong>ion now includes<br />
an element based on the average market price of Fi<strong>at</strong> shares, as well as a set fee of<br />
3,000 euro for <strong>at</strong>tendance <strong>at</strong> each meeting of the Board or committee thereof and the<br />
cost of premium s for directors’ liability insurance. Such amount are included in the<br />
amounts set forth in the Fig.15.<br />
On June 23, 1999 the Board of Directors gave the Chairman, Paolo Fresco,<br />
and the Chief Executive Officer, Paolo Cantarella, broad oper<strong>at</strong>ing powers<br />
authorizing them to perform all acts th<strong>at</strong> are consistent with the Company’s purposes.<br />
452
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
Notwithstanding the ample powers granted to them, the Chairman and the Chief<br />
Executive Officer must regularly submit for approval to the Board of Directors all<br />
transactions th<strong>at</strong> have a m<strong>at</strong>erial impact on the Company’s profitability, balance sheet<br />
and financial position, and must provide the Directors and St<strong>at</strong>utory Auditors with<br />
adequ<strong>at</strong>e inform<strong>at</strong>ion on any transaction performed by virtue of the powers granted to<br />
them which may be <strong>at</strong>ypical, unusual or involve rel<strong>at</strong>ed parties.<br />
8. The policy of investment-divestment of the Fi<strong>at</strong> Group<br />
8.1. The stage of multidimensional expansion<br />
As previously shown Fi<strong>at</strong> maintained, since its establishment until the crisis<br />
years after 1970, a policy largely based upon expansion. It was however a large but<br />
non homogeneous expansion, with different political guidelines. There are those<br />
concerning the automobile industries (Automobiles, Commercial Vehicles, Agricultural<br />
& Earthmoving Equipments), where it is easy to see the general plan of Fi<strong>at</strong><br />
management. There are the guidelines regarding the industries still revolving around<br />
the automobile industry itself, such as Metallurgical Products, Components and<br />
Autom<strong>at</strong>ed Productions Systems, but seen as ancillary and not autonomous with<br />
respect to automotive industries. Finally there are the many other industries not linked<br />
to the automotive one, for which the lines of development vary over time.<br />
With respect to the three main automotive industries there is no doubt th<strong>at</strong> the<br />
str<strong>at</strong>egic guidelines of the Fi<strong>at</strong> management have constantly moved towards growth in<br />
size both through gaining relevant scale economies (hence to a growth in efficiency),<br />
and through acquisition of forms of control of market shares seen as the necessary<br />
complement to maintaining the group profitability.<br />
Moving on to consider the field of automotive components the group str<strong>at</strong>egy<br />
is highly diverse, deriving from different needs m<strong>at</strong>ured in subsequent times. The<br />
starting point of the Fi<strong>at</strong> policy lay, since its establishment, in the need to develop a<br />
wide range of internal production which is necessary due to the limited degree of<br />
Italian industrial development which made choices mainly based on the assembly of<br />
components manufactured externally (as it happened for French, German and<br />
English 58 car makers) inapplicable. The specific traits of the Italian situ<strong>at</strong>ion were due<br />
also to the fact th<strong>at</strong> Fi<strong>at</strong> was the only domestic car maker with large size. This<br />
determined th<strong>at</strong> even independent component manufacturers ended up revolving<br />
around Fi<strong>at</strong>’s orbit. As a consequence it was common th<strong>at</strong> facing a situ<strong>at</strong>ion of crisis<br />
for the supplier in the capability to s<strong>at</strong>isfy technological and organis<strong>at</strong>ional needs of<br />
the main (if not exclusive) client, Fi<strong>at</strong> decided to step in by acquiring firms whose<br />
difficulties thre<strong>at</strong>ened the maintaining of a steady production flow. In such way,<br />
however, the growth in vertical integr<strong>at</strong>ion did not derive from a detailed plan of<br />
development for the group technological potential, but it was led by waving facts<br />
connected with the suppliers’ stories.<br />
In the fields not linked to automotive the investment and divestment policies<br />
were even more diverse. Fi<strong>at</strong> not only decided to rapidly enter industries where it<br />
believed to have competencies which were transferable from the industry of main<br />
interest, but the considerable financial resources produced by favourable market<br />
stages induced it to often try forms of conglomer<strong>at</strong>e diversific<strong>at</strong>ion.<br />
58 See Volp<strong>at</strong>o [1996].<br />
58
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
However such diversific<strong>at</strong>ion forms, even when they were promising, had<br />
difficulties in acquire a distinctive development policy of their own. Until 1976, year<br />
in which Fi<strong>at</strong> was transformed into industrial holding and activities were grouped<br />
along 11 sectors, it was the hierarchical and decisional organis<strong>at</strong>ion in itself to prevent<br />
forms of coll<strong>at</strong>eral development on new promising activities since the monolithic<br />
structure of Fi<strong>at</strong> inevitably ended up granting enough <strong>at</strong>tention to the automobile<br />
business only. Hence other businesses although potentially highly interesting were<br />
neglected. On the contrary, during times in which the economic recession neg<strong>at</strong>ively<br />
influenced the automotive industry, the easiest way to acquire the necessary resources<br />
to boost investments in the group’s leading industry consisted in the sale of “non<br />
str<strong>at</strong>egic” activities. Only a substantial degree of autonomy of the individual<br />
businesses could have provided the condition, necessary albeit not sufficient, to carry<br />
out adequ<strong>at</strong>e str<strong>at</strong>egies of value valoris<strong>at</strong>ion in diversified activities.<br />
8.2. The reorganis<strong>at</strong>ion of captive suppliers<br />
Already <strong>at</strong> the beginning of the 1970s, before the stage of profound industry<br />
reorganis<strong>at</strong>ion driven by the first oil shock Fi<strong>at</strong> was involved in the production of a<br />
very wide range of components, but the following years intensified this situ<strong>at</strong>ion<br />
further. Infact the 1973 oil shock and the subsequent recession in automobile demand,<br />
and the strong infl<strong>at</strong>ion drive in the second half of the 1970s, gener<strong>at</strong>ed considerable<br />
difficulties to component suppliers, even to those directly controlled by Fi<strong>at</strong>, but<br />
mainly to the independent ones. On the sales end Fi<strong>at</strong> could adjust vehicle prices,<br />
which in Italy grew to a pace which was higher than retail prices and, after 1975, also<br />
than wholesale prices 59 . But price adjustments for component suppliers were<br />
inevitably slowed down, if not for the lengthening of payment terms. Furthermore<br />
Fi<strong>at</strong>, which in some areas had excess personnel and plants, had a n<strong>at</strong>ural interest for<br />
reintroducing work which was before outsourced. Hence the development of<br />
considerable employment and productive restructuring by suppliers, particularly by<br />
those who were weaker on the financial side, who were not able to carry out the<br />
necessary investments to gain considerable productivity gains. There m<strong>at</strong>ured also the<br />
interest for Fi<strong>at</strong> to acquire component makers in trouble, or who played a considerable<br />
importance for the objectives of productive r<strong>at</strong>ionalis<strong>at</strong>ion.<br />
It was a stage which was burdensome on the economic standpoint, which had<br />
to be r<strong>at</strong>ionalised by an oper<strong>at</strong>ion of organis<strong>at</strong>ional “clean-up”. Between 1977 and<br />
1979 Fi<strong>at</strong> carried out a compar<strong>at</strong>ive analysis of the component market in Europe, and<br />
technical and commercial fe<strong>at</strong>ures of the manufactured components are evalu<strong>at</strong>ed 60 .<br />
There were two most important points.<br />
A) Fi<strong>at</strong> component production was distributed over a high number of<br />
component product families, differently from wh<strong>at</strong> main independent<br />
component makers did, even those who were more diversified. On a total<br />
of 60 families rel<strong>at</strong>ed to the three key industries (electromechanical,<br />
mechanical and chemical) Fi<strong>at</strong> was present in 46 families, compared to<br />
Lucas, the most diversified, with 27 (Fig.16).<br />
59 Also in the French and German automobile markets the increase in automobile prices was higher<br />
than retail prices, but lower than wholesale prices. For an analysis of automobile price trends in Italy,<br />
France and West Germany from 1973 to 1985 see Volp<strong>at</strong>o (1988).<br />
60 See Fi<strong>at</strong> (1979).<br />
59
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
B) Although with such a wide spectrum of activity, Fi<strong>at</strong> component activities<br />
during those years were more present in products with lower technological<br />
content than in those more sophistic<strong>at</strong>ed and complex (Fig. 17). They<br />
frequently were products with low technological and productive barriers<br />
and which independent firms, smaller and more flexible, could<br />
manufacture with higher productivity levels. Such consider<strong>at</strong>ions moved<br />
Fi<strong>at</strong> to develop a long-ranging oper<strong>at</strong>ion, aimed <strong>at</strong> redesigning the<br />
boundaries of its activities which will lead to the acquisitions in the second<br />
half of the 1980s.<br />
Fig. 16 – Technological content of components<br />
No. of component families manufactured<br />
and technological content<br />
Companies High Medium Medium Medium Low Total<br />
High<br />
60<br />
Low<br />
Fi<strong>at</strong> 11 7 10 5 13 46<br />
Lucas 11 4 2 2 8 27<br />
Ferodo 10 4 2 1 7 24<br />
Bosch 11 3 3 - 5 22<br />
Bendix 10 3 2 - 5 20<br />
ITT 5 4 3 1 6 19<br />
AC Delco 8 1 3 1 5 18<br />
GKN 8 5 - - - 13<br />
TRW 5 - 3 1 1 10<br />
Source: Fi<strong>at</strong><br />
Fig.17 – Degree of diversific<strong>at</strong>ion in components<br />
Electromechanical<br />
technologies<br />
Mechanical<br />
technologies<br />
Chemical<br />
technologies<br />
Total<br />
Tot no. of families 17 28 15 60<br />
Fi<strong>at</strong> 15 16 15 46<br />
Lucas 13 8 6 27<br />
Ferodo 12 8 4 24<br />
Bosch 14 7 1 22<br />
Bendix 11 6 3 20<br />
ITT 5 9 5 19<br />
AC Delco 9 7 2 18<br />
GKN 1 11 1 13<br />
TRW 2 7 1 10<br />
Source: Fi<strong>at</strong>
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
The new situ<strong>at</strong>ion required also a change in the way of looking <strong>at</strong> the<br />
component sector. In the past transfer prices between group firms had traditionally<br />
privileged profit objectives of final activities represented by automobiles 61 , but they<br />
had also played as a “safety net” in cases in which captive productions were less<br />
competitive than those developed by independent suppliers 62 . With the new situ<strong>at</strong>ion<br />
it was clear th<strong>at</strong> such policy on the one hand played against the development of<br />
innov<strong>at</strong>ive capabilities by “s<strong>at</strong>ellite” activities, which now had to be highly<br />
developed, and on the other hand took transparency out of management control and of<br />
differences in performance, which in turn had to be able to emerge in order to<br />
stimul<strong>at</strong>e adequ<strong>at</strong>e restructuring efforts.<br />
In tune with such a policy of realignment to the market, the holding company<br />
tried to boost captive component companies to supply other car manufacturers and the<br />
part aftermarket in general. Just to this respect it was decided, in the middle of 1976,<br />
th<strong>at</strong> component firms had to use own makes and own commercial networks for spare<br />
part sales: for example in 1987 Magneti Marelli established own distribution<br />
companies in Italy, France, Spain and Germany.<br />
During those years the most important acquisitions in the component arena<br />
were: Gilardini, sold by Carlo De Benedetti in exchange of a considerable package of<br />
Fi<strong>at</strong> shares (little less than 5%) and Corte & Cosso. But there were also considerable<br />
internal reorganis<strong>at</strong>ions, through the sale and establishment of firms for activities<br />
which were previously integr<strong>at</strong>ed in vehicle manufacturing. In 1977 the organis<strong>at</strong>ion<br />
of component activities were structured along three levels. At the lowest one there<br />
were individual firms. They referred to 7 “Groups”, defined according to the<br />
