[Editorial] Fiat’s Secret: Aggressive Restructuring

Europe’s largest carmaker Fiat, which was founded in Italy 110 years ago, was on the verge of collapse in 2004. Its accumulated deficit was around 12 billion U.S. dollars, and even General Motors, which owned a 20-percent stake, broke off ties with the company. Then Sergio Marchionne took over Fiat and introduced aggressive restructuring, laying off 10 percent of the automaker’s 20,000 office workers and hiring young talent. As a result, Fiat posted a surplus in 2005. After GM paid Fiat a penalty of two billion dollars for breaking their 2000 joint venture agreement, Fiat invested the money into developing and producing smaller cars.

Fiat’s turnaround is now set to evoke a seismic change in the world’s automotive landscape. After announcing its rescue of the bankrupt Chrysler, Fiat said yesterday that it has negotiated with the German government to acquire GM’s European operation, Opel. Fiat wants to spin off its car division to merge with Opel and Chrysler, something which would result in combined output of six million to seven million vehicles per year. If Fiat completes the deals, it will jump from ninth to third in global car production. The list of the world’s three biggest carmakers would then be Fiat (Italy), Toyota (Japan) and Volkswagen (Germany), instead of Toyota (Japan), GM and Ford (United States).

Korean carmakers such as Hyundai, Kia, GM Daewoo and Ssangyong need to reflect on Fiat’s example. The Italian company used to be smaller than the Hyundai-Kia Automotive Group, but can buy its competitors after painful restructuring. Korean carmakers have failed to introduce restructuring, cut costs and effectively deal with their unions. Not only high-ranking executives but also union officers opposed to management’s restructuring efforts are also responsible for the difficulties. When Hyundai Motor announced the need for emergency management measures, its union blasted the move as “a challenge” against it and threatened to strike and oppose management’s plans to change car models produced at plants. In light of Fiat’s success, what excuses will Hyundai’s union make? The unions of Ssangyong and GM Daewoo are no better than Hyundai’s.

Last year, more than 70 million vehicles were sold on the world market, but this year’s figure is expected to plunge to 60 million units due to the global financial crisis. Nevertheless, world carmakers have the capacity to produce a whopping 94 million vehicles. That means carmakers need to cut production more than 30 percent and conduct restructuring. Carmakers that have finished restructuring are emerging as world powerhouses by acquiring competitors. Those who have failed to aggressively restructure are subject to takeover by stronger counterparts. What kind of future will Korean carmakers choose?