Fiat’s Benchmark to Outsource Chrysler Jeep – $1 in Savings

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Obama Marchionne photoFiat CEO Sergio Marchionne discussed, in limited detail, some of the Italian company's plans for future production of its vehicles, including the Chrysler and Jeep brands, during an earnings conference call yesterday. There has been much recent speculation on the possibility that some of the once American-owned Chrysler Jeep vehicles will be outsourced and produced overseas.

It was confirmed that at least some Jeeps will be manufactured outside the US in the near future. The plan is to produce a new, smaller Jeep in Italy that will be sold in Europe and also exported to America. The question now is, how many more American-made Chrysler products are at risk of being outsourced? Marchionne's answers to analysts' questions give insight into the mindset of Fiat's management regarding where the company's loyalties lie.

Marchionne announced that he wants full "unification" of Fiat and Chrysler by 2015 and made clear that Italian manufacturing facilities are going to have priority as European problems continue to plague Fiat's operations. Italian plants are operating at only 45% capacity, according to the call. In spite of that, there are no plans to make cuts at the plants, rather a focus on utilizing the plants for new models and vehicles to be exported to an already competitive American market. One can not rule out the possibility that American jobs will be put at risk as vehicles that would otherwise be made in the US will end up being produced in Italy or elsewhere. One of Marchionne's answers during the Q&A session may be the most telling.

The question asked was, "Could we see Chrysler funding some of the CAPEX (capital expenditure) for the Jeep vehicles to be produced out of Italy or will that all come from the Fiat side?" Marchionne gave the following logical answer that may have been a warning to the US that, if manufacturing costs are not kept in check, Fiat stands ready to produce the cars elsewhere.

"At the end of the day, if any brand belongs to the other organization and to the extent that, in the case of Jeep for example, which is owned by Chrysler; if Fiat is manufacturing a car for them, the only requirement that it should really worry about is that the alternative production that is being provided by Fiat is available at at least one dollar cheaper than Jeep can do it on its own. And so, as long as that benchmark standard is met than the financing has to follow, right? I mean if you are willing to fund it on your own terms then you should be able to fund it for somebody else. So the possibility of that happening is undoubtedly part of the plan and I think it's something we need to continue to develop."

So, while it may be accurate to say that there are no firm commitments to produce all Chryslers or Jeeps outside the US, bear in mind the benchmark mentioned by Marchionne that Chrysler should have for paying to produce vehicles outside America. The cost should be at least one dollar less for Fiat to decide to produce the vehicles elsewhere. Considering that, the possibility of Jeep manufacturing moving to China (something Fiat has already hinted at) can not be ignored, given the fact that they should be able to produce the cars for a lot less than America or Italy.

The simple lesson here is that if you are going to give an American company to the Italians, the company that accepts your gift may not repay the kindness by protecting US jobs. In the words of Marchionne, having Chrysler pay other countries to produce its vehicles for less than America can produce them "is undoubtedly part of the plan and I think it's something we need to continue to develop." Obviously, Fiat's loyalties are with its shareholders and the Italian citizens that now own Chrysler. President Obama should have considered that when he gave them Chrysler.

Mark Modica is an NLPC Associate Fellow.