technological affinity of products and production processes (plastics oper<strong>at</strong>ions,<br />
electromechanical components, carburettors, paint, lubricants, etc.) and the groups<br />
finally converged into the component “Sector” where the str<strong>at</strong>egic coordin<strong>at</strong>ion of<br />
such activities took place.<br />
It was a structure which in 1979 had 37,200 employees, about sixty oper<strong>at</strong>ion<br />
units, almost exclusively oper<strong>at</strong>ing in Italy, a turnover of about 1,460 billion lira.<br />
About 75% of it referred to vehicle components, which for 50% were sold to Fi<strong>at</strong>,<br />
while the remaining 25% fed the aftermarkets. Only a few firms, like Magneti<br />
Marelli, Weber and the rel<strong>at</strong>ed company Borletti, could fe<strong>at</strong>ure constant supply to<br />
other car manufacturers. The establishment of the component “Sector” implied, on the<br />
other hand, an overall examin<strong>at</strong>ion by Fi<strong>at</strong> of objectives and str<strong>at</strong>egies to be assigned<br />
to th<strong>at</strong> area, which was more and more important towards a fast and effective<br />
renov<strong>at</strong>ion of models, as required by the automobile market.<br />
8.3. The reorganis<strong>at</strong>ion of the 1980s<br />
With the present<strong>at</strong>ion of the first consolid<strong>at</strong>ed balance sheet in fiscal year 1981<br />
it was possible to have a complete picture of the structure of the Fi<strong>at</strong> Group. It<br />
fe<strong>at</strong>ured 432 controlled companies and 26 rel<strong>at</strong>ed companies in 60 countries and<br />
oper<strong>at</strong>ing in a wide spectrum of activities 63 .<br />
61 See Comito (1982).<br />
62 Captive production are those carried out by firms controlled by car manufacturers.<br />
63 In the book by Enrietti and Fornengo [1989], from which many interesting pieces of inform<strong>at</strong>ion<br />
were drawn, there are 16 business industries recorded.<br />
61
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
With respect to the “Automobile” sector in the 1980s the L<strong>at</strong>in-American<br />
market fe<strong>at</strong>ured a stage of crisis. During the previous period initi<strong>at</strong>ives over there<br />
were relevant with the establishment of Fi<strong>at</strong> Automoveis in Brazil with particip<strong>at</strong>ion<br />
by the St<strong>at</strong>e of Minas Gerais (1973) and of Sevel in Argentina, with particip<strong>at</strong>ion by<br />
the French company Peugeot (1980). But the unfavourable trend led first to the sale of<br />
Sevel by the two car makers to local capital (Macrì Group) in 1982, and then in Brazil<br />
the retre<strong>at</strong> of the St<strong>at</strong>e of Minas Gerais which forced Fi<strong>at</strong> to acquire all shares of Fi<strong>at</strong><br />
Automoveis (1986). Instead, in the European landscape, automobile activities fe<strong>at</strong>ured<br />
three important acquisitions: Alfa Romeo, acquired in 1986 and incorpor<strong>at</strong>ed in 1987,<br />
the Innocenti make in 1989 and the Maser<strong>at</strong>i make in 1990.<br />
The industrial vehicle sector also carried out acquisitions of some relevance.<br />
The intern<strong>at</strong>ional policy in this sector started in 1974 with the establishment of Iveco<br />
with headquarters in Amsterdam, with a 20% particip<strong>at</strong>ion by the German group<br />
Klockner-Hunboldt-Deutz (KHD), which was reinforced further through the<br />
acquisition of the whole share package. In 1986 the Iveco-Ford Truck Ltd company<br />
was established in Langley (UK) with the aim of manufacturing and distribute<br />
commercial vehicles in UK over 3.5 tons under the two makes.<br />
Even in the sector of agricultural tractors and earth-moving machines during<br />
this decade there was a marked r<strong>at</strong>ionalis<strong>at</strong>ion mainly based upon the acquisition of<br />
new companies previously controlled by the US companies Allis and Ford and finally<br />
to the reunific<strong>at</strong>ion of the various companies coordin<strong>at</strong>ed by Fi<strong>at</strong> Allis and Ford New<br />
Holland in a single sector under the management of the newly established company<br />
New Holland Geotech (1990).<br />
However in the automotive sector (in its wide sense) the most profound<br />
transform<strong>at</strong>ion took place in the component industry. Here it was clearly visible the<br />
outcome induced by the analysis carried out <strong>at</strong> the end of the 1970s, which were<br />
previously highlighted. The Group carried out many acquisitions and sales aimed <strong>at</strong><br />
exiting from technological arenas where the Fi<strong>at</strong> Group believed not to have strong<br />
enough competitive cards, and to acquire new companies in sectors where<br />
perspectives are more promising. The sector in 1986, during the acquisition stage,<br />
coordin<strong>at</strong>ed 100 companies, including controlled and linked, which decreased to 84 in<br />
1987, when the divestment stage begun. On the whole the most important oper<strong>at</strong>ion is<br />
the joint-venture carried out with the French company M<strong>at</strong>ra for the establishment of<br />
a new pole specialised in components (Ufima company) in 1987.<br />
During the middle of the 1980s there was a considerable expansion for<br />
automobile activities in Fi<strong>at</strong> with strong cash gener<strong>at</strong>ion <strong>at</strong> group level, mainly<br />
derived from the intern<strong>at</strong>ional success of the “Uno” model manufactured since 1983.<br />
The consolid<strong>at</strong>ed net profit moved from the modest levels achieved in 1981 and 1982<br />
(90 and 137 billion lira respectively) to larger values which exceeded 2,000 billion in<br />
1986 and 3,000 in 1988. Hence an expansion potential which involved also businesses<br />
outside the automotive one. To this respect the most important acquisition was th<strong>at</strong> of<br />
Snia BPD in which Fi<strong>at</strong> in 1983 had already a minority stake, previously controlled<br />
by the Montedison company. After its integr<strong>at</strong>ion into the Fi<strong>at</strong> Group the Snia was<br />
leading a complex of 85 companies grouped along five entities: defense and space,<br />
fibers, chemical products, textiles and bioengineering. The first four were already<br />
controlled by the leading company in the past, and Fi<strong>at</strong> conferred to it also the<br />
activities previously developed within the group in the bioengineering sector.<br />
62
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
With such move one can say th<strong>at</strong> the Fi<strong>at</strong> Group begins a diversific<strong>at</strong>ion stage<br />
outside the traditional mechanical and metallurgical ones. There grew the idea th<strong>at</strong> the<br />
technological industries where Fi<strong>at</strong> had built its growth in the past could not offer<br />
expansion opportunities which could be compared to more advanced industries such<br />
as defense and space applic<strong>at</strong>ions, chemical products, bioengineering and mainly the<br />
inform<strong>at</strong>ion and telecommunic<strong>at</strong>ion technology. At the middle of the 1980s the<br />
investment and divestment policy seemed to indic<strong>at</strong>e the willingness of Gianni<br />
Agnelli and Fi<strong>at</strong>’s management to pursue a gradual repositioning of the Group<br />
through the growth in more technologically advanced industries.<br />
Fi<strong>at</strong> had initi<strong>at</strong>ed its presence in the telecommunic<strong>at</strong>ions industry already in<br />
1968 with the purchase of a share of 35% of Telettra <strong>SpA</strong>, a company specialised in<br />
the design and manufacturing of telecommunic<strong>at</strong>ion systems, radio and electronic<br />
devices. In 1976 Fi<strong>at</strong> had acquired control of the whole company aiming <strong>at</strong> making it<br />
its main tool in the telecommunic<strong>at</strong>ion industry. Such initi<strong>at</strong>ives did grow manifold<br />
starting in 1982 along with the growth in investments oper<strong>at</strong>ed by S.I.P, a company<br />
controlled by the system of St<strong>at</strong>e Particip<strong>at</strong>ions (IRI) and Italian entity for telephone<br />
networks. Moreover, Telettra acquired in 1988 the control shares in Telettra Norge<br />
and Telettra Española. Such last oper<strong>at</strong>ion, which increase Fi<strong>at</strong> share from 49% to<br />
90% acquired a specific meaning since it entailed an agreement with the Spanish<br />
company: Compañia Telefonica Nacional which acquired the remaining 10% of<br />
Telettra Española. With the oper<strong>at</strong>ions carried out after 1982 Telettra Spa became in<br />
1988 the fifth European maker of TCL systems with a market share of 35% in Italy<br />
and sales abroad for 50% of its turnover.<br />
8.4. The “re-entry” in the 1990s<br />
However such policy of refocusing towards a higher oper<strong>at</strong>ional diversific<strong>at</strong>ion<br />
did not last. With the worsening of the n<strong>at</strong>ional and intern<strong>at</strong>ional economic<br />
trend in the early 1990s Fi<strong>at</strong> went back with the sale of Telettra and the exit from the<br />
telecommunic<strong>at</strong>ion industry. At the time the move was justified by the Company<br />
Report with the fact th<strong>at</strong> the core business of the group was represented by automotive<br />
activities, while other investments, seen as a sort of legacy of the past, had just<br />
a function of anti-cyclical stability for the financial and economic equilibrium of the<br />
group:<br />
“Fi<strong>at</strong> considers the Automotive Sectors as its principal activities and is committed to<br />
fortifying and stabilizing leading positions in the various segments comprised in the business.<br />
The function of the Group’s diversified oper<strong>at</strong>ions, all of which represent activies th<strong>at</strong><br />
d<strong>at</strong>e back to the origins of Fi<strong>at</strong> itself, is to develop both high-tech industrial Sector and<br />
Services, in order to enhance the Group’s subtance and compens<strong>at</strong>e for the cyclical n<strong>at</strong>ure of<br />
its automotive manufacturing activities 64 ”<br />
The argument did not appear convincing both because the diversific<strong>at</strong>ion<br />
policy continued beyond the “origins” of Fi<strong>at</strong>, and because if they were truly activities<br />
linked to the origins one could not see why they could rel<strong>at</strong>e to the High Technology<br />
industry. As a m<strong>at</strong>ter of fact in this case too the Group had applied a r<strong>at</strong>her simple<br />
scheme which consisted in moving along the diversific<strong>at</strong>ion p<strong>at</strong>h any time in which<br />
the favourable trend in the automotive business gener<strong>at</strong>ed enough cash, while selling<br />
such activities in times of financial stress.<br />
64 Fi<strong>at</strong> Annual Report 1991.<br />
63
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
In 1993 there came the sale of Fi<strong>at</strong> particip<strong>at</strong>ion in the retailing industry<br />
(Rinascente). Some years l<strong>at</strong>er, in 1998, the same happened to Snia BPD, acquired<br />
with the aim of diversifying with a long ranging move within a wide range of<br />
activities previously linked to chemical and fibres. In 1999 came the sale of 51% of<br />
Fi<strong>at</strong> Ferroviaria which was sold to the French company Alshton for 153 million euro.<br />
The oper<strong>at</strong>ion entails a “put & call” option which grants Alshton the right of purchase<br />
and Fi<strong>at</strong> the right of sale of the remaining 49% within 2001.<br />
Broadly speaking the aim of such sales (including some less relevant ones),<br />
was th<strong>at</strong> of acquiring financial resources necessary to revamp automotive initi<strong>at</strong>ives,<br />
such as the purchase of the US company Case in the earth moving industry for the<br />
establishment of the Case New Holland Global and of the US company Progressive<br />
Tools & Industries (Pico) and of the French company Renault Autom<strong>at</strong>ion to be<br />
incorpor<strong>at</strong>ed into Comau <strong>SpA</strong>.<br />
In some cases sales were certainly adequ<strong>at</strong>e since they rel<strong>at</strong>ed to industrial<br />
activities which were scarcely competitive, <strong>at</strong> least in the short term. However in<br />
other cases they were sales of activities with good profitability, certainly better than<br />
the majority of the automotive ones, and a competitive position which could not be<br />
neglected on the intern<strong>at</strong>ional side. For example it was the case of Fi<strong>at</strong> Ferroviaria.<br />
The Group had entered the railway m<strong>at</strong>erial industry in 1917 oper<strong>at</strong>ing mainly for the<br />
internal market. During the early 1970s the diffusion of high speed trains did move<br />
Fi<strong>at</strong> Ferroviaria to develop research on a variable-trim train, named “Pendolino”,<br />
