Friday, July 6, 2012

Fiat Chief Retools Italian Car Maker

POMIGLIANO D'ARCO, Italy—Roberta Ruocco thought she had landed a job for life when her father found her a post on the same factory floor where he had worked for decades, churning out bumpers and dashboards for Fiat F.MI -5.33% SpA. Seven years later, she is bracing for a pink slip.

"I'm hanging on by the fingernails," said the 28-year-old factory worker, who has been on furlough and maternity leave for three years.

Fiat, like its native nation, is going on a diet. The company has long been the locomotive of the Italian economy, employing 63,000, more than any other private firm in the country. But Fiat boss Sergio Marchionne closed an assembly plant in Sicily last year, and this week he raised doubts about the future of another Italian plant. Fiat slashed its plans to invest in Europe this year by €500 million, or about $630 million, equivalent to 7% of the company's investment world-wide. Mr. Marchionne aims to revamp other factories in order to squeeze more cars out of a leaner workforce, as he did in Pomigliano.

Fiat's downsizing is one of the first signs of how the European debt crisis is reshaping the continent's corporate landscape. The process is brutal for car makers, who must pare a glut of capacity built over decades.

Consider this: In 2009, Fiat's five biggest Italian assembly plants produced 650,000 cars using 22,000 workers. That same year, a single Fiat plant in Tychy, Poland, produced 600,000 cars with 6,100 workers. Too many inefficient plants, coupled with a plunge in consumer demand, have left not only Fiat, but other car makers such as PSA Peugeot UG.FR -7.71% Citroën and Adam Opel, a unit of General Motors Co., GM -1.12% bleeding cash.

At the same time, European car makers' biggest safety net—their national governments—is wearing thin. Leaders here have traditionally bent over backward to prevent the car plant closures. The French government doled out €6 billion in loans in 2009 in exchange for pledges from car companies to keep plants open. Italy has given billions in tax incentives to car buyers. Like other European countries, Italy now is focused on slashing spending.

Fiat's revamp, the first significant restructuring in the European industry, could preface more belt-tightening around the continent. Last month, Adam Opel announced plans to close a plant after 2016, the first closing of a major auto plant in Germany since World War II.

Ignoring the factory glut will only lead to disaster, says Luciano Massone, an engineer who has redesigned Fiat's assembly lines in an effort to reduce waste. "Sooner or later the collapse will occur," he says.

The bailout of Spanish banks and instability in Greece have thrust Italy to the center of the debt crisis. Investors have resumed their flight from Italian bonds, driving up Rome's borrowing costs and putting pressure on Italy's biggest firms to reassess their ties to the country. Last month, Mr. Marchionne said he expected Europe's annual car sales to drop below 10 million units, compared with 13.1 million in 2011, "if the euro disintegrates."

Mr. Marchionne is getting help from the government, but of a different kind than before. New legislation is expected to make it easier for companies to hire and fire workers in economic downturns. The law allows large companies like Fiat to fire workers rather than placing them on Italy's state-backed temporary layoff program—a system whereby workers get paid two-thirds of their salary while not working.

Fiat says it has no plans to cut jobs. Yet the company also hasn't made clear what it plans to do with the one-quarter of its employees that unions say are on furlough. Workers at plants undergoing overhauls will get called back to the factory floor once the makeovers are complete and demand for cars recovers, according to Fiat officials. Other Fiat factories, like the one that employs Ms. Ruocco, are in limbo with Fiat declining to say when, if ever, they will be revived.

That is making unions and governments nervous. Unions say the possible wave of layoffs in Italy's poorer southern regions—such as Campania, where Pomigliano is located—could drive people to take jobs in the country's "black" economy, where salaries are paid under the table and organized crime syndicates loom large.

"Let's face it. The choices made by Marchionne could reduce the potential for the rather extraordinary components sector in Campania," says Minister of Regional Development Fabrizio Barca.

Mr. Marchionne has remained unwavering about the need for belt-tightening. "We can no longer make exceptions for the Italian system," he said in December.

Ms. Ruocco's path to Fiat began in 2005, when her father, Raffaele, lined up a job for her on the same factory floor where he worked. Located on the outskirts of Naples, the factory supplied plastic consoles, dashboards and bumpers to an assembly plant in Pomigliano D'Arco, where Fiat produced Alfa Romeos.

Ms. Ruocco knew little about the automotive industry other than it provided steady work. Her 59-year-old father worked at the plastics plant his entire career. "I entered the gates of paradise," she recalled.

At the time, the factory was owned by Ergom, one of the many suppliers in the region with a symbiotic relationship with Fiat. The firm relied on Fiat to fill its order book. As Ergom ran into financial trouble in 2007, Fiat bought the company for what it described as a "symbolic" fee in order to preserve a crucial supplier.

That move allowed Ms. Ruocco and her Ergom colleagues to keep working under contracts that entitled them to nearly ironclad job protections. If Fiat ever tried to fire her, Ms. Ruocco would have the right to appeal the decision in court and get rehired if a judge ruled that the dismissal was made without "just cause."

But workers learned their livelihood would ultimately depend on the plastic factory's main lifeline: the Alfa Romeo assembly plant.

As the financial crisis gripped Italy, Fiat slowed its factories across the country. In 2009 Fiat discontinued the Alfa 159 altogether. Production at the plastics factory was slashed, and Fiat began to ease workers into the temporary layoff program.

