Wheeler Dealers

Making cars is one of Europe's last great family businesses. Names like the Peugeots of France, the Porsches of Germany and the Agnellis of Italy are inextricably linked with their cars. "In some ways, they seem like the last vestiges of feudal Europe," says Garel Rhys, an economist who specializes in the auto industry at Cardiff Business School in Wales. Although immensely rich, the families have walked a tightrope, struggling to keep their firms profitable while avoiding being devoured by king-sized global competitors.

It hasn't been easy. Last week, two families from Europe's elite auto club took drastic steps to ensure the survival of their independent firms. The Agnellis, padroni for more than 100 years of the automaker Fiat, agreed to a share-swap alliance with General Motors, the world's biggest carmaker. The deal will initially focus on reaping savings in such things as engines and transmissions for the European and Latin American markets, while leaving the Italian firm independent.

At the same time, the Quandt family, which controls 48% of the shares of Germany's upscale automaker BMW, stunned the auto world by deciding to walk away from their money-losing British car operation, Rover, which some BMW insiders have dubbed the English Patient. BMW will recoup most of its $3.06 billion write-off by selling the main jewel in the British firm's crown, four-wheel-drive specialist Land Rover, to Ford, which has already gobbled up such famous British marques as Jaguar and Aston Martin.

The painful scramble in the auto business was touched off when Germany's Daimler-Benz snapped up Chrysler, the No. 3 U.S. automaker, in 1998. Carmakers suddenly realized that the coming struggle for global market share was going to be dominated by giants. Shortly thereafter, France's Renault extended its reach by buying a chunk of Japan's failing Nissan, while Sweden's tiny Volvo decided it couldn't afford to compete against the majors and sold its car division to Ford so it could focus on making trucks (see box).

The introduction of the euro last year has also shaken Europe's automakers. The Continent's single currency has given consumers a better handle on price levels and that is beginning to cut into profit margins. The euro's weakness against the dollar thus far has helped boost European exports, but the strength of the British pound contributed to Rover's demise by making its cars too expensive on the other side of the English Channel. Despite huge gains in productivity--thanks to investments of over $2.9 billion--since being acquired by the Germans in 1994, Rover racked up losses of $1.6 billion last year and was headed for more of the same in 2000. BMW chairman Joachim Milberg told reporters that the pound's rise against the euro has depressed Rover sales by nearly $1 billion. BMW's harsh medicine, which could result in 7,500 job losses, might now force many of Britain's euro-skeptics to rethink their opposition to joining the common currency.

For the Agnellis, keeping control of Fiat has always been a paramount concern. In 1990, Chrysler under the leadership of the legendary Lee Iacocca came close to buying the Italian carmaker, but the Agnellis balked at the last moment. Fiat's current chairman Paolo Fresco said the linkup with General Motors "permits us to become more competitive on a global scale, be a leader on the cost front, and master of our own destiny." Under the plan, GM is buying 20% of Fiat stock and the Italian company will own 5.1% of GM, making it one of GM's largest shareholders. Fiat also has an option to sell the remaining 80% to the Americans.

Family patriarch Gianni Agnelli said he had been advised by Enrico Cuccia, the secretive head of Italian investment bank Mediobanca, to sell Fiat to DaimlerChrysler, cash in his Daimler shares and forget the car business. "What can I say? I trust the Americans more than the Germans," Agnelli told La Stampa of Turin, his family's newspaper. There was a collective sigh of relief in Italy that Fiat will remain independent, at least for the time being. Industry Minister Enrico Letta noted that Fiat "is not a normal private company, but an important part of the system of production and history of Italy."

The initial benefit to the two companies will be cost savings: joint production of engines and drive trains should shave expenses by over $450 million annually in the first three years, rising to more than $2 billion by 2005. Fiat, which has withdrawn from the key U.S. market, also stands to gain by such initiatives as selling its sleek Alfa Romeo sports car at selected GM dealerships. Karl E. Ludvigsen, an auto industry analyst based in London, noted that GM's Opel division based in Germany is developing a new small car platform and said that would fit well with Fiat, one of Europe's largest producers of small cars. "The relationship is actually quite complementary and there's a lot GM and Fiat could do together," Ludvigsen said.

But the linkup doesn't resolve the key problem facing all makers of small cars: overcapacity is forcing them to cut prices to stay competitive and that means lower profits. Both Opel and Fiat suffered from a sharp profit decline in the last three years. According to Cardiff Business School's Rhys, the carmakers hope to solve this problem by simply giving it to competitors. "The idea is the companies get economies of scale, reduce prices and the overcapacity problem is shifted to rivals."

GM last year increased its stake in two longtime Japanese affiliates, Isuzu and Suzuki, and purchased a 20% stake in Fuji Heavy Industries, parent of Subaru, for $1.4 billion. Scott Upham, president of Providata Automotive Consulting in Southgate, Mich., says the alliance helps both GM and Fiat protect their market position in South America, as well as helping GM gain access to Eastern Europe, where Fiat has been strong for decades. He added that he expected GM and Fiat now to make a joint bid for Daewoo, the nearly bankrupt Korean carmaker.

Rather than extending its scope, BMW decided to reinvent itself as a quality German carmaker, handing over the Rover and MG brands to a British venture capital firm called Alchemy Partners. Although the carmaker said in a prepared statement that the strategy of expansion was "not appropriate," three members of its board were ousted in a sign that the decision was not unanimous. BMW also said it was launching a new model range aimed at the luxury end of the small car market. John Lawson, a car company analyst at Salomon Smith Barney in London, said that while BMW's diversification strategy failed, a return to being a smaller, independent company may work. "They are very good at developing a sharp-looking car with healthy profit margins," he said.

Best known for reviving the fortunes of Fatty Arbuckle's, an American diner-style chain, and Fads DIY, a group of home-improvement stores, Alchemy has a reputation for pursuing deals that other companies shy away from. But until now, none of its deals has topped $80 million. "All our investments are a gamble," founder Jon Moulton says. That's a good frame of mind to take into the Rover venture. After all, if a company with deep pockets and long carmaking expertise like BMW failed miserably, it's hard to imagine how less experienced hands could turn around Rover's tired old brand--even after renaming it the MG Car Company. Besides, the new owners will face the same currency problems as BMW.

For now, the fortunes of two of Europe's best-known carmaking families seem safe. BMW has avoided allowing Rover to drive the Munich company into the arms of a suitor, like German rival Volkswagen, which has long coveted the upscale brand. Fiat gets to stay independent, while earning many of the benefits of becoming large-scale. The problem is that the world still has more car companies than demand for cars. That's good news for consumers, who like lower prices, but Europe's family-run car firms are likely to find the road ahead more bumpy than ever before.

With reporting by Greg Burke/Rome, Joseph R. Szczesny/Detroit and Christine Whitehouse/London