specifically studied for tortuous lines such as those present in many areas of Italy and<br />
in areas surrounding the Alps, and capable of oper<strong>at</strong>ing in traditional lines not<br />
specifically designed for high speed trains such as the French TGV and the Japanese<br />
Shikansen. Thanks to these fe<strong>at</strong>ures the Pendolino had acquired good success in the<br />
intern<strong>at</strong>ional landscape and the company did record a considerable average<br />
profitability, around 4% of turnover. Hence, given the perspectives for future<br />
strengthening of European and intern<strong>at</strong>ional railway systems, the str<strong>at</strong>egy of “value<br />
cre<strong>at</strong>ion” for shareholders which had been declared years before by the Turin<br />
company should have suggested a different <strong>at</strong>titude towards this industry.<br />
8.5. Investments and divestments: the theory of the “competitive weight”<br />
In reality by analysing the various oper<strong>at</strong>ions of investment and divestment of<br />
Fi<strong>at</strong> over time one has the impression th<strong>at</strong> the management of Fi<strong>at</strong>, and certainly<br />
Gianni Agnelli, did apply a sort of “competitive weight” theory. It must be said th<strong>at</strong><br />
such idea has never been clearly formul<strong>at</strong>ed by Fi<strong>at</strong> management, and it r<strong>at</strong>her appears<br />
as a sort of “external interpret<strong>at</strong>ion”, made by the writer, on the basis of the analysis<br />
of the whole of initi<strong>at</strong>ives of investment and divestment in the group during the last<br />
three decades. It can be expressed as follows: “in the long term the profitability of an<br />
industrial activity depends (in the Fi<strong>at</strong>’s management view) upon the ability to acquire<br />
a dominant position in the market exerted in a prevailing measure, albeit not<br />
exclusively, by its market share. In other words, if a company managed to acquire a<br />
dominant position, such position represents a sort of “insurance” capable of allowing<br />
the acquisition, beyond highs and lows of the economic trend, of a s<strong>at</strong>isfactory level<br />
of growth and profits. In such sense it would pay more to be “big” in an industry even<br />
though it is rel<strong>at</strong>ively m<strong>at</strong>ure and les dynamic, r<strong>at</strong>her than being outsiders in industries<br />
with big growth r<strong>at</strong>es. N<strong>at</strong>urally this <strong>at</strong>titude mainly refers to industrial activities<br />
directly managed by the Fi<strong>at</strong> management and not the particip<strong>at</strong>ions in the portfolio<br />
64
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
such as for example those achieved by the two financial companies of the Agnelli<br />
family IFI and IFIL which will be analysed shortly.<br />
As a m<strong>at</strong>ter of fact the whole investment policy of Fi<strong>at</strong> management appears as<br />
the applic<strong>at</strong>ion of such scheme:<br />
a) when the management of automotive activities, and cars in particular,<br />
achieve relevant results gener<strong>at</strong>ing considerable financial resources, the management<br />
of Fi<strong>at</strong> carried out “experimental” investments by diversifying into industries which<br />
are believed to be promising;<br />
b) if the favourable trend results to be brief, it is almost unavoidable th<strong>at</strong><br />
positions acquired outside the automotive business is sold after a short stage of direct<br />
management;<br />
c) instead if the growth in the core business is long enough to sustain a<br />
prolonged direct management, the maintaining of the divestment of the activity<br />
depends whether such activity has reached a relevant competitive weight, capable of<br />
placing it within a restricted oligopolistic range;<br />
d) to this respect Fi<strong>at</strong> uses the concept of core business, also because it is th<strong>at</strong><br />
most widely supported by US managerial liter<strong>at</strong>ure, but as a m<strong>at</strong>ter of fact wh<strong>at</strong> is<br />
placed within the “core” and “non core” areas does not depend upon the technological<br />
homogeneity with the automotive industry, but whether some activity is part of the<br />
leading oligopoly which controls the market. Such market could be the Italian<br />
domestic one for some industries whose intern<strong>at</strong>ionalis<strong>at</strong>ion process is restrained by<br />
juridical or tariff barriers (such as the “Publishing and Communic<strong>at</strong>ion” or the<br />
“Insurance” ones), or the European or worldwide ones if the intern<strong>at</strong>ionalis<strong>at</strong>ion of<br />
markets is a consolid<strong>at</strong>ed reality.<br />
Given th<strong>at</strong> for the Fi<strong>at</strong> Group automotive is referred to as “core business” and<br />
cars are the reference point within th<strong>at</strong>, clearly more relevant than commercial<br />
vehicles and agricultural and earth moving equipment, one should see th<strong>at</strong> the<br />
component industry, and auto components in particular, belongs to the core business<br />
to a wider extent than such two industries and th<strong>at</strong> of autom<strong>at</strong>ed production systems<br />
led by Comau, not to speak about “Publishing and Communic<strong>at</strong>ion” and “Insurance”.<br />
However it is known th<strong>at</strong> the Magneti Marelli group, after some partial sales, already<br />
m<strong>at</strong>erialised in 1999 with the sale of “rot<strong>at</strong>ing machines”, “fuel control systems” and<br />
“lubricants” 65 is due to be broken into parts and sold to intern<strong>at</strong>ional automotive<br />
component manufacturers. Moreover, Magneti Marelli profitability is not astonishing,<br />
but certainly higher than other activities considered not for sale as integral part of the<br />
“core business”.<br />
But here wh<strong>at</strong> comes into play is mainly the fact th<strong>at</strong> Magneti Marelli cannot<br />
enjoy a relevant oligopolistic weight which places it within the restricted group of<br />
industry leaders. Fi<strong>at</strong> during the years has carried out many initi<strong>at</strong>ives of grouping and<br />
r<strong>at</strong>ionalis<strong>at</strong>ion of the sector, as shown in Fig. 18, right with the aim of providing it<br />
with the necessary “weight”, but unfortun<strong>at</strong>ely the evolution of the intern<strong>at</strong>ional<br />
globalis<strong>at</strong>ion in the industry has been so fast th<strong>at</strong> the gain of a leadership position<br />
65 The lubricant division of Magneti Marelli, recently sold, was traditionally one of the most profitable<br />
divisions in Magneti Marelli, and hence appeared as one of the activities capable of a sustained value<br />
cre<strong>at</strong>ion for shareholders.<br />
65
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
would have required a policy of acquisitions so vast and urgent to be practically<br />
impossible.<br />
On the other hand one must ask himself whether Fi<strong>at</strong> would have sold Telettra<br />
in case of a positive outcome for the agreement between Fi<strong>at</strong> and Stet, financial<br />
company of the IRI group, leading entity in telecommunic<strong>at</strong>ions, which had<br />
m<strong>at</strong>erialised into the Telit company, through the coupling of Telettra and Italtel, with<br />
the aim of establishing, with the support of Mediobanca, the n<strong>at</strong>ional pole of<br />
telecommunic<strong>at</strong>ions.<br />
In the end the guiding principles of the policy of acquisition and divestment of<br />
the Fi<strong>at</strong> Group seem deeply influenced by a sort of p<strong>at</strong>h dependence linked to the<br />
history of the company and in particular to its position of undisputed leader in the<br />
internal market and then of member of a restricted group of manufacturers in the<br />
European and then worldwide landscape, ruling out solutions as a possible merger<br />
with the DaimlerChrysler Group which would have inevitably led to a loss of<br />
autonomy. This means also th<strong>at</strong> the management of Fi<strong>at</strong> tends to discard as a m<strong>at</strong>ter of<br />
principle the possibility to play the outsider role in industries with high growth r<strong>at</strong>es<br />
but with high risk, where an aggressive company, with a winning managerial or<br />
technological idea, could gener<strong>at</strong>e increases in value for shareholders by far higher<br />
than those traditionally afflicted by excess capacity on a worldwide scale like<br />
automobiles. On this standpoint the management of Fi<strong>at</strong> shows no interest towards<br />
oper<strong>at</strong>ions which are limited on the investment side, but aimed <strong>at</strong> valorising own<br />
entrepreneurial ideas (or belonging to small emerging companies), to be sustained<br />
through forms of joint venture.<br />
In theory a large group as the Turin one, with a vast intern<strong>at</strong>ional experience,<br />
solid commercial rel<strong>at</strong>ionships with a wide range of large intern<strong>at</strong>ional groups and<br />
markets, would seem the ideal partner to invest in a range of initi<strong>at</strong>ives quantit<strong>at</strong>ively<br />
small, on the investment standpoint, but with high risk and returns even higher in case<br />
of success. The added value which Fi<strong>at</strong> could place into these kind of joint-ventures<br />
would be to limit the risks to which firms without a management with intern<strong>at</strong>ional<br />
st<strong>at</strong>ure and links - which instead the Fi<strong>at</strong> Group could provide - would be exposed.<br />
66
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
Fig.18 – Fi<strong>at</strong> Group Investments and Divestments<br />
Sectors 1970-1974 1975-1979 1980-1984 1985-1989 1990-94 1995-1999<br />
No.inv No.div No.inv No.div No.inv No.div No.inv No.div No.inv No.div No.inv No.div Total<br />
Automobiles 1 1 2 1 3 3 1 12<br />
Comme rcial Vehicles 1 1 1 1 4<br />
Agricultural & earthmoving Equip. 1 4 1 3 3 1 1 14<br />
Metallurgical Products 1 1 2<br />
Components 1 1 5 4 1 3 5 4 1 25<br />
Autom<strong>at</strong>ed Production Systems 2 2<br />
Avi<strong>at</strong>ion 1 1 2<br />
Publishing & Communic<strong>at</strong>ions 1 1 1 1 4<br />
Insurance 1 1 2<br />
Source: Fi<strong>at</strong> Annual Reports<br />
Others 1 1 2 2 1 2 2 11<br />
Total 5 2 12 2 6 2 14 2 13 7 10 3 78<br />
67
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
9. The Research & Development Policy of Fi<strong>at</strong><br />
9.1. Research activities as a whole<br />
Research and development activities have always played a relevant role in<br />
building the competitiveness of the Fi<strong>at</strong> Group even though, as it will be shown l<strong>at</strong>er,<br />
the trend of such investments over time has been influenced by the economic trend of<br />
the various company businesses. In absolute terms the Turin group represents one of the<br />
largest research centres in the Italian economic system, with an expense th<strong>at</strong> in the year<br />
2000 amounted to 1,725 million euro. The whole of R&D activities are carried out in a<br />
range of centres, of which many are loc<strong>at</strong>ed within manufacturing plants, mainly with<br />
respect to new product design and development. On the whole the Fi<strong>at</strong> Group has 131<br />
Italian and foreign R&D centres which in the year 2000 have involved 13,000<br />
technicians and researchers.<br />
With respect to the activities of base research the Fi<strong>at</strong> Group has some<br />
specialised centres which oper<strong>at</strong>e in a “horizontal” way, with effects on all Group<br />
sectors, such as the Centro Ricerche Fi<strong>at</strong> – CFR (Fi<strong>at</strong> Research Centre) and the<br />
company Elasis.<br />
9.2. The Fi<strong>at</strong> Research Centre<br />
With a wealth of particularly high-tech equipment, over 900 technicians and<br />
researchers, with a network of over 1,000 external researchers, often represented by<br />
scientists and university scholars, the CFR is the most important Italian priv<strong>at</strong>e research<br />
centre which oper<strong>at</strong>es not only for Fi<strong>at</strong> sectors but also for other entities which are<br />
external to the Group, in general for small and medium Italian firms. In the year 2000<br />
the Centre has transferred to the many Group sectors 110 new products/processes and<br />
156 oper<strong>at</strong>ional methodologies, and has carried out over 300 initi<strong>at</strong>ives of consulting<br />
and technological transfer towards suppliers of the Fi<strong>at</strong> Group and towards other small<br />
and medium firms.<br />
The str<strong>at</strong>egy of intern<strong>at</strong>ionalis<strong>at</strong>ion of the CRF has led over recent years to a<br />
wide particip<strong>at</strong>ion to European Union research programmes. In the year 2000, 49 new<br />
projects have been awarded to the CRF, which, added to the ones previously awarded,<br />
position the CRF as the leader in European research by number of approved projects<br />
