Fiat Auto: The Italian Giant in Trouble

After the Italian economy was opened to foreign players, foreign car companies relied on price cuts, improvement of quality and new and innovative designs to gain market share. Fiat failed to react to changing market dynamics, even as Renault and Volkswagen restructured their operations and focused on R&D to compete globally. During 1995-2001, while Renault and Mercedes invested more than $9 billion in R&D and Volkswagen spent $20 billion, FA spent only $4.5 billion. As a result, there were huge gaps in FA's product lines. Fiat's competitors constantly launched new models in the market during the late 1990s and slashed prices causing severe erosion in FA's market share and revenues. Analysts criticized Fiat for being a one-trick pony as FA depended heavily on individual models for a long period to retain its market leadership...

Following this announcement, the company's shares fell sharply on the stock market. According to reports, the restructuring at Fiat was the largest restructuring exercise ever undertaken by any Italian company. The restructuring exercise, which cost the group €6 billion, included measures to increase capital, reorganize business operations, and sell off of non-strategic business units. To increase capital, Fiat issued new shares worth € 1 billion through a rights issue in January 2002. In February 2002, it also launched a bond issue worth € 2.5 billion, backed by its 5.7% stake in GM. As a part of restructuring its business operations, Fiat announced that it would lay-off 6,000 employees, mostly in plants outside Italy. Fiat sources said that this was necessitated by the revamp of 18 factories (16 outside Italy) between 2002 and 2004...