Investment Breakdown - Mohnish Pabrai and (Stellantis) Fiat Chrysler
“Mediocrity is never worth the trip” - Sergio Marchionne
How did a school hall in Pune, India, end up being named after an Italian automobile CEO?
How did US car companies go from having the worst margins to the best in only a couple of years?
How did the US auto union negotiate so well that they managed to get billion dollar viagra coverage in their healthcare policy.
These are all strange questions with strange answers.
Needless to say, they are all part of the industry and investment that I will talk about today:
Fiat (now called Stellantis).
This one's an interesting one: It illustrates that having a great idea is only part of the game. The other part is being able to hold the investment for a long time. Fund structure, temperament, and many other things play a role here. 2001 - John Elkann Takes the Reigns
The great Italian industrialist Gianni Agnelli passed down CEO duties of Fiat within the family. Family politics of course were present, but ultimately control over Fiat was handed to the young John Elkann in 2001, aged 26.
Side note: Here’s a super interesting read for all those interested in not only the car industry, but also the Fiat family business. But Elkann didn’t inherit a cushy “lifestyle” business. The situation was “incredibly dire” at Fiat in 2004 - as explained around 13:00 in the podcast below.
If you look between the financial and operational difficulties that the company was facing back then, the likelihood of us not making it were extremely high.” - John Elkann on Fiat in 2004
There were a number of problems with Fiat at the time:
Production was concentrated primarily in Italy. Though Italy is great for holidays, it’s not so much for manufacturing. Productivity is low. Labour costs are high. This was problematic for Fiat, where the majority of its models were economy vehicles sold at low prices.
Financial losses ruined the company’s ability to invest back into the business. Between 2002 to 2004, the company bled billions.
“Follower” position in the industry - limiting options and ability to compete effectively.
Thus, Fiat had a large investment, R&D, and technology gap to competitors. The banks were knocking on their doors. And perhaps more importantly, for the family, pride was on the line!
John Elkann appointed 5 CEOs to Fiat in the space of 2 years - all of whom were apparently the wrong fit.
Meanwhile, Fiat was on its last legs…
Sergio Marchionne Enters the Scene
John Elkann desperately searched for a Fiat CEO that could turn it around.
One of the portfolio companies of the Agnelli family was SGS - a testing, inspection, certification business based out of Switzerland. Sergio Marchionne became CEO in 2002, after previously creating huge value at Alusuisse through reorganisation. He was trained as a lawyer and a qualified accountant in Canada, and crushed it wherever he went.
John Elkann noticed Sergio’s work at SGS, and apparently met with him in secret to recruit him to Fiat.
This time Elkann struck gold.
It sounds easy - but what happened was almost impossible.
Marchionne put through a series of cost reduction plans, freeing up space for investment in product refreshment to meet consumer tastes. What used to be a DAILY loss of $5M in 2004, turned into a DAILY profit of $5M.
Anyone who has operated in Europe knows how impossible it is to negotiate anything to do with cost reductions or labour. Unions are slow-moving - even when it’s in their long-term best interests to move fast. Labour laws prioritise not rocking the boat, rather than keeping local industry relevant.
Somehow Sergio managed to get it done - and in a way where he got all stakeholders on board without burning bridges. And while he had to engage with massive bureaucracies daily, he didn’t turn bureaucratic himself. Not an easy feat!
Now we get to the point where Fiat was safe… for that moment. But there was still an ugly truth within the auto industry.
Too Much Cost 💲
The auto making boom started at the turn of the 20th century. Every enterprising individual joined the gold rush.
"There were about 2,000 automobile companies in the United States in the early part of the 20th century." - Warren Buffett
As with any industry, most of these 2000 got knocked out by bankruptcy, acquisition, irrelevance, and sheer bad luck. By the 1970s, the US auto industry whittled down to just 3 companies - General Motors, Ford, and Chrysler.
In the 1950s, insulated somewhat from global competition, the Big 3 creamed profits from a growing market. Each household bought their first car, and then a second. The baby boom also created huge numbers of future drivers, assuring the car companies of a growing end market for decades to come.
Something similar happened in Europe. First a gold rush, then a few European automakers like BMW, Volkswagen, Peugeot, Porsche etc.
Auto-making became more capital intensive over time. But large companies could afford to pay the bill. Labour also became more of a fixed cost for Western automakers, with the formation of unions reducing flexibility in hiring and firing. As the automakers creamed profits, the unions argued, it was only fair to share the pie with workers.