within the “Fifth Programme Framework”. On a n<strong>at</strong>ional base the CFR, in the year<br />
2000, has presented 16 new research projects for a total investment of over 80 million<br />
euro. The relevance of the investment in R&D co-financed by intern<strong>at</strong>ional and n<strong>at</strong>ional<br />
public institutions must be particularly underlined since it represents a significant<br />
enlargement of expenses for research compared to th<strong>at</strong> managed within the various<br />
manufacturing units of the group, even though understandably the achieved results of<br />
this second kind of activity cannot be appropri<strong>at</strong>ed exclusively by Fi<strong>at</strong> as they are<br />
subject to regul<strong>at</strong>ion entailed in contracts of public co-financing of research.<br />
are:<br />
Among the most important results achieved over recent years by the CRF there<br />
68
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
- Multijet, a second gener<strong>at</strong>ion (1999) “common rail” injection system which has<br />
many significant improvements compared to the first gener<strong>at</strong>ion one 66 . The new<br />
system allows to reduce fuel consumption by 20% compared to other common<br />
rail systems, allowing also to meet European emission regul<strong>at</strong>ions named as<br />
Euro 4, which will be enforced in 2005. The Fi<strong>at</strong> solution is particularly relevant<br />
because the compliance is achieved without costly systems of post-tre<strong>at</strong>ment <strong>at</strong><br />
exhausts.<br />
- The development of the Ecobasic concept car for which over 50 p<strong>at</strong>ents have<br />
been registered (1999). This concept car has a second gener<strong>at</strong>ion common rail<br />
diesel engine of 1,200 cc, already Euro 4 compliant and with a fuel consumption<br />
below 3 litres per 100 km.<br />
- The development of a vehicle prototype with fuel cell powered by hydrogen,<br />
developed with a partial financing by the Italian Ministry of the Environment. It<br />
is a prototype which has considerably expanded the performance of a<br />
conventional electric car already manufactured and distributed by Fi<strong>at</strong>. It is the<br />
Fi<strong>at</strong> Seicento Elettra which, thanks to the new device, has seen its fuel<br />
autonomy grow by 70% with a recharging time of only 10 minutes.<br />
- The Concept Tripm<strong>at</strong>e NEA, a vehicle prototype developed on behalf of Fi<strong>at</strong><br />
Auto within Intelligent Transport Systems Programme aiming <strong>at</strong> high safety<br />
standards and <strong>at</strong> expanding the driver communic<strong>at</strong>ion potential through new<br />
opportunities of Inform<strong>at</strong>ion and Communic<strong>at</strong>ion Technology.<br />
- A new commercial vehicle required by the Iveco company, head of the Fi<strong>at</strong><br />
group for the commercial vehicle sector, named InfoDaily, which allows to<br />
access a range of integr<strong>at</strong>ed services: mobile telephony, traffic inform<strong>at</strong>ion,<br />
remote roadside assistance, logistics tracking management, tele-navig<strong>at</strong>ion, telediagnosis.<br />
9.3. The Elasis company<br />
Elasis is a company established by the Fi<strong>at</strong> Group with the aim of developing in<br />
Southern Italy a technical-scientific network providing innov<strong>at</strong>ion to the manufacturing<br />
units of the group. Its structure encompasses 7 R&D centres and over 1,000 researchers<br />
and technicians. The most relevant competences of Elasis are focussed on the area of<br />
vehicles, telecommunic<strong>at</strong>ions, aeronautics, environment/safety. Virtual reality<br />
techniques are used to develop new vehicles and to fine-tune new control str<strong>at</strong>egies for<br />
electronic systems which manage the main vehicle functions.<br />
The agreement between Fi<strong>at</strong> and General Motors had an important impact over<br />
the activity of Elasis which has launched the study of a new engine particularly aimed <strong>at</strong><br />
fuel economy and the design of a new gearshift/transmission with reduced size and wide<br />
fields of applic<strong>at</strong>ion. They are examples thought mainly towards common pl<strong>at</strong>forms for<br />
the new Fi<strong>at</strong> and General Motors models, in the medium-high product segments.<br />
66 As it is known also the first “unijet common rail” system has been developed by the CRF in 1998 and<br />
l<strong>at</strong>er on sold to Bosch for the following industrialis<strong>at</strong>ion stage.<br />
69
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9.4. The evolution of Fi<strong>at</strong> R&D investment<br />
In the decade 1991-2000 the policy of R&D investment in the Fi<strong>at</strong> Group has<br />
marked some vari<strong>at</strong>ions due to a plurality of factors, among which the most important<br />
are:<br />
- The trend in the oper<strong>at</strong>ing income in the automotive sector;<br />
- The choices of focusing the Group around automotive sectors in the broader<br />
sense;<br />
- The reduction in the degree of vertical integr<strong>at</strong>ion within the automotive and the<br />
vehicle sector in particular.<br />
With respect to the first aspect the most visible element is a marked cyclical<br />
trend in the cre<strong>at</strong>ion of profit and cash-flow. The Group had enjoyed up to the end of the<br />
1980s a stage of strong expansion, led mainly by the automotive sector which had<br />
achieved a considerable growth also in Europe, but mainly in Italy with record sales<br />
levels and with very high market shares of Fi<strong>at</strong>, equal to almost 60% of the domestic<br />
market. All makes of the Fi<strong>at</strong> Group took advantage of such trend (Fi<strong>at</strong>, Alfa Romeo,<br />
Lancia and Innocenti). During these years the R&D investment was quite high, in the<br />
order of 4.5% of sales turn-over of industrial sectors, with a peak of 5% in the auto<br />
sector in 1990.<br />
However with the beginning of the new decade the competitiveness of Fi<strong>at</strong><br />
appeared on a downward trend both in the European market and in the domestic one,<br />
where the renewed aggressiveness of foreign automakers could be felt in terms of loss<br />
of market share in models of medium segments (“Tipo”) and medium-large ones<br />
(“Croma”) which had entered a downward trend in their lifecycle. Such competitive<br />
evolution had neg<strong>at</strong>ively influenced the financial and economic trend of the Group<br />
which had tried <strong>at</strong> the beginning of the decade to maintain a high level of R&D<br />
investments, kept between 1991-93 over 4.5% of sales in the auto sector and over 4% in<br />
the whole of the group (Fig.19). Unfortun<strong>at</strong>ely the competitive landscape had worsened<br />
further in 1993, with a marked sales downturn in the domestic market. Such downturn<br />
had mainly hit domestic makes, whose market share for the first time fell below 45%.<br />
Hence the dilution in financial resources of Fi<strong>at</strong> turned into a marked reduction in the<br />
R&D investment, which decreased after many years below the threshold of 3% of sales,<br />
with a weight for automobiles compar<strong>at</strong>ively lower than for the rest of the group.<br />
Such stage of slowing down is still on, mainly due to the neg<strong>at</strong>ive economic<br />
trend in the auto sector which has recorded neg<strong>at</strong>ive oper<strong>at</strong>ional results in 1992 and<br />
1993, modest results between 1994 and 1997, neg<strong>at</strong>ive results again in 1998 and 1999,<br />
and a modest comeback in the year 2000 (44 million euro in the auto sector). Such trend<br />
cannot but raise worries since, if it is obvious th<strong>at</strong> the adverse economic trend in the<br />
sector makes it harder to find resources to be invested into the development of new<br />
models, it is obvious as well th<strong>at</strong> an actual comeback in competitiveness can take place<br />
only through a policy of profound renov<strong>at</strong>ion of the product range. Such renov<strong>at</strong>ion,<br />
however, when looking <strong>at</strong> the whole of segments, has not m<strong>at</strong>erialised, but should be<br />
put in place in 2002 with the new models of Fi<strong>at</strong> (Stilo, Stilo S.W. and Ulysse), Alfa<br />
Romeo (GTA) and Lancia (Thesis and New Y) .<br />
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Volp<strong>at</strong>o - Fi<strong>at</strong><br />
6,0%<br />
5,0%<br />
4,0%<br />
3,0%<br />
2,0%<br />
1,0%<br />
0,0%<br />
4,9%<br />
4,8%<br />
4,4% 4,2%<br />
4,6%<br />
4,1%<br />
Fig.19 - R&D Expenses as % of Turn-over<br />
2,8%<br />
2,9%<br />
3,0%<br />
2,4% 2,3%<br />
2,8%<br />
2,5%<br />
2,0%<br />
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000<br />
Source: Fi<strong>at</strong> <strong>SpA</strong> Annual Reports<br />
Fi<strong>at</strong> Auto Fi<strong>at</strong> Gruppo<br />
2,4%<br />
2,8%<br />
2,9%<br />
2,9%<br />
3,0%<br />
71<br />
3,0%
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
The pessimism emerging from the mere analysis of d<strong>at</strong>a concerning R&D<br />
spending, must however be eased in the light of a policy of redefinition in the whole of<br />
activities of the group aiming <strong>at</strong> privileging mainly the so-called core business and <strong>at</strong><br />
reducing the degree of vertical integr<strong>at</strong>ion in the automobile sector. In fact with these<br />
two kinds of policies the Fi<strong>at</strong> Group has redesigned the profile of the group’s borders by<br />
considerably reducing some industrial activities previously carried out internally, and<br />
which being aimed <strong>at</strong> manufacturing investment goods (railway sector), intermedi<strong>at</strong>e<br />
products (fibers) and automotive components required R&D investments. Such<br />
significant transform<strong>at</strong>ion in the group structure and in the degree of vertical integr<strong>at</strong>ion<br />
(reduction of upward activities in the automobile filière) cannot be directly traced<br />
through a simple index of the intensity of R&D expense as the r<strong>at</strong>e of investment<br />
compared to turnover.<br />
There follows th<strong>at</strong>, in reality, the reprise of R&D investment recorded between<br />
1997 (where a minimum of 2% has been hit) and 3% recorded in the year 2000, has<br />
been gre<strong>at</strong>er than wh<strong>at</strong> these two figures seem to indic<strong>at</strong>e, since the concentr<strong>at</strong>ion of<br />
R&D efforts has grown, with focus mainly on total vehicle design, reducing the<br />
involvement in components. To this respect it can be reasonably argued th<strong>at</strong> over the<br />
coming years the total investment is bound to return to levels of excellence, both due to<br />
innov<strong>at</strong>ion initi<strong>at</strong>ives stemming from cooper<strong>at</strong>ion agreements with General Motors, and<br />
due to the wide renov<strong>at</strong>ion program of the whole automobile product range, recently<br />
announced by Fi<strong>at</strong> Top Management.<br />
10. Fi<strong>at</strong>’s financial trends and stock quot<strong>at</strong>ion<br />
10.1. The financial-economic trend of the Group<br />
Notwithstanding a st<strong>at</strong>ed commitment by Fi<strong>at</strong> top management to develop a<br />
str<strong>at</strong>egy for value cre<strong>at</strong>ion for the Group, the results obtained since 1996, year in which<br />
such orient<strong>at</strong>ion has become an explicit goal, did not m<strong>at</strong>ch shareholders’ expect<strong>at</strong>ions.<br />
As usual to ascertain the multitude of causes which concurred to determine such result<br />
is quite a complex task. However the main reasons can be grouped as follows:<br />
- A neg<strong>at</strong>ive economic trend in some markets which were important for the<br />
Group;<br />
- The higher degree of competitiveness in the industries which were considered as<br />
core business for the Turin company;<br />
- A slowdown in the renov<strong>at</strong>ion cycle of models, some of which did not achieve<br />
the expected targets in the market.<br />
If one looks <strong>at</strong> the d<strong>at</strong>a on total turnover of the Group and for individual sectors<br />
(Fig.20) one can see th<strong>at</strong> turnover has remained high in all sectors, and even marking<br />
some significant increases. Such increases are partly due to acquisitions carried out by<br />
Fi<strong>at</strong> within its globaliz<strong>at</strong>ion str<strong>at</strong>egy.<br />
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Volp<strong>at</strong>o - Fi<strong>at</strong><br />
Fig.20 – Net Revenue per Sector<br />
1996 1997 1998 1999 2000<br />
Fi<strong>at</strong> Group Net Revenue<br />
Million euro<br />
40,244 46,257 45,769 48,123 57,555<br />
Fi<strong>at</strong> Auto<br />
Million euro<br />
21,950 26,201 24,859 24,101 25,361<br />
CNH Global<br />
Million euro<br />
4,419 5,284 5,127 5,246 10,770<br />
Iveco<br />
Million euro<br />
5,551 5,850 6,649 7,387 8,611<br />
Teksid<br />
Million euro<br />
