Backa Seata Driva Saysa - "GM Justa Saya No Toa Fiat"

Courtesy Jerry Flint: Forbes Magazine

If General Motors is forced to buy Fiat it'll be a terrible move. It's one thing to lose billions of dollars mismanaging Isuzu or Saab, but executives could sink the ship mismanaging Fiat. Bust the contract at all costs.

The headline in the trade journal reads: "GM prepares to save Fiat." Saints preserve us! General Motors is in the midst of saving itself and doing a good job of it. But the General is just terrible when it comes to saving foreign partners. Just look at the disasters at Isuzu and Saab .

GM got into its Fiat jam two years ago. That's when it exchanged 5.3% of its stock for 20% of Fiat Auto (the auto business is 42% of the Fiat Group). Under a provision of the contract Fiat has the option to sell the rest of its auto business to GM starting in 2004.

Urgent message to GM: Get all those lawyers of yours to work proving the contract is invalid. The "i" wasn't dotted, the ipso wasn't facto, whatever, but bust that contract.

It's one thing to lose billions of dollars mismanaging Isuzu or Saab, but you guys can sink the ship mismanaging Fiat. I know the GM thinking: Put two losers together and you get a winner. GM of Germany (otherwise known as Opel) plus Fiat would be the biggest automaker in Europe. We've been through this before. Putting Willys and Kaiser together will create the biggest automaker in Toledo. Merging Nash and Hudson will make the biggest automaker in Kenosha, Wis. and Studebaker plus Packard will be the biggest automaker in South Bend. More accurate arithmetic: Put two losers together and you get a smaller loser with bigger debt.

When the trade was made it was a $2.4 billion deal. On paper Fiat has lost $380 million on the 32 million GM shares it owns, as the stock dropped from $75 to $64--as of this writing--(only $268 million lost if you count the dividends GM paid to Fiat). I'm guessing GM has already lost $1.25 billion (Fiat Auto is not a listed stock).

The premise in this deal is that GM will use similar parts in German Opels and Italian Fiats and save all sorts of money. The company claims hundreds of millions in savings already. But the losses are growing faster than the "savings," and I think these "savings" are fiction.

Also, Italians don't buy many GM German Opels now, and they are buying fewer Fiats all the time. Why should they want to buy more Fiats simply because they are half Opel? And Germans are buying few Fiats, and the Opels are losing popularity. Why should they want to buy more Opels when they are half Fiat?

When the deal was made Fiat's honorary leader, Giovanni Agnelli, said control would never be given to GM. But he is 81 and ill, and younger members of the family are willing to take the money and run.

And business isn't good. Between January and April its Alfa and Lancia lines sold 18% fewer cars in western Europe than the year earlier, while industry sales were down only 3%. And even those Fiat sales may have been padded by registering cars twice. Last year the company ran an operating loss of $500 million on its auto business (most of the other parts of Fiat were profitable) and probably lost almost as much in just the first quarter this year.

Not that Opel is any profit center. Opel car sales in western Europe were down 14% for the four months. The GM Europe net loss last year was $765 million and the first-quarter loss was a bit more than last year's.

You can see we have two troubled companies. And Fiat's outside-Europe capacity is centered in Brazil, a sinkhole of too much capacity.

What is wrong with Fiat? Its cars are good, and its Alfa Romeos are beautiful. Fiat was always huge in Italy, but now Italians want a change. I recall when 60% of Italian car sales were Fiat. Now the proportion has fallen to 35%. With all that Italian business, Fiat didn't push hard enough in other western Europe countries and quit in America. It also didn't understand that the big money was in fancy cars, like Alfas and Lancias, and concentrated on the low end.

If this GM management had a record of turning sows' ears into silk purses the Fiat acquisition might be worth the risk. But this management turns big sows' ears into smaller sows' ears.

Now GM is "war-gaming" the situation, according to its chief financial officer, and the story going around the industry is that GM wants to speed up the acquisition before Fiat sinks beneath the sea.

My advice: Remember what they sang in Little Shop of Horrors, "Whatever you do, don't feed the plants."

Jerry Flint, a former Forbes Senior Editor, has covered the automobile industry since 1958. Find past columns at www.forbes.com/flint.