Automakers had a lot of fixed costs. If production idled due to worker strikes, automakers bled money. No management wanted to entertain unpleasant discussions with unions while there was enough money to go around. Therefore they agreed to union concessions over the years. Unions, in turn, became accustomed to extracting wage gains from automakers. So the spiral continued.
By the 1970s, the Japanese automakers started to enter the fray - adding competition back into the automobile industry. The Japanese were tougher on cost, and better on price.
The industry gradually became lower margin, higher capital intensity, more subject to consumer tastes, and ultimately worse for Western automakers, from the 1970s.
Warren Buffett, as usual, had something incredibly intelligent to say on the subject in 2006 in a Charlie Rose interview:
“The big problem was that they entered into contracts with the UAW, and they were based on the economics of market dominance. And they don’t have market dominance anymore, but they still got the contracts. And I don’t like the UAW. It was a freewill negotiation, but what they signed up for, and I think they’re paying like two and a half people who don’t work for every person who works in terms of retirement and health care.”
“General Motors is a huge annuity and health insurance company with a major auto company attached.”
How much of the cost or capital intensity could actually be taken out of an individual auto company?
It was hard to say. But it was clear that there was a lot of duplicated cost and waste in the industry. For example:
Factories - There were un-utilised or defunct factories which were hard to close because of unions. This is understandable. Factories provide jobs and purpose to communities. Shutting them was tough.
Brands - Low-scale brands became worse in the new world of Japanese competition. They were sitting there eating up inventory, advertising dollars, etc. GM, for example, axed 3 brands in 1970 alone.
Platforms - Each carmaker built platforms for its own vehicles. There was a lot of room for standardisation. E.g. maybe GM SUVs and Ford SUVs could be built off a standardised platform (same parts, same designs etc), saving dollars.
R&D - Same thing here. Companies played their cards close to their chest - not sharing ideas. Therefore, each company had their own massive R&D budget rather than sharing R&D across multiple brands, cars, and platforms.
Overheads - To some extent, consolidating all of the above would drop overhead costs across the industry. E.g. if two companies merge, they no longer need 2 R&D heads or Sales heads.
Conclusion?
The industry needed to consolidate and remove cost duplication.
Sergio was one of the loudest voices calling for consolidation within the industry - seeing no place for an independent Fiat to survive.
He would get one of the craziest opportunities of all time…
US Automaker Bankruptcies 🤯
Normally US auto sales hover around the 16M per year mark. A healthy financing environment also meant that a consumer faced no hiccups refinancing their new car.
In 2008, the Great Financial Crisis hit the automobile industry. The financial arms of the Big 3 US automakers hit potholes because of their lending activities to non-auto products. Therefore even auto lending seized. Consumers also faced job cuts for any company that relied on financial markets to stay open (many at the time). The result was less spending on autos - with US sales dropping to 13.5M in 2008, and barely above 10M in 2009.
“Why is this so bad?”, you ask.
If you recall our little discussion above, industry margins at this point were wafer thin - especially in the US, around 5% in the best of times. Making matters worse, their labour costs were effectively fixed through union contracts. The ability to cut costs in the face of revenue decline was limited.
Let’s go through a hypothetical P&L comparing 2007 to 2009:
Our hypothetical mini auto-maker would have gone bust with a drop of 33% in revenue. And that’s exactly what happened.
The whole thing unfolded like a drama.
GM and Chrysler became insolvent in 2009. Ford, the other major American automaker, survived off its own balance sheet and Ford family willingness to preserve their equity.
Side note: One of my favourite books of all time, Overhaul, by Steve Rattner detailed his whole experience working in the Auto Task Force of the US government, tasked with the restructure of the Big 3 automakers. If you buy the book in your browser, I’ll collect some money to buy ice cream with my daughter. OK, I admit it, the icecream is for me...GM and Chrysler filed for Chapter 11 (bankruptcy protection) - but this was no ordinary bankruptcy. The automakers employed many hundreds of thousands, or even millions of people in the US. Wiping it out through bankruptcy and forcing a massive restructure would have ripple effects through American manufacturing. Since no private capital was willing to enter the space at this point, the US government became a reluctant investor of last resort into the space.
An Auto Task Force was appointed, reporting to the President’s office in 2009. They handled the bankruptcy directly and took control of various aspects of the bankruptcy process.
Debt and Pensions 💳
Chrysler defaulted on around $4B of debt in the bankruptcy process. Creditors were therefore asked to take a haircut.
Pension funds had also been long underfunded by both GM and Chrysler. The bankruptcy opened the kimono on this fact even more. Pensioners were deeply out of pocket.
