How Unions Could Sink Fiat Chrysler's Profits

A key part of Fiat Chrysler's plan is at risk if this union won't play ball.

Jul 10, 2014 at 6:31PM

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Sales of the Maserati Ghibli are booming. But the workers that build it aren't happy, and that could be a huge problem for Fiat Chrysler's profit plan. Source: Maserati

Will union leaders derail Fiat Chrysler Automobiles' (NASDAQOTH:FIATY) five-year transformation plan?

It's a possibility -- and an all-too-familiar one for longtime auto-stock investors. But this time, the United Auto Workers aren't the ones threatening trouble.

A big boost in luxury-car sales is a key part of Fiat Chrysler CEO Sergio Marchionne's plan to increase his company's profits. FCA is making big investments in its Alfa Romeo and Maserati brands to make that happen -- but a cornerstone of the plan is that the new Alfas and Maseratis will be made in Italy, and the Italian unions might not play along.

As Motley Fool senior auto specialist John Rosevear explains in this video, FCA is on good terms with the UAW, but the Italian unions are another story. They've already disrupted production of a hot-selling new Maserati -- and if Marchionne can't make peace, FCA's plan could be in trouble.

A transcript of the video is below.

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John Rosevear: Hey Fools, it's John Rosevear, senior auto specialist for Fool.com. Back in May, the newly merged Fiat Chrysler Automobiles revealed its five-year business plan. It's wildly ambitious in many ways, and it has a lot of moving parts, but one part that has drawn a lot of interest is FCA's plan to compete globally in the luxury-car business in a big way.

We know why they want to do this, CEO Sergio Marchionne is very aware that his European arch-rival, the Volkswagen Group (NASDAQOTH:VLKAY), gets close to two-thirds of its profits from the Audi and Porsche brands, and Marchionne would be a very happy man if he could boost FCA's global profits up anywhere near VW's.

So that's the big driver behind this plan, which is essentially to relaunch Alfa Romeo and Maserati as competitors to BMW (NASDAQOTH:BAMXF) and Mercedes-Benz and Audi, with Alfa covering the smaller and midsize models and Maserati having the more premium vehicles at the higher end.

But what's interesting is that it's becoming clear that this plan solves an entirely separate problem for Marchionne as well.

One of Fiat's biggest problems for years has been that they haven't been able to make small inexpensive vehicles competitively in Italy because of high costs. So they've been doing more and more manufacturing in Eastern Europe and in other lower-cost regions, but that has put Fiat under great political pressure in Italy, with politicians pushing Fiat to employ more Italians, to do more manufacturing in its home country.

And as Bloomberg recently reported, Marchionne has a strong relationship with the labor unions here in the US and in Canada, the UAW rank and file kind of look at him as a hero for saving Chrysler and making it a thriving profitable business. But in Italy, things are much more contentious between the unions and Fiat's boss. Marchionne has pushed the unions to adopt more flexible rules to increase productivity, something the unions have been very wary about.

But now, Marchionne is reaching out to those unions, and this luxury car plan is a big part of it. You can build a Fiat anywhere, but a big part of the appeal of an Alfa Romeo or a Maserati is its Italian style, its Italian flavor, and while it's possible that someday we'll see Alfas built in the US or Mexico or whatever on assembly lines with Chryslers and Dodges, at least for a while they really need to be built in Italy. And Marchionne needs the unions on board with that.

Workers at a Maserati factory recently protested a decision to add Saturday shifts and cut a week of vacation by striking for an hour, and Marchionne responded to that by visiting the factory and giving the union a concession while talking about the need for labor peace with workers, and hopefully this will work out well.

But it's one point in this very complicated five year plan that could easy go wrong, and it's something that anyone who is invested in Fiat or who is thinking about investing in Fiat Chrysler when it moves to the New York Stock Exchange later this year, you need to keep an eye on this. Thanks for watching.

John Rosevear has no position in any stocks mentioned. The Motley Fool recommends BMW. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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