Older workers, including Mr. Ruocco, agreed to take early retirement, believing the move would allow younger workers like his daughter to stay on the factory floor. Instead, Fiat cut further into Ms. Ruocco's working hours while ratcheting up her time on the state-backed layoff program. Under the program, she collected two-thirds of her €1,200 monthly salary. Ms. Ruocco decided to start a family and went on paid maternity leave, which paid about 80% of her salary.

By then, Mr. Marchionne had turned his focus to Detroit, pulling off a daring takeover of the nearly bankrupt Chrysler LLC with the help of billions in government loans from the U.S. and Canadian governments. As the North American car market recovered, Chrysler staged a comeback in part by using Fiat technology transplanted from the car maker's Italian factories. Fiat began to rely on Chrysler profits to offset money-losing operations back home.

Mr. Marchionne turned his attention back to Italy in early 2010. Among other problems, Fiat's assembly plants were plagued by persistent labor unrest and endemic absenteeism: Outbreaks of sickness, backed by doctors' notes, often coincided with popular soccer matches.

In April 2010, Mr. Marchionne unveiled a five-year overhaul for Fiat. It envisioned spending €16 billion—nearly 70% of planned global investment for that period—to double Fiat's Italian production and ensure the company's long-term future in its home market.

There was a quid pro quo: Unions would have to agree to new work rules, including shorter breaks for factory workers and double the potential overtime hours, which ran counter to the leisurely pace of Italian life. A large chunk of pay would be pegged to performance in addition to seniority. And Fiat's labor leaders would have to agree to stand by while Fiat placed thousands of workers on furlough.

"Take it or leave it," Mr. Marchionne told union leaders, according to Bruno Vitale, a top union official who attended the closed-door meeting. "If you don't back our project there's already a plan B ready, and I guarantee you it won't be pretty," Mr. Marchionne said. Fiat declined to confirm Mr. Vitale's account.

Negotiations dragged on for months. In the fall of 2010, Mr. Marchionne made a move that showed he was serious. He shifted production of the Fiat 500L—one of the few new models the car maker had planned to build in Italy—to Serbia.

Unions bosses scrambled to reach an agreement, fearful that Mr. Marchionne might pull even more production from Italy. "We didn't want to give Marchionne an alibi," Mr. Vitale says. All but one union agreed to the new terms.

The Pomigliano plant was the first to go through the Marchionne cost-makeover. Under the €800 million plan, the refurbished plant would build the low-cost Panda city car rather than pricey Alfa Romeos. Fiat shut down the plant, putting all of its 5,000 workers on furlough while it re-engineered the factory to reduce the human effort that goes into assembling Fiat cars.

Employees were trained to work to eliminate extraneous movement. New machinery rotated cars so they would move down the assembly line in a way that obviated the need for workers to bend over and stretch to get the job done.

Extra footsteps, said Mr. Massone, the Fiat engineer, can cost the plant millions of euros a year when multiplied across the entire workforce. "We measure out everything we do. If a project doesn't pay for itself, we don't do it."

Since the plant reopened in December Fiat has hired back only 3,000 of the original 5,000 workers. Supervisors were given assessment tests before being called back, and in some cases priority was given to younger workers, according to Fiat and workers. Fiat is also appealing a recent court order to reinstate 145 additional workers at Pomigliano. A judge ruled the workers were unfairly left at home because they belong to a union with a history of rabble-rousing—an allegation that Fiat denies.

The ruling has rekindled tensions that were underscored this week as Mr. Marchionne delivered somber remarks in Turin at a presentation of the Serbian-made 500L. He said the welfare of Fiat's Italian factories hinged on the success of Chrysler and on his plan to one day export Italian-made cars to the U.S. If the European car market remains in a slump, Mr. Marchionne said, "there's one plant too many in Italy."

The revamp in Pomigliano left Fiat factories that once supplied the assembly plant staring into the abyss. Fiat created a new plastics department inside the revamped assembly plant, so it no longer relies on the plastics factory that employs Ms. Ruocco. Fiat aims to relocate just over half of the plastic plant's 1,000-strong workforce to the new plastics department, according to unions.

Other workers remain in limbo, and Fiat has given little information about what it plans to do. For more than a decade, Pamela Polcaro, 34, and her husband, Marco Petruzziello, 37, built Alfa Romeo engines at a Fiat engine factory in Pratola Serra, located just 30 miles east of Pomigliano D'Arco.

Today, the engine factory no longer supplies the assembly plant, because Fiat now sources engines for the Panda from its plant in Poland. Fiat plans to build a new gas engine at Pratola Serra in 2013, but won't say whether the new motors will be enough to revive the factory's workforce. For now, Fiat is telling the engine plant's 1,800 workers—including Ms. Polcaro and Mr. Petruzziello—to stay home most days of the month.

Under the temporary employment program, Ms. Polcaro and Mr. Petruzziello collect two-thirds of their €1,500 monthly salaries. After three years on the program, however, their finances have been stretched thin.

The couple recently considered buying a small house after their landlord announced that rent was going up to finance higher property taxes being demanded under Italy's latest austerity measures. A local banker, however, told the couple it was "useless" applying for a loan without secure jobs.

"We were like adopted children, but today the future is uncertain," Ms. Polcaro says.

Write to Stacy Meichtry at