Ciao, Paolo

AP

Was Cantarella driven out?

WHEN the travails of Fiat were splashed across the front pages for weeks on end in the mid-1980s, the then chairman, Giovanni Agnelli, regally dismissed speculation as “la telenovella dell'estate” (the summer soap). The patriarch of the family that owns about 30% of Fiat's shares cannot afford to be so dismissive today. If the media's feeding frenzy this summer is a soap, the leading actor has written himself out of the script in suitably dramatic fashion.

Bosses do not usually resign at seven o'clock in the evening after an emergency board meeting—unless, that is, they have been arm-twisted into it. Paolo Cantarella, chief executive of the Fiat group since 1996 and previously head of its car division for six years, is going because Fiat Auto is bleeding cash faster than the group can replace it via capital-raising exercises and disposals. Fiat's limp shares perked up on news of his departure.

And yet, despite appearances, senior Fiat sources insist that Mr Cantarella was neither fired nor asked to resign. About ten days ago, they say, he told Mr Agnelli (now Fiat's honorary chairman) that he was going to leave because he had become the symbol of the group's misfortunes; it was time for a change to show that Fiat was determined to cure its problems and avoid a much-rumoured sale to America's General Motors (GM). This came just a few days after Mr Agnelli had publicly endorsed his chief executive.

When the 81-year-old patriarch returned a few days later from New York, where he had been receiving treatment for a prostate condition, Mr Cantarella insisted he would not change his mind. At a hastily called board meeting on June 10th, it was decided that Paolo Fresco, Fiat's chairman and a former number two to Jack Welch at General Electric, would take over as chief executive.

The depth of the crisis at Fiat became obvious when its first-quarter results showed Fiat Auto's loss increasing to euro429m ($376m), and its net debt rising by euro600m to euro6.6 billion—three months into a year when it is supposed to be halved. Fiat Auto is expected to burn through euro1 billion of cash this year. Capital spending has been hacked to the limit, just over 3.5% of sales, and 7% of the workforce is being laid off. Despite Fiat's notorious overcapacity, however, only one car plant is being closed, although several assembly lines are being shut down at the company's Mirafiori plant in Turin.

Fiat's problems have been building up for years. Its good reputation as a maker of slick small cars has been a mixed blessing, as it has been difficult to stretch the brand to bigger models. Over the past 20 years a string of small cars, such as the Uno and the Punto, have emerged to revive the group's flagging market share. But Fiat's efforts to develop a successful wider range have failed. For instance, its new mid-sized model, the Stilo, will fall about 20% short of sales targets this year. Consumers found it chock-full of fancy electronics they did not want, and thus overpriced; a cheaper, basic version is now being rushed out.

As long as Fiat dominated the Italian market, thanks in part to a batch of now-dismantled protectionist measures designed to exclude Japanese cars, its inherent weaknesses were overlooked. Another distraction was the pile of cash Fiat earned in emerging markets, such as Latin America, Poland and Turkey. Fiat invested heavily to expand in these markets, just before they all crashed. Suddenly, the $500m a year of cashflow from the likes of Brazil and Argentina was no longer there. This change exposed Fiat's fading position in Europe. Not only were its model range and brand weak, but its distribution networks were no match for those of its rivals.

Two years ago Fiat, inspired by Mr Fresco's American connections, sold 20% of Fiat Auto to GM; the Italians took 6% of the American car maker in return. Included in the deal was a put option, valid between January 2004 and July 2009. If it chooses to exercise this, Fiat can sell the remaining 80% of Fiat Auto to GM at a price agreed by three investment banks. Should the car makers fail three times over to agree on a price, Fiat would be free to sell the shares elsewhere.

With only 18 months left before the option can be exercised, GM is working on plans to integrate Fiat with its European subsidiary, Opel, in case it has to. Together with Daewoo Motor, a South Korean car maker that GM bought in a fire sale earlier this year, the integration of Fiat would give GM over 20% of the European car market.

If the word from Turin is to be believed, none of this is going to happen. Fiat is trying to offload assets to cut its debt and boost its cashflow, in a bid to remain in the car business—and independent. Like a desperate balloonist throwing out ballast whenever the earth rushes up, it is offering shares in its Ferrari subsidiary, and is also trying to sell its component and steel businesses. Mr Fresco's old employer, General Electric, is rumoured to be interested in picking up bits of Fiat on the cheap.

But the rate at which Fiat is burning cash means that these asset sales alone cannot keep it aloft. Unless it can start selling cars at a profit by the end of the year, it will have to be sold, if only to appease the big Italian banks that are anxious about their exposure. The chances are the put option will have to be exercised. No wonder GM is already doing its due diligence.