1,012 1,190 1,165 1,682 1,873<br />
Magneti Marelli<br />
Million euro<br />
2,998 3,451 3,793 4,062 4,451<br />
Comau<br />
Million euro<br />
831 841 843 1,693 2,440<br />
Fi<strong>at</strong> Avio<br />
Million euro<br />
901 1,262 1,361 1,361 1,491<br />
Altre <strong>at</strong>tività<br />
Million euro<br />
2,582 2,178 1,972 2,591 2,558<br />
Source: Our elabor<strong>at</strong>ion from Fi<strong>at</strong> Group Consolid<strong>at</strong>ed Annual Reports<br />
This is the case of earth moving equipment and tractors, led by CNH Global,<br />
born after the merger between the US company Case and the previous head of sector<br />
New Holland, and th<strong>at</strong> of autom<strong>at</strong>ic manufacturing systems in which Comau, head of<br />
sector, carried out important acquisitions in the USA, France and Germany 67 . On the<br />
other hand they indic<strong>at</strong>e th<strong>at</strong> the group companies preferred to carry out a firm defense<br />
of their own market shares even in situ<strong>at</strong>ions which were objectively difficult, as in the<br />
automobile sector.<br />
Hence a trend in the oper<strong>at</strong>ing income (Fig.21) which on the whole is not very<br />
s<strong>at</strong>isfying mainly due to the automobile sector, which in 1998 suffered the impact of the<br />
economic crisis in L<strong>at</strong>in America, and th<strong>at</strong> of earth moving equipment, due to the costs<br />
of integr<strong>at</strong>ion among the companies in the sector and the recently acquired Case, which<br />
suffered the hard situ<strong>at</strong>ion of this market on an intern<strong>at</strong>ional scale.<br />
The policy of globaliz<strong>at</strong>ion pursued by Fi<strong>at</strong> has required gre<strong>at</strong> investments both<br />
on the manufacturing and on the financial side linked to acquisitions 68 . Such<br />
acquisitions were only for a small part financed through cash flow gener<strong>at</strong>ed by<br />
oper<strong>at</strong>ions. The remaining and largest share has benefitted, with respect to the<br />
automobile sector, from the subscription of shares by General Motors, linked to a sale of<br />
67 See the part focusing on the analysis of investments.<br />
68 Among “acquisitions” one should also consider the two purchasing public offerings moved by Fi<strong>at</strong> <strong>SpA</strong><br />
to acquire 100% of capital of Magneti Marelli (components) and Toro (insurance) for an expense of 3,300<br />
million euro.<br />
73
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
20% of the equity of Fi<strong>at</strong> Auto and, with respect to automotive components, from the<br />
sale of he “Lubricants” division of Magneti Marelli. On the whole however the financial<br />
resources required by the Group str<strong>at</strong>egy have determined a marked increase in debt,<br />
only partially eased by the sales carried out in non-core industrial activities, as in rail<br />
systems and textile fibers.<br />
Fig.21 - Oper<strong>at</strong>ing Income<br />
1996 1997 1998 1999 2000<br />
Fi<strong>at</strong> Group Oper<strong>at</strong>ing Income<br />
Million euro<br />
1.225 1.787 746 788 855<br />
Fi<strong>at</strong> Auto<br />
Million euro<br />
242 758 (108) (121) 44<br />
CNH Global<br />
Million euro<br />
393 601 452 371 45<br />
Iveco<br />
Million euro<br />
161 202 261 311 489<br />
Teksid<br />
Milioni di euro<br />
30 53 42 76 101<br />
Magneti Marelli<br />
Million euro<br />
81 98 56 108 55<br />
Comau<br />
Million euro<br />
35 27 (1) 43 87<br />
Fi<strong>at</strong> Avio<br />
Million euro<br />
34 56 60 109 143<br />
Altre <strong>at</strong>tività<br />
Million euro<br />
249 8 23 109 (109)<br />
Source: Fi<strong>at</strong> Group Consolid<strong>at</strong>ed Annual Reports<br />
The net financial position in the year 2000 marked net debts for 6,467 million<br />
euro, 2,436 million higher than the previous year. As a consequence the increase in total<br />
interest costs did play a significant influence over the net profitability of the Group.<br />
10.2. Value cre<strong>at</strong>ion<br />
The result of the above mentioned trend has determined in the 1996-2000 period<br />
a return on investment for the Fi<strong>at</strong> Group, defined as a r<strong>at</strong>io between the annual result<br />
(equal to the sum of the Oper<strong>at</strong>ing Income plus the Income from particip<strong>at</strong>ions) and the<br />
average net capital employed, of neg<strong>at</strong>ive value (value destruction) for all the years with<br />
the only exception of 1997, in which there was value cre<strong>at</strong>ion for 144 million euro<br />
(Fig.22). Such result was considered clearly uns<strong>at</strong>isfactory by the top management of<br />
Fi<strong>at</strong>, and it was gener<strong>at</strong>ed notwithstanding the improvement in the intern<strong>at</strong>ional<br />
financial trend and the reduction in interest r<strong>at</strong>es by the Federal Reserve and by the<br />
European Monetary Union has allowed a decrease in the WACC for Fi<strong>at</strong> from 12% to<br />
74
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
10% during the last two years (1999-2000). This means th<strong>at</strong> while in the 1996-1998<br />
period the return on investment necessary to cre<strong>at</strong>e value had to exceed the threshold of<br />
12%, during the following two years th<strong>at</strong> threshold was just 10%.<br />
These d<strong>at</strong>a show with gre<strong>at</strong> evidence the urgency which Fi<strong>at</strong> had to rapidly<br />
complete the reorganiz<strong>at</strong>ion in the Group activities, and in particular those in the two<br />
most important ones for turnover and investment (Automobiles and Earth moving<br />
equipment) which were responsible for the missed objective of value cre<strong>at</strong>ion.<br />
Fig.22 - Main financial and economic d<strong>at</strong>a<br />
1996 1997 1998 1999 2000<br />
Group net income<br />
Million euro<br />
1,225 1.248 621 353 664<br />
Objective return on capital<br />
employed<br />
12.0% 12.0% 12.0% 10.0% 10.0%<br />
Actual return on capital<br />
employed<br />
8.5% 12.8% 7.7% 7.0% 6.0%<br />
Value cre<strong>at</strong>ion(*)<br />
in absolute term<br />
(607) 144 (714) (480) (899)<br />
Distributed dividends<br />
Million euro<br />
361.1 361.1 353.7 353.7 353.7<br />
Market capitalis<strong>at</strong>ion<br />
Million euro<br />
10,108 12,423 13,740 13,734 12,706<br />
(*) Difference between the Oper<strong>at</strong>ing Income of the year, including income from<br />
particip<strong>at</strong>ions, and the average net cost of capital employed.<br />
Source: Our elabor<strong>at</strong>ion from Fi<strong>at</strong> Group Consolid<strong>at</strong>ed Annual Reports<br />
To this respect it is relevant to fully exploit the synergies which can be achieved<br />
in the automobile sector through the alliance with General Motors which will be<br />
examined shortly.<br />
10.3. Dividends, market capitaliz<strong>at</strong>ion and share value<br />
In such delic<strong>at</strong>e evolution the management of Fi<strong>at</strong> carried out a “conserv<strong>at</strong>ory”<br />
policy with respect to dividend distribution. Differently from the tradition of US public<br />
companies, in which the policy of income distribution constantly m<strong>at</strong>ches short-term<br />
profitability, Fi<strong>at</strong> has always carried out a policy of considerable re-investment during<br />
favorable years, both to finance expansion and diversific<strong>at</strong>ion str<strong>at</strong>egies for the group,<br />
on which we have already talked about in another chapter, and to accumul<strong>at</strong>e reserves to<br />
use to level distribution of dividends during less favourable years.<br />
As shown in Figure 23, Fi<strong>at</strong> has adopted this policy also in the five years<br />
considered during which the low profitability r<strong>at</strong>e has not prevented a distribution of<br />
75
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
dividends in the last three years as well, which was only marginally lower than in years<br />
with a more brilliant economic result. However the policy of dividend support carried<br />
out by Fi<strong>at</strong> has turned out insufficient to sustain the trend in stock values 69 which have<br />
recorded a downward trend for some time.<br />
In general, considering the trend in stock values during a large time span (from<br />
1984 to December 2000), one can see th<strong>at</strong> the stock has recorded r<strong>at</strong>her big movements,<br />
clearly linked to the trend in financial and economic results, but also due to specul<strong>at</strong>ive<br />
rumours on financial oper<strong>at</strong>ions of extraordinary scope, which however did not happen.<br />
Hence <strong>at</strong> the end of 1986 there was a strong upward trend in stock values due to<br />
the favourable financial-economic trend of the Group, which reached its peak with the<br />
acquisition of Alfa Romeo which Fi<strong>at</strong> successfuly won over Ford. In January 1997 the<br />
value of common stock of Fi<strong>at</strong> <strong>SpA</strong> was <strong>at</strong> its historical peak of 44.4 euro.<br />
However the stage of contrast between Cesare Romiti, Chairman of the Group,<br />
and Vittorio Ghidella, Chairman of Fi<strong>at</strong> Auto, which became evident in 1988, cre<strong>at</strong>ed a<br />
clim<strong>at</strong>e of uncertainty which was exacerb<strong>at</strong>ed further by the resign<strong>at</strong>ion of Vittorio<br />
Ghidella and by the slowdown in the renov<strong>at</strong>ion in the product range which came after<br />
it. Then came a stage of reduction in the competitiveness of the automobile sector,<br />
which influenced the whole group with a very neg<strong>at</strong>ive effect on the financial and<br />
economic results, aggrav<strong>at</strong>ed further by the market crisis during the early 1990s. During<br />
th<strong>at</strong> stage the stock value reached its minimum of the 1994-2000 period, with 11.1 euro.<br />
69 As it is known the stocks of Fi<strong>at</strong> <strong>SpA</strong> are divided into three kind of shares: common (with right to<br />
vote), privileged and savings. To keep things simple, here we refer just to common shares.<br />
76
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
Euro<br />
50<br />
45<br />
40<br />
35<br />
30<br />
25<br />
20<br />
15<br />
10<br />
5<br />
0<br />
1/1/84<br />
1/1/85<br />
Fig.23 - Fi<strong>at</strong> <strong>SpA</strong> stock value by quarter<br />
1/1/86<br />
1/1/87<br />
1/1/88<br />
Source: Milan Stock Exchange<br />
1/1/89<br />
1/1/90<br />
1/1/91<br />
1/1/92<br />
1/1/93<br />
1/1/94<br />
1/1/95<br />
1/1/96<br />
1/1/97<br />
1/1/98<br />
1/1/99<br />
1/1/00<br />
77
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
Only with the turnaround in sales which followed the launch of the Fi<strong>at</strong> Punto<br />
model in 1994, which strengthened further in 1995, the stock value showed signs of<br />
take-off, which however did soften already in 1996. L<strong>at</strong>er because of rumors on an<br />
incoming financial oper<strong>at</strong>ion by Fi<strong>at</strong>, involving the automobile sector, gener<strong>at</strong>ed an<br />
increase in the stock value mainly due to specul<strong>at</strong>ive movements. The most credited<br />
hypothesis around the stock market, and reinforced by the analysis of highly known<br />
financial consultants, was th<strong>at</strong> negoti<strong>at</strong>ions were in place between the Daimler-<br />
Chrysler Group and Fi<strong>at</strong> for the de-merging and sale of Fi<strong>at</strong> Auto to the German-US<br />
group.<br />
Such oper<strong>at</strong>ion, besides the difficulties which emerged l<strong>at</strong>er on within the<br />
Daimler-Chrysler Group for the neg<strong>at</strong>ive trend in sales of the US brand, did have an<br />
industrial logic of its own, and such logic fed a flow of upward negoti<strong>at</strong>ions in stocks<br />
which rapidly exceeded 41 euro.<br />
However the rumors in the stock market were based upon the hypothesis, l<strong>at</strong>er<br />
on disconfirmed by facts, th<strong>at</strong> not only the Agnelli family but also the Honorary<br />
President Gianni Agnelli had m<strong>at</strong>ured the idea th<strong>at</strong> in the new era of globaliz<strong>at</strong>ion the<br />
opportunities of comeback for Fi<strong>at</strong> Auto could m<strong>at</strong>erialize only within a mega-merger<br />
which gave the lead of the automobile sector outside Fi<strong>at</strong> and outside the Agnelli<br />
family itself. It was a wrong hypothesis, particularly in a stage in which Fi<strong>at</strong> was<br />
preparing to celebr<strong>at</strong>e the historical record of a century of life of the company and of<br />
its automobile brand. If one had considered the effects of such a traum<strong>at</strong>ic event, as<br />
the sale of automobile activities of Fi<strong>at</strong>, would have inevitably produced for the Turin<br />
company, and for the intern<strong>at</strong>ional image of the Agnelli family and for the charism<strong>at</strong>ic<br />
figure of Gianni Agnelli, it would have been evident th<strong>at</strong> such hypothesis could<br />
