Fiat and GM consider merger in Europe and Latin America

Fiat of Italy and General Motors of the US are studying plans for a merger of their car making operations in Europe and Latin America, according to sources close to the two companies.

Such a deal would involve plant closures and heavy job losses among the two companies' 120,000 workers in Europe because of the overlap in their product ranges. For the same reason, any merger of their activities could run into anti-trust difficulties.

The two car makers have been forging closer links since 2000 when GM took a 20 per cent stake in Fiat Auto, and Fiat Spa, its parent company, took a 6 per cent stake in GM, making it the US company's largest single shareholder.

Fiat has an option to make GM buy out the remaining 80 per cent of Fiat Auto between 2004 and 2009 at a "fair value" price to be established by an independent investment bank. But an outright sale of the business is opposed by Fiat's honorary president, Gianni Agnelli.

Since the cross-shareholding deal, Fiat and GM have set up two joint ventures in Europe to pool component purchasing and their respective engine and gearbox manufacturing plants.

They have also begun work on the joint development of two car platforms. One will be the basis for a new premium car to be built by Alfa Romeo, Lancia and Saab. The other will be a platform for a new B-segment car to replace the Fiat Palio and Punto and the GM Corsa and Agila.

Fiat is dominant in Latin America, where it has two plants in Brazil producing 500,000 cars a year and one in Argentina. GM, by contrast, has failed to make much headway in the region. Both companies have suffered heavy losses in Europe in recent years.

The aim of combining Fiat and GM's separate manufacturing operations in Europe and Latin America would be to cut costs radically and turn them into profit.

It is one of a number of scenarios being worked on if Fiat fails to turn the corner in the next 18 months. Fiat Auto has lost money in seven of the last eight years and it is expected to record a loss of about £650m for the current year.

Fiat reports first-half results today and is expected to announce a loss in its car business of almost €800m (£505m) after suffering a 21per cent fall in its Western European car sales for the six month period.

Fiat Auto lost €429m in the first three months of the year and is expected to report a loss of about €365m for the second quarter. Earlier this month it announced it was reducing output by 90,000 cars and laying off 21,700 workers in August and September in an attempt to cut costs.

A merger with GM in Europe could lead to much heavier and permanent job losses. The two companies employ about 120,000 car workers in Europe and have more than 20 car plants between them. Fiat has eight manufacturing plants in Italy alone.

GM lost $776m (£495m) in Europe last year and warned earlier this month that the loss for the current year would exceed $350m. The company also said it was reviewing the carrying value of its stake in Fiat which was put at $2.4bn when the shareholding was acquired in July 2000. This will lead to a "significant" write-down in the value of the Fiat stake in GM's third-quarter results.

A Fiat spokesman refused to comment on any studies being undertaken by the two companies. But it denied that it planned to exit car making and said no decisions would be taken about the car division until March 2004 – the deadline the group has set for its recovery plan. "Our intention is to turn Fiat Auto around on our own. Fiat without cars would not be the same company. If we weren't interested in cars we would have sold the business last year." Fiat is pinning its hopes on the launch next year of two models – a new Panda to be built in Poland and a mini MPV-style vehicle based on the Punto – to turn its fortunes around.