A questionable upgrade

Marchionne's job upgrade bodes ill for Fiat

If you had the choice between driving a Fiat or a Ferrari, what would you choose? Sergio Marchionne has answered this question in his very own way: both, and at the same time. On May 2, the chief executive of Fiat Chrysler Automobiles took over the same position at Ferrari. The timing is unfortunate, because Fiat needs him more than ever.

In a way, Marchionne's move just ratifies the actual balance of power at Ferrari. The luxury carmaker was listed separately on the stock market in October and legally spun off from Fiat Chrysler in January. As Ferrari's chairman, Marchionne had been the architect of this move and had effectively called the shots in the spun-off luxury brand.

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Ferrari is almost certainly the more alluring of the two jobs. Its double-digit operating margins are among the car industry's highest, and sales volumes grew 15 per cent in the first quarter. Despite a 19 per cent slump in the share price since October, investors are valuing the stock at 22 times the next 12 months' earnings, Thomson Reuters data shows. That's three to four times the valuation of most listed peers. Porsche, which has grown sales volumes by almost seven times since 1996, may indicate the future potential.

Fiat Chrysler, on the other hand, is one of the weaker global carmakers, facing operative challenges as well as a feeble balance sheet. In Europe, the world's seventh-largest automaker is only producing an operating margin of 1.9 per cent, compared to at least twice as much at rivals like Renault and Peugeot. Sales in Latin America and Asia are falling. Net debt shot up by 30 per cent to Euro 6.6 million at the end of the first quarter.

Marchionne has made no secret of his view that a merger between Fiat and a big rival would be his preferred next step, and that he wants to leave Fiat when his current contract runs out in late 2018. For the Agnelli family that controls Fiat and Ferrari, in the absence of a willing merger partner, broadening Marchionne's role might be a way of persuading him to stay. Other Fiat investors should hope it works.