Fiat fires another chief as troubles pile up

Car wars: Rescue plan for Italian giant in doubt after second boardroom coup in four months, write Peter Popham in Rome and Michael Harrison

The chief executive of Fiat, the Italian car giant, was fired yesterday, a victim of the latest spasm in the company's long-running struggle for survival. On Monday the car-making part of the company laid off 5,600 workers in plants around Italy in its latest attempt to cut costs and appease creditors.

Gabriele Galateri, who was only appointed chief executive in July, was thrown to the lions as the founding Agnelli family, which still owns 34 per cent of the company, slugged it out with bankers and the Italian government over the future of a conglomerate that has towered over the Italian economy for the best part of a century. The future of Fiat's Italian-American chairman Paulo Fresco was unclear, although there is a board meeting scheduled for tomorrow.

The speculation in Fiat's home city of Turin yesterday was that Enrico Bondi, a former Fiat executive and managing director of Montedison – now a Fiat subsidiary – was being lined up to take over as chief executive.

Umberto Agnelli, the younger brother of honorary chairman Gianni Agnelli, and now the dominant family figure in Fiat, visited Prime Minister Silvio Berlusconi at the latter's official residence in Rome to discuss the crisis. Mr Berlusconi's coalition government has already rejected the possibility of intervention to rescue the company although last Friday it approved an industrial plan whereby Fiat can draw down state funds to pay for the temporary lay-off of 8,000 car workers. Yesterday afternoon, after confirmation of the dismissal of Mr Galateri was made public, the company's creditor banks reacted angrily. The president of administrative delegates of the four banks that in May concluded a tough rescue package with Fiat said he "dissented" from the dismissal and was "seriously worried" by what he called a "substantial violation" of the agreement, which he said "could possibly compromise the enactment" of the plan.

Insiders said that Mr Galateri, who until July had been running the Agnelli family's private business interests, had cracked under the pressure of trying to turn Fiat around. "He was totally stressed out and just could not hack it," one said.

But Mr Fresco, who arrived at Fiat in 1998, is also under a cloud. Coming from General Electric in the United States he spent a lot of money Fiat could ill afford buying companies, but discovered that there was not the same sort of pool of executive talent within Fiat to turn them around.

There was speculation yesterday that, with the chief executive gone, the Agnellis were planning to abort the previously agreed rescue plan, whereby Fiat has the right to make General Motors buy out the loss-making car making division in 2004. GM owns 20 per cent of Fiat Auto.

There was also talk of possible new alliances between Volkswagen and Alfa Romeo, Fiat's successful upmarket brand, and with Ferrari, which is still 66 per cent owned by Fiat. But with Fiat's new top executive yet to be named it was too early to predict the outcome. "The financial crisis of Fiat is just about under control," one well-placed Italian economic commentator said, reading out a list of Fiat assets disposed of in recent months. "But in industrial terms it is not under control at all."

However the pieces fall this week, after 10 years of steadily worsening performance by Fiat's car making division, Italy faces the loss of its most important industrial patrimony: the company that transformed Italian life and the Italian landscape during the decades when it enjoyed a near-monopoly of car sales.

Although Fiat Auto accounts for less than half the group's total sales and workforce, it is the car division which makes Fiat the virility symbol of Italian manufacturing.

Officially Fiat maintains that its plan is still to return to financial health under its own steam, breaking even next year and then returning to profit in 2004. A lot depends on the success or otherwise of two key models being launched next year – a new Panda to be built in Poland and a mini MPV-style car based on the Punto.

But if Fiat fails to turn its car division around and the GM rescue plan is aborted, what then?

A tie-up with robustly healthy Volkswagen is not guaranteed to solve Fiat's problems. Even if, as is being suggested, VW were to take a minority stake in Alfa Romeo, there is the question of Alfa and Audi chasing the same customers, and the near-certainty that the German company would swallow the smaller company's identity.

For many years Fiat was, in the words of Professor Paul Ginsborg, "an over-powerful, quasi-monopolistic private giant.". But whatever the pernicious consequences of its inordinate strength "the failure of Italy to develop remotely adequate public transport, for example, and the over-saturation of the peninsula with cars" the economic benefits were also great. One insider in Rome said: "Giovanni Agnelli was a sort of prince entrepreneur: he saw the car industry in Italy as his mission, his moral duty." Fiat's plants are dotted across the country, and when Agnelli built the Termini Imerese factory in Sicily in 1972, bringing heavy industry to the island for the first time, he was regarded as a hero and saviour. Even today many call him Italy's uncrowned king.

But Giovanni is now gravely ill with prostate cancer and undergoing treatment in the United States. And Umberto is different. Like Giovanni he is old; both his son and Giovanni's died tragically young, and there is no one to take over. And Umberto does not have the same sense of national duty as his older brother. So now the family is committed to changing its role from entrepreneurs to investors. They will not directly run the company. Umberto said: "We are not missionaries. We will put our money in well-run companies."

For most of the period since the Second World War, Fiat thrived in a market that was only half-open. But when its stranglehold did begin to weaken in the early 1990s it was fatally unprepared for the challenge. Fiat Auto has lost money in seven of the past eight years and this year it is heading for a loss of €1.2bn (£771m). The natural, inevitable choice of car for generations of Italians has suddenly become vulnerable, partly as a result of increasing imports, partly through a series of uninspired product launches.

Although Fiat still commands 30 per cent of the Italian car market, it has been losing one per cent of market share in Italy every year since 1991. This year it will sell 2 million cars worldwide compared with 3 million in the boom year of 1997.

Fiat's response to a faltering home market – sales in Italy this year are down 14 per cent – was to expand into Latin America and Eastern Europe, but the strategy has backfired as first Argentina and then Brazil went into economic meltdown.

Still, Italy, if not Fiat, might look over to Britain and take heart: 30 years ago the UK's motor industry went through a similarly traumatic reckoning. Today, virtually none of it is domestically-owned but at least it is thriving again with German-built Minis pouring out of Oxford and the Japanese increasing production at Sunderland, Derby and Swindon.