m<strong>at</strong>erialize only in case of a crisis with no way out in the auto sector within the Fi<strong>at</strong><br />
Group, which clearly was not the case.<br />
However it is worth pointing out th<strong>at</strong> the analysts of consulting companies and<br />
institutional investors did express some neg<strong>at</strong>ive views over the agreement between<br />
Fi<strong>at</strong> and General Motors. For some the critiques were based upon the missed<br />
opportunity in increase in the stock value, which in fact marked a rapid and<br />
considerable decrease. For other, not conditioned by expect<strong>at</strong>ions for higher stock<br />
values, skepticism derived from the fact th<strong>at</strong> it was not clear yet in which way the<br />
agreement would have produced the conditions for the management turnaround which<br />
was believed to be necessary not only for Fi<strong>at</strong> Auto, but also for General Motors.<br />
Hence an <strong>at</strong>titude of wait-and-see with some skepticism.<br />
11. The GM-Fi<strong>at</strong> alliance<br />
11.1. The objectives of the alliance<br />
General Motors is the largest automaker with an annual production (as of<br />
2000) of over 8.5 million vehicles, equal to 15% of world production, with total<br />
employment of 386,000 units and turnover over $ 184 billion, 87% of which achieved<br />
in vehicle sales. Hence it stands out as the best positioned automaker from the<br />
intern<strong>at</strong>ional competitive perspective, to the point th<strong>at</strong> its commercial presence is significant<br />
in all the main commercial areas, with market shares equal to: 26.7% in North<br />
78
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
America, 9.3% in Europe, 16.3% in the whole of L<strong>at</strong>in America, Africa and Middle<br />
East, and 3.7% in the Asia-Pacific zone.<br />
However the General Motors giant seems to have lost part of its past dynamic<br />
<strong>at</strong>titude, and fe<strong>at</strong>ures some areas in which financial and economic results are not as<br />
brilliant as one would expect for such an automaker (for example in the USA) or they<br />
even record some losses (as Opel oper<strong>at</strong>ing in Europe). During recent years GM has<br />
also suffered the confront<strong>at</strong>ion with its traditional competitor, Ford Motor Company,<br />
who managed to achieve better results and to fe<strong>at</strong>ure an image of higher<br />
aggressiveness. For example, the recent decision by General Motors to stop<br />
manufacturing vehicles with the Oldsmobile brand appears as an evident sign of<br />
weakness which in some way had to be balanced by some wide ranging initi<strong>at</strong>ive<br />
which could boost image of the Detroit automaker.<br />
General Motors had and certainly has the resources to carry out acquisitions,<br />
however for the top management an initi<strong>at</strong>ives based upon an alliance fe<strong>at</strong>ures a set of<br />
advantages which are believed as essential for the new competitive clim<strong>at</strong>e, as the<br />
company recently underlined:<br />
“Alliances are sometimes the only option th<strong>at</strong> available companies will<br />
consider. Quite simply, we are not in the business of acquiring company we cannot<br />
work with on a partnership basis, because the auto business is just too hard for us to<br />
be fighting with our own partners. With an alliance we enter the rel<strong>at</strong>ionship knowing<br />
th<strong>at</strong> our partner also wants to enter the rel<strong>at</strong>ionship. With some of our current partners<br />
we chose an alliance because th<strong>at</strong>’s the way our partners wanted to go.<br />
Alliances ensure th<strong>at</strong> everyone, including management talent, stays actively<br />
engaged. And we need good management around the globe, especially in places like<br />
Japan, where GM’s presence has been limited since World War II. We are pleased<br />
and enthused to have the leadership of Fi<strong>at</strong> Auto, for example, in control of their<br />
brand and driving for mutual synergies just as hard as we are.<br />
Alliances sidestep much of the cultural and market place trauma th<strong>at</strong> come<br />
with a full merger. We avoid the typical concerns th<strong>at</strong> arise about who is taking over<br />
whom, or who is winning, and instead can focus on getting business results. Th<strong>at</strong>’s<br />
constructive and important, because cultural disconnects can destroy morale and<br />
ultim<strong>at</strong>ely cost you in the marketplace.<br />
Finally alliances are capital efficient. They provide many of the benefits of<br />
mergers and acquisitions without the capital commitment from one side or the other.<br />
This allows us to focus more of our financial resources on the biggest benefit of<br />
alliances: innov<strong>at</strong>ive products and services” 70 .<br />
Finally one can remember th<strong>at</strong> in a heavily oligopolistic competitive landscape<br />
as th<strong>at</strong> of the current automobile industry, an agreement with a relevant partner has<br />
the advantage (which is not negligible) to prevent agreements of the partner with<br />
other competitors. From this standpoint any form of alliance has a “defense” value,<br />
compared to antagonist agreements, which nobody can afford to neglect.<br />
The Fi<strong>at</strong> Group has undoubtedly even more important reasons to pursue an<br />
agreement capable of strengthening its competitive opportunities without resorting to<br />
more radical moves. On the one hand the Italian automaker could have some<br />
difficulties in finding the financial resources to acquire a major partner. From this<br />
70 General Motors Stockholder News, September 2000.<br />
79
Volp<strong>at</strong>o - Fi<strong>at</strong><br />
standpoint Fi<strong>at</strong> had already shown to prefer moves which were financially less<br />
burdensome, but significant under the competitive profile in other industries of<br />
interest for the Group such as th<strong>at</strong> of Commercial Vehicles, of Tractors and earthmoving<br />
equipment, of autom<strong>at</strong>ed production systems. But <strong>at</strong> the same time an<br />
acquisition or a merger with other partners, such as the hypothesis brought forward by<br />
the specialized press over an agreement with Daimler-Chrysler, would have been<br />
quite a shock for the Italian public opinion.<br />
One must not forget th<strong>at</strong>, differently from many automakers, the Fi<strong>at</strong> Group is<br />
not a public company but a company controlled by a family whose presence within<br />
the top management has always played a relevant role since its establishment (1899)<br />
with the presidency of Giovanni Agnelli which lasted until 1945. A role which was<br />
maintained also during the presidency (from 1946 to 1966) of Vittorio Valletta, a<br />
manager with gre<strong>at</strong> managerial capabilities but completely loyal to the interest of the<br />
Agnelli family 71 . The identific<strong>at</strong>ion between the company and the family has become,<br />
if possible, even more marked and definitive with the long and charism<strong>at</strong>ic presidency<br />
of the “avvoc<strong>at</strong>o” Gianni Agnelli, which has led the group in first person from 1966 to<br />
1996, to then take on the role of honorary president, formally more marginal, but not<br />
less relevant with respect to fundamental choices of str<strong>at</strong>egy. The mix between the<br />
image of the group and the person of Gianni Agnelli is so deeply rooted, even<br />
intern<strong>at</strong>ionally, th<strong>at</strong> a sale, and even a merger among equals with other makes, would<br />
have appeared as a sort of “treason” with respect to a family tradition founded over a<br />
century before by Giovanni Agnelli, the grandf<strong>at</strong>her of Gianni Agnelli.<br />
However th<strong>at</strong> Fi<strong>at</strong> had to take some important initi<strong>at</strong>ive was a true fact. On the<br />
one hand the whole of makes controlled by the Fi<strong>at</strong> Group: Fi<strong>at</strong>, Alfa Romeo and<br />
Lancia 72 had suffered some competitive weakening during recent years, mainly in<br />
Italy but also in Western Europe, decreasing from a share of 42.6% and 11.73% in<br />
1997 to 35.4% and 9.5% in 2000. On the other hand in South America the brilliant<br />
trend in sales of models derived by the “178” project had suffered a marked delay due<br />
to the economic crisis which affected those countries starting in 1998.<br />
Certainly the Fi<strong>at</strong> Group could have kept on going on its own, but it would<br />
have been a highly risky move. A neg<strong>at</strong>ive trend in the domestic market or in Europe,<br />
or the unsuccessful launch of a new model which was important to the sales volumes<br />
of the Turin company would have been enough for the top management to face a<br />
situ<strong>at</strong>ion hard to manage. Hence the need to study an initi<strong>at</strong>ive capable of offering<br />
new important opportunities both on the cost reduction side, and on the enhancement<br />
of product quality perceived by consumers 73 .<br />
If one accepts the view th<strong>at</strong> ruled out the possibility to carry out an initi<strong>at</strong>ive<br />
which could have reduced the “sovereignty” of the Turin automaker 74 there is no<br />
doubt th<strong>at</strong> the alliance between Fi<strong>at</strong> and General Motors appears the best which could<br />
be designed. On the one hand there is a partnership with the first world automaker on<br />
71 See Castronovo [1999].<br />
72 The Fi<strong>at</strong> Group controls also the Ferrari and Maser<strong>at</strong>i makes, which however do not fall within the<br />
GM agreement and which anyway enjoy, given their specific traits, ample managerial autonomy.<br />
73 See the interview to the Managing Director of Fi<strong>at</strong> Auto: “C’est long à changer une reput<strong>at</strong>ion”, in<br />
L’Auto Journal, 8 Mars 2001.<br />
74 To this respect the term “sovereignty” has a precise meaning if one considers th<strong>at</strong> quite often the<br />
intern<strong>at</strong>ional press identifies Gianni Agnelli as the king of the Italian automobile industry and the<br />
Agnelli family as a true dynasty.<br />
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initi<strong>at</strong>ives capable of gener<strong>at</strong>ing significant cost reductions, and on the other hand the<br />
three makes of the automaker maintain their individual n<strong>at</strong>ure: Fi<strong>at</strong>, Alfa Romeo and<br />
Lancia can be turned around even in higher segments, in which Fi<strong>at</strong> suffers a<br />
structural weakness derived from specific traits of the Italian market and from the<br />
Italian government’s fiscal policy carried out for years towards motoriz<strong>at</strong>ion 75 .<br />
11.2. The structure of the agreement<br />
One of the advantages of an alliance which does not entail mergers or<br />
company acquisition consists in the speed with which one can move from the stage of<br />
negoti<strong>at</strong>ion to th<strong>at</strong> of initi<strong>at</strong>ives useful on the competitive side. After a few months of<br />
confidential contacts, the agreement has been made public, but still in the definition<br />
stage on 13th March 2000. The end of the juridical aspects of the agreement took<br />
place on 24th July of the same year and <strong>at</strong> th<strong>at</strong> time priorities were set <strong>at</strong> the highest<br />
level, to be carried out as soon as the European Union authorized it, which took place<br />
on 16th August 76 . In such way already on 13th September it was possible to name the<br />
Board of Directors and the main Top Executives of two 50/50 joint companies<br />
between General Motors Corpor<strong>at</strong>ion and Fi<strong>at</strong> Auto <strong>SpA</strong>. The l<strong>at</strong>ter is the head<br />
company of car manufacturing activities, controlled by Fi<strong>at</strong> <strong>SpA</strong>, holding of the<br />
Italian industrial group, which in turn controls other industry holdings which form the<br />
economic galaxy of Agnelli Family.<br />
These two companies in joint-venture, having a twin and mirror organiz<strong>at</strong>ion<br />
between the two mother companies, are GM-Fi<strong>at</strong> Worldwide Purchasing BV, with<br />
oper<strong>at</strong>ional headquarters in Ruesselsheim, and Fi<strong>at</strong>-GM Powertrain BV with<br />
oper<strong>at</strong>ional headquarters in Turin, whose structures started to officially oper<strong>at</strong>e on 1st<br />
January 2001. Such JVs play a role of considerable importance with respect to full<br />
manufacturing cost: in fact the weight of purchasing and manufacturing of the<br />
powertrain systems represents about 80% of the whole vehicle manufacturing cost.<br />
The alliance is geographically limited to South America and Europe. This is<br />
due to the fact th<strong>at</strong> in North America there isn’t presently any “str<strong>at</strong>egic room” for<br />
such initi<strong>at</strong>ives, since GM does not suffer particular competitive pressures. Vice<br />
versa, L<strong>at</strong>in America represents a market which the industry competitors judge very<br />
relevant for its growth potential, while in Europe competition has become particularly<br />
strong and, in such sense, the alliance aims <strong>at</strong> achieving a cost leadership.<br />
The establishment of a 50/50 joint-venture to manage purchasing has been<br />
made easier since the amount of purchasing costs of the two companies was basically<br />
the same.<br />
Alongside the establishment of the two above mentioned JVs, an agreement of<br />
cooper<strong>at</strong>ion in financial services was signed, plus common initi<strong>at</strong>ives in many other<br />
functional areas, such as inform<strong>at</strong>ion technology, logistics, quality, R&D,<br />
engineering, etc.<br />
75 On this particular aspect see Volp<strong>at</strong>o [1996].<br />
76 The European Commission Release said: “The Commission took the view th<strong>at</strong> although Fi<strong>at</strong> and<br />
General Motors will coordin<strong>at</strong>e, on an exclusive basis their activities in the production of powertrains<br />
and in the purchasing of components and parts, the alliance should benefit consumers. The<br />
Commission noted comp onents accounted for a large part of the cost of new cars , so any savings the<br />
two firm make should be passed on to the consumers”.<br />
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The main objective of the agreement, as for all the other mergers and<br />
acquisitions carried out in the automobile industry over recent years, is cost reduction:<br />
when such agreement oper<strong>at</strong>es <strong>at</strong> full pace it should allow the two companies to save<br />
on the whole 2 billion euro. In fact the motto of the agreement is: “Allies in costs,<br />
competitors in the markets”.<br />
With respect to purchasing activities Fi<strong>at</strong> Auto has declared to have achieved,<br />
thanks to this JV, the first positive results already <strong>at</strong> the end of the year 2000.<br />
11.3. The juridical and financial aspects of the agreement<br />
Taking into account th<strong>at</strong> the agreement between the two partners involves<br />
mainly the manufacturing areas, since on the commercial standpoint the various<br />
makes managed by the two automakers will keep on oper<strong>at</strong>ing separ<strong>at</strong>ely, it involves<br />
directly the activities carried out in Europe and in L<strong>at</strong>in America. This means th<strong>at</strong><br />
from the perspective of General Motors the makes involved are basically Opel,<br />
Vauxhall, Saab and Chevrolet (the l<strong>at</strong>ter for L<strong>at</strong>in America) while for Fi<strong>at</strong> the makes<br />
involved are those directly controlled by Fi<strong>at</strong> Auto: Fi<strong>at</strong>, Alfa Romeo and Lancia. The<br />
str<strong>at</strong>egic industrial alliance with General Motors has implied, during the year 2000, a<br />
reorganiz<strong>at</strong>ion of the company structure in the Fi<strong>at</strong> Automobile Sector. Since 1st July<br />
2000 Fi<strong>at</strong> Auto <strong>SpA</strong> (now Fi<strong>at</strong> Auto Partecipazioni <strong>SpA</strong>) has de-merged its<br />
oper<strong>at</strong>ional activities which have been conferred to a new head company Fi<strong>at</strong> Auto<br />
Holdings b.v. At the same time General Motors Corpor<strong>at</strong>ion has acquired a stake in<br />
Fi<strong>at</strong> Auto Holdings B.V. for 20% and Fi<strong>at</strong> has acquired a stake of about 6% in<br />
General Motors Corpor<strong>at</strong>ion itself. The considerable gain gener<strong>at</strong>ed by the sale of<br />
20% of Fi<strong>at</strong> Auto Holdings b.v. equity to General Motors has allowed to launch many<br />
initi<strong>at</strong>ives of industrial restructuring and capital strengthening of the company which<br />
will be mostly completed in 2001, for which some non-current costs have been<br />
provided.<br />
The equity swap did not take place <strong>at</strong> market values, but r<strong>at</strong>her on the basis of<br />
the evalu<strong>at</strong>ion of the company branches which have been conferred. By considering<br />
the market prices <strong>at</strong> th<strong>at</strong> time, the oper<strong>at</strong>ion meant th<strong>at</strong> the whole equity of Fi<strong>at</strong> Auto<br />
was estim<strong>at</strong>ed <strong>at</strong> about 12 billion dollars, th<strong>at</strong> is about 1.5 times net equity. Such<br />
estim<strong>at</strong>e corresponds also to the market capitaliz<strong>at</strong>ion of the whole Fi<strong>at</strong> group (of<br />
which Fi<strong>at</strong> Auto represents about half in terms of sales), before th<strong>at</strong> rumors on<br />
imminent agreements triggered upward specul<strong>at</strong>ion.<br />
As previously said the equity of the two joint-ventures: GM-Fi<strong>at</strong> Worldwide<br />
Purchasing BV and Fi<strong>at</strong>-GM Powertrain BV is divided exactly <strong>at</strong> 50% between the<br />
two partners and the two companies have respectively a Chairman appointed by GM<br />
and a CEO appointed by Fi<strong>at</strong> Auto and vice versa. Furthermore the oper<strong>at</strong>ional<br />
headquarters is loc<strong>at</strong>ed for the first JV <strong>at</strong> the headquarters of Opel and for the second<br />
JV in the Mirafiori industrial complex in Turin (previously headquarters of<br />
mechanical activities), where the Fi<strong>at</strong> Auto headquarters is also loc<strong>at</strong>ed.<br />
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11.4. Synergy savings<br />
According to calcul<strong>at</strong>ions proposed by the partners themselves, the economies<br />
deriving from the integr<strong>at</strong>ion process should m<strong>at</strong>erialize already in 2001 to then get to<br />
2005, thanks to the contribution of economies allowed by the plan of convergence in<br />
engines and transmissions and then by common architectures, with a total of 2 billion<br />
euro (Fig.24). Such amount, if rel<strong>at</strong>ed to the sum of revenues highlighted by<br />
consolid<strong>at</strong>ed balance sheets of Fi<strong>at</strong> Auto and GME in 2000 (equal to about 53 billion<br />
euro), would provide a percentage of about 3% (if one includes also GM in L<strong>at</strong>in<br />
America). It is a significant value equal to the r<strong>at</strong>e of profitability of an automaker<br />
which financial analysts would certainly define “in good health”.<br />
2500<br />
2000<br />
1500<br />
1000<br />
500<br />
0<br />
Source: Fi<strong>at</strong><br />
500<br />
Fig.24 - Synergy Savings<br />
( Euro Billion)<br />
1200<br />
2000<br />
2001 2003 2005<br />
Purchasing Powertrain Pl<strong>at</strong>forms Other<br />
Just for the sake of comparison one could say th<strong>at</strong> in 2000 the whole<br />
automotive division of General Motors (with a production of 8.5 million units) totaled<br />
profits for 2.3 billion dollars equal to about 2.4 billion euro, but with sales equal to<br />
148.1 billion dollars, which corresponds to about 150 billion euro. As one can see a<br />
total saving for Fi<strong>at</strong> Auto and GME of 2 billion euro would represent a considerable<br />
amount, which would allow a combined str<strong>at</strong>egy both on sales prices reduction and<br />
market share increase, and on profit increase, of which both companies have urgent<br />
need, to be invested in future programs of quality enhancements and strengthening in<br />
higher segments which are known to be the weak point in the product offer of Fi<strong>at</strong><br />
Auto and GME.<br />
With respect to the break-up of cost economies the d<strong>at</strong>a provided by the two<br />
partners highlight a significant saving deriving from the synergies in purchasing 77<br />
which will m<strong>at</strong>erialize since the start of the cooper<strong>at</strong>ion. L<strong>at</strong>er one, albeit representing<br />
the largest source of savings in the timeframe considered, even the remaining savings<br />
77 In the calcul<strong>at</strong>ion of savings the c<strong>at</strong>egory “Purchasing” does not include the purchasing of parts and<br />
components linked to the development of “Powertrains” and of “Architectures”.<br />
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should become considerable, mainly due to the plan of convergence of engines and<br />
transmissions and the sharing of architectures. It is significant th<strong>at</strong> by adding<br />
Purchasing activities to Powertrain manufacturing one obtains on average 80% of the<br />
total manufacturing cost of a vehicle, while the remaining 20% corresponds to the<br />
activities of final assembly of the product.<br />
11.5. Wh<strong>at</strong> effects on corpor<strong>at</strong>e governance?<br />
The alliance is still too recent to make a sure judgement on the outcomes<br />
which it will gener<strong>at</strong>e on the corpor<strong>at</strong>e governance of the Fi<strong>at</strong> Group. In the<br />
meanwhile the top management itself underlines th<strong>at</strong>: “the alliance has taken off in its<br />
best conditions. At the end of last year [2000] Fi<strong>at</strong> has already marked in its income<br />
st<strong>at</strong>ement a net benefit in purchasing which equals to euro 20 million. Synergies will<br />
increase to about euro 200 million in 2001, to reach one billion in 2005” 78 .<br />
Undoubtedly however, on the financial-economic evolution standpoint, perspectives<br />
are encouraging since the synergies which could be achieved are significant, and they<br />
should contribute in a marked way to the str<strong>at</strong>egy of value cre<strong>at</strong>ion. From this<br />
standpoint the fact th<strong>at</strong> General Motors is a shareholder for 20% of Fi<strong>at</strong> Auto Holding<br />
b.v. represents another stimulus for Fi<strong>at</strong> to restore an adequ<strong>at</strong>e level of profitability of<br />
its main controlled company.<br />
However it is likely th<strong>at</strong> the Fi<strong>at</strong>-GM alliance will gener<strong>at</strong>e interesting results<br />
on other fields. For example already during recent years the financial communic<strong>at</strong>ion<br />
carried out by the Turin company towards priv<strong>at</strong>e and institutional investors had<br />
clearly improved through a rich program of initi<strong>at</strong>ives aimed <strong>at</strong> improving “investor<br />
rel<strong>at</strong>ions”. Meetings have been held <strong>at</strong> the time of public<strong>at</strong>ion of annual Balance<br />
sheets and mid-year reports, as well as seminars for discussing the management trend<br />
and the str<strong>at</strong>egies in the main sectors and “roadshows” which allow direct contact<br />
between the top management of the Group and the financial analysts of the main<br />
intern<strong>at</strong>ional markets, with particular <strong>at</strong>tention for London and New York 79 .<br />
In general it appears hence most likely th<strong>at</strong> the Fi<strong>at</strong>-GM cooper<strong>at</strong>ion will more<br />
and more bring along also within the Italian Group management habits and practices<br />
which are consolid<strong>at</strong>ed in the US environment.<br />
78 Fi<strong>at</strong> <strong>SpA</strong> Consolid<strong>at</strong>ed Annual Report 2000.<br />
79 See for instance the recent Fi<strong>at</strong> Group’s Usa Roadshow Present<strong>at</strong>ion in New York of June 2001.<br />
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12. Conclusions on Fi<strong>at</strong>’s <strong>Corpor<strong>at</strong>e</strong> <strong>Governance</strong><br />
At the end of the reconstruction of the long and complex history of Fi<strong>at</strong> <strong>SpA</strong>,<br />
the conclusions which can be drawn highlight how the company during recent years is<br />
moving on an evolutionary p<strong>at</strong>h which clearly brings closer the corpor<strong>at</strong>e governance<br />
of the company, still tightly controlled by a family group, to the schemes of a more<br />
open and m<strong>at</strong>ure capitalism, as th<strong>at</strong> of Anglo-Saxon style. In such sense the introduction<br />
of value cre<strong>at</strong>ion for the shareholder as a value of reference in the elabor<strong>at</strong>ion of<br />
company str<strong>at</strong>egies has already become a component in the culture of management<br />
and a clear element of benchmarking in determining bonuses <strong>at</strong>tributed to managers in<br />
the various sectors.<br />
However such new awareness, st<strong>at</strong>ed and oper<strong>at</strong>ed since 1996, has clashed<br />
with the difficulties gener<strong>at</strong>ed by harder intern<strong>at</strong>ional competition in the automotive<br />
sector on a global scale, and with the financial-economic difficulties which came after<br />
it.<br />
As it is known the response str<strong>at</strong>egy of Fi<strong>at</strong> was to carry out a vast process of<br />
refocusing of the Group on core businesses defined as those areas of activity in which<br />
the company has reached or plans to reach positions of global competitive excellence.<br />
As a consequence it is right the capability to achieve such final objective the proof of<br />
validity of the adopted p<strong>at</strong>h, and the basis of request for trust directed to majority and<br />
minority shareholders.<br />
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Appendix No.1<br />
Fi<strong>at</strong> Group’s Relevant Financial Initi<strong>at</strong>ives<br />
Year Initi<strong>at</strong>ive<br />
1973 Establishment in Brazil of Fi<strong>at</strong> Automòveis between Fi<strong>at</strong> (50%) and the St<strong>at</strong>e of Minas Gerais<br />
(50%).<br />
1973 Establishment of the Fi<strong>at</strong> Allis group with equal shares between Fi<strong>at</strong> and Allis Chalmers. The<br />
two companies merge all activities in the earth moving equipment industry.<br />
1974 Agreement between Fi<strong>at</strong> and the German company Klockner-Hunboldt-Deutz AG (KHD) of<br />
Köln for the establishment of the Iveco company with headquarters in Amsterdam. Fi<strong>at</strong> acquires<br />
80% of shares.<br />
1975 The reorganis<strong>at</strong>ion of the manufacturing structure carried on with the demerging and<br />
establishment as company of Ages (Components), Fi<strong>at</strong> Lubrificanti (Lubricants), Sepa<br />
(Electronics for autom<strong>at</strong>ion).<br />
1975 Fi<strong>at</strong> acquires the whole capital of Telettra <strong>SpA</strong>, specialised in the design and manufacturing of<br />
telecommunic<strong>at</strong>ion systems. The group had acquired an initial particip<strong>at</strong>ion of 35% in the<br />
company already in 1968.<br />
1975 Fi<strong>at</strong> buys 20% of stock of the Pietro Laverda company (agricultural machines and motorcycles).<br />
1975 Sale of Radiomarelli and exit from the industry of radio equipment and tape recording.<br />
1976 Agreement with the Lybian Arab Foreign Bank (Lafico) which buys the capital increase of Fi<strong>at</strong><br />
from 150 to 165 billion ITL, underwrites the issue of 90 million convertible bonds <strong>at</strong> 1,000 ITL<br />
each and lends Fi<strong>at</strong> USD 104 million.<br />
1976 Fi<strong>at</strong> acquires the majority of Gilardini <strong>SpA</strong> stock.<br />
1976 Magneti Marelli acquires the company York (b<strong>at</strong>teries).<br />
1976 Establishment of Fi<strong>at</strong> Aviazione <strong>SpA</strong> and the research centre (Centro Ricerche Fi<strong>at</strong> <strong>SpA</strong>).<br />
1976 The company Piemonte Sviluppo Industriale <strong>SpA</strong> changes name into Fidis <strong>SpA</strong>, financial<br />
company with particip<strong>at</strong>ion in manufacturing activities of the Fi<strong>at</strong> Group.<br />
1977 Fi<strong>at</strong> Tr<strong>at</strong>tori (tractors) buys the companies Ghepardi, Saimm and Toselli specialised in the<br />
manufacturing of agricultural machines.<br />
1978 The share of Fi<strong>at</strong> in Fi<strong>at</strong> Allis (earth moving equipment) is increased from 77% to 80.2%.<br />
1978 Gilardini (components) incorpor<strong>at</strong>es Whitehead Motofides and Simonini.<br />
1979 Fi<strong>at</strong> Auto <strong>SpA</strong> is established, grouping the makes Fi<strong>at</strong>, Lancia, Ferrari, Autobianchi. With such<br />
move Fi<strong>at</strong> Spa becomes a financial company with particip<strong>at</strong>ion in firms grouped in 11 industries.<br />
1979 Establishment of Marelli Autronica <strong>SpA</strong>.<br />
1979 Gilardini acquires Castagnetti (components)<br />
1980 Established in Argentina Sevel <strong>SpA</strong>, with equal particip<strong>at</strong>ion by Fi<strong>at</strong> Auto and P.S.A.<br />
1981 Fi<strong>at</strong> <strong>SpA</strong> increases its stake in Fi<strong>at</strong> Allis from 80.2% to 88%.<br />
1981 Fi<strong>at</strong> particip<strong>at</strong>es to the establishment of Gemina Spa with an investment of 30 billion lire. The<br />
firms acquiring Gemina by Montedison are, besides Fi<strong>at</strong>: Mediobanca, Invest, Pirelli and SMI.<br />
1982 Fi<strong>at</strong> sells its own siderurgical activities to Finsider (IRI) for ITL 64 billion.<br />
1982 Sevel Argentina is sold to local investors (Macrì Group).<br />
1982 Fi<strong>at</strong> acquires a minority stake in KHD in Iveco for ITL 367 billion acquiring control of the whole<br />
of Iveco capital.<br />
1983 Fi<strong>at</strong> <strong>SpA</strong> acquires the rel<strong>at</strong>ive majority stake in Snia (fibres) for ITL 21 b illion.<br />
1985 Fi<strong>at</strong> acquires the whole of Fi<strong>at</strong> Allis (J.V. with Allis Chalmers in 1973) for ITL 18 billion.<br />
1985 Fi<strong>at</strong> sells majority of Ventana to Compagnie Intern<strong>at</strong>ional des Wagon Lits.<br />
1986 Fi<strong>at</strong> acquires the whole of shares by Brazilian Fi<strong>at</strong> Automòveis.<br />
1986 Fi<strong>at</strong> repurchases Lybian stock for ITL 1,485 billion.<br />
1986 Fi<strong>at</strong> acquires a particip<strong>at</strong>ion in Westland (helicopters) for ITL 65 billion.<br />
1986 Fi<strong>at</strong> acquires Alfa Romeo <strong>SpA</strong> for ITL 1,050 billion.<br />
1986 Sale of the company Altena (braking systems) to Allied Signal.<br />
1986 Establishment of Iveco-Ford Truck Ltd. in Langley (UK) aiming <strong>at</strong> manufacturing and<br />
distributing under the two makes commercial vehicles over 3.5 tons.<br />
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Volp<strong>at</strong>o - Fi<strong>at</strong><br />
1986 Fi<strong>at</strong> acquires Fr<strong>at</strong>elli Borletti <strong>SpA</strong> (components).<br />
1987 Fi<strong>at</strong> acquires control of Snia BPD<br />
1987 Joint-venture Fi<strong>at</strong>-M<strong>at</strong>ra with the establishment of Ufima<br />
Year Initi<strong>at</strong>ive<br />
1988 Fi<strong>at</strong> incorpor<strong>at</strong>es the company Pietro Laverda into Fi<strong>at</strong> Allis changing its name in Fi<strong>at</strong> Geotech.<br />
1988 Fi<strong>at</strong> increases its stake in Telettra Española from 49% to 90%. The remaining 10% is acquired by<br />
the Compañia Telefonica Nacional. In 1988 Fi<strong>at</strong> acquires whole control of Telette Norge.<br />
1989 Fi<strong>at</strong> acquires 51% of car maker Innocenti.<br />
1989 Absorbing of companies: Sepi <strong>SpA</strong> and Autoflug (components).<br />
1990 Fi<strong>at</strong> acquires control (80%) of Ford New-Holland.<br />
1990 Toro (insurance) and Rinascente (retailing) enter into the Fi<strong>at</strong> Group.<br />
1990 Fi<strong>at</strong> acquires 49% of car maker Maser<strong>at</strong>i. The remaining 51% remains owned by the De Tomaso<br />
Group.<br />
1991 Iveco acquires the Spanish company Enasa-Pegaso (industrial vehicles) previously controlled by<br />
the Istituto Nacional de Industria (INI) and renames it Iveco-Pegaso S.A.<br />
1991 Establishment of New Holland Geotech from the merging of Ford New Holland and Fi<strong>at</strong><br />
Geotech. Fi<strong>at</strong> holds 80% of shares.<br />
1991 Fi<strong>at</strong> deals some agreements with the French group CGE (l<strong>at</strong>er on renamed Alc<strong>at</strong>el Alshtom). In<br />
telecommunic<strong>at</strong>ions there is the assignment to the Alc<strong>at</strong>el of Telettra, renamed Alc<strong>at</strong>el Italia,<br />
with a gain of ITL 1,640 billion. In the b<strong>at</strong>tery industries there is the purchase by Fi<strong>at</strong> of<br />
Compagnie Européenne d’Accomul<strong>at</strong>eurs (CEAC). On a broader level Fi<strong>at</strong> acquires 2% of<br />
Alc<strong>at</strong>el Alshtom shares, with which Fi<strong>at</strong> becomes the second shareholder after the French<br />
company Société Générale, and the sale to Alc<strong>at</strong>el Alshton of Fi<strong>at</strong> shares equal to 2% of capital.<br />
1991 Sale of Cavis <strong>SpA</strong> to French Labinal.<br />
1992 Fi<strong>at</strong> establishes Fi<strong>at</strong> Auto Poland acquiring Fsm from the Polish St<strong>at</strong>e. The acquisition of shares<br />
implies an investment of USD 650 million.<br />
1992 Sale of Magneti Marelli activities in b<strong>at</strong>teries to the French company Ceac S.A.<br />
1993 Acquisition of whole control of New-Holland Geotech renamed New Holland with activities<br />
grouped along two sectors: a) tractors and agricultural machines, b) earth moving equipment.<br />
1993 Fi<strong>at</strong> acquires whole control of Maser<strong>at</strong>i.<br />
1993 In Brazil Magneti Marelli acquires ABC Autronica S.A.<br />
1994 Many component activities are sold to foreign companies: to the French Labinal (cables), to the<br />
US Allied Signal (safety systems) and to Lear Se<strong>at</strong>ing (se<strong>at</strong>s).<br />
1994 Gilardini is merged with Magneti Marelli and Magneti Marelli <strong>SpA</strong> is established as head of<br />
component activities of the Fi<strong>at</strong> Group.<br />
1996 Intern<strong>at</strong>ional placement of 46.5 million New Holland N.V. shares, equal to 31.2% of capital <strong>at</strong> a<br />
unit price of 21.5 USD for a total value of USD 950 million.<br />
1997 Acquisition of the Brazilian group Cofap, n<strong>at</strong>ional leader in suspension manufacturing.<br />
1997 Fi<strong>at</strong> sales to the Société Générale its own share (2%) in Alc<strong>at</strong>el Alshtom with a return of 590<br />
billion lire and a gain of about 200 billion.<br />
1998 Sale of control particip<strong>at</strong>ion, equal to 45.9% of ordinary capital of Snia BPD through placement<br />
of shares in the n<strong>at</strong>ional and intern<strong>at</strong>ional markets. The initi<strong>at</strong>ive gener<strong>at</strong>ed cash for ITL 708<br />
billion, with a gross profit of ITL 214 billion, and a reduction of net invested capital for about<br />
ITL 1,900 billion.<br />
1998 Sale of 80% of “rot<strong>at</strong>ing machines” activities and “fuel control systems” to Japanese company<br />
Denso.<br />
1998 Acquisition by Magneti Marelli of European activities of Midas specialised in quick service.<br />
1999 Integr<strong>at</strong>ion of foundry activities of Renault S.A. in Teksid. At the end of the oper<strong>at</strong>ion Fi<strong>at</strong> holds<br />
66.5% and Renault 33.5%.<br />
1999 Acquisition of French company Seima (lighting) and establishment of joint-venture Automotive<br />
Lighting Holding with control of worldwide activities, with German company Bosch.<br />
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Year Initi<strong>at</strong>ive<br />
1999 From 23th Aug 1999 Fi<strong>at</strong> shares are converted in €, with a rounding by defect of nominal value<br />
of ITL 1,000 to 0.50 euro, and then regrouped with a new common share (there are three types of<br />
shares: ordinary share, privileged share or saving share), for a nominal value of 5 € every 10 old<br />
shares. Subsequently also the Fi<strong>at</strong> ADR (issues by JP Morgan <strong>at</strong> the New York Stock Exchange),<br />
which represent 5 shares are grouped in the r<strong>at</strong>io of 1 new ADR for every two in the market;<br />
hence a Fi<strong>at</strong> ADR now equals one share.<br />
1999 Establishment of Case New Holland Global (CNH) from the merging of New Holland and Case<br />
Co. (Fi<strong>at</strong> share <strong>at</strong> 71%) with an investment by Fi<strong>at</strong> equal to $ 4.5 billion.<br />
1999 Public purchase offer for Toro (519 million euro), Comau <strong>SpA</strong> ( 69 million) and Magneti Marelli<br />
(278 million) end with success increasing Fi<strong>at</strong> share respectively to 98% for the first company,<br />
96% in Comau (renamed Comau Systems <strong>SpA</strong>) and over 99% in Magneti Marelli.<br />
1999 Fi<strong>at</strong> sells 51% of Fi<strong>at</strong> Ferroviaria to French company Alshtom (153 million). The oper<strong>at</strong>ion<br />
entails a “put & call” option which grants Alshtom the right of purcahse and Fi<strong>at</strong> the right of sale<br />
of the remaining 49% over the next two years.<br />
1999 Fi<strong>at</strong> Spa acquires the group Progressive Tools & Industries Co. (Pico), US leader in body<br />
manufacturing (306 million euro for the acquisition and further 200 million for capital increase)<br />
and Comau Spa acquires 51% of French company Renault Autom<strong>at</strong>ion (engine component<br />
works).<br />
2000 Str<strong>at</strong>egic alliance between GM and Fi<strong>at</strong> Auto through acquisition by GM of 20% of Fi<strong>at</strong> Auto<br />
capital for a total of USD 2.4 billion. This transl<strong>at</strong>es into a whole valu<strong>at</strong>ion of Fi<strong>at</strong> Auto <strong>at</strong> USD<br />
12 billion. Fi<strong>at</strong> <strong>SpA</strong> has acquired for a similar amount a share of 5.7% of GM, hence Fi<strong>at</strong><br />
becomes the major GM shareholder. The oper<strong>at</strong>ion has gener<strong>at</strong>ed <strong>at</strong> consolid<strong>at</strong>ed level a gain of<br />
euro 1,780 million.<br />
2000 The whole of oper<strong>at</strong>ions of str<strong>at</strong>egic repositioning of the Group in the different industries has<br />
implied a remarkable financial commitment, over 6,000 million euro, a value which was never<br />
achieved in the past.<br />
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