Side note: While America Aged is a great book about 3 failed pension scheme case studies. Some of these schemes are notoriously mismanaged for future retirees. Best to be careful and review your own pension scheme too.Union Employees
Unions wanted to maintain the cushy contracts of their employees. They were paid very well at GM and Chrysler, and had great healthcare coverage conditions - including a special clause for enhanced viagra expenditures. These employee gains had been extracted year after year by the United Auto Workers (UAW) union for decades before.
It’s easy to understand the desires of union employees to maintain their good working conditions. However, what Sergio called a “culture of entitlement” pervaded the place.
It was no longer sustainable to demand such great work conditions and salaries when:
The industry didn’t have enough profit to sustain them - the pie literally wasn’t big enough to feed everyone
The US auto workers were not as productive as the equivalent labour at a cheaper cost elsewhere.
Mathematics was not on the side of the UAW. Nevertheless, they kept fighting and negotiating tooth and nail to not only keep, but enhance their share of the dwindling pie.
At one dramatic point in the negotiations, Rattner made it clear to the UAW President that they would have to shut GM and Chrysler down - if the UAW wasn’t willing to play ball - since only the US government was willing to finance US automakers at that point.
The ultimatum from the US government got the UAW to reduce the labour cost structure, making US auto manufacturing competitive once again.
Such a deal never would be made again - and was only possible during a crisis.
Since then, the UAW has gone back to their old ways of extracting gains from automaker profits - which will probably leave the business in the same situation years from now.
A Buyer
In Chrysler’s case, finding a buyer was super important. It wasn’t as large as GM, which could survive by itself and emerge from Chapter 11 independent. No, Chrysler was worth so little that it would have been liquidated for scrap value!
The situation was very dire.
Rattner, in Overhaul, says that it would have created a deep wound in the American psyche if Chrysler’s brands disappeared.
Fiat took the plunge and negotiated with the US government in 2009. Sergio saw this as a chance to:
Realise his vision of consolidation within the auto industry
Turn Chrysler around and restore its brand value, in turn creating value for shareholders and employees.
Emerging from Bankruptcy ⤴️
Fiat emerged as the buyers from the bankruptcy, borrowing $8B from the US government at an interest rate of 21%!! to fund the purchase of 58.5% of Chrysler. The clock was ticking the moment they closed the deal.
The UAW agreed to a two-tier system of workers. The older workers would keep their conditions and probably be managed out. Any new workers would be given a much lower wage and far fewer benefits and perks. The result was a far lower and more flexible cost structure. The US became a competitive place to manufacture automobiles once again.
Pensioners (and maybe even creditors) were given 41.5% of Chrysler in trust called VEBA. If Chrysler gained value over time then pensioners would get paid out a decent amount.
With the Chrysler reorganisation out of the way, the only thing left to do was make it work.
Make it Work!
Now the pressure was on. Sergio was under pressure to:
Revitalise the Chrysler brands
Return Chrysler to profitability
After closing the acquisition, the pressure was on Sergio to cut cost, refresh the product line-up, generate profits, and repay the US government. Only after all of that would shareholders in the parent Fiat get rewarded.
A few initiatives stand out as highlights:
Dealer Network Restructure
Sergio closed 789 out of 3,200 Chrysler dealers who were not achieving sufficient sales volume. This was hard to do outside of bankruptcy given franchising and state laws protecting auto dealerships.
Reducing the dealer network improved profit per dealer, and lowered competition between them, therefore resulting in fewer incentives paid by Chrysler to consumers, therefore improving margins. Additionally, there were other cost saving opportunities of having fewer dealers like reduced administration and training expenses.
Fewer, Bigger, Bolder Bets
Chrysler was full of complexity in terms of the models it supported, and customisation it allowed customers (e.g. different seat colours). There was a massive opportunity to trim this down to offer more basic, but better models. Customers later could no longer choose seat colours - but it turns out they didn’t really care about that as long as the overall car was great.
The model line-up was slimmed down to a couple of bets, and backed by an advertising blitz. Although Sergio was under financial pressure, he had no hesitation to authorise a Super Bowl ad featuring Eminem, announcing that Chrysler was back.
After seeing some of the big spending, but no big profits, the US Government nervously emailed Sergio about when the company would turn a profit. After all, they wanted to recover the taxpayer’s investment. He had no idea, but carefully danced around a proper reply, typing back:
”Soon."
Standardisation
R&D and other costs were duplicated across car companies. The Fiat/Chrysler combination let them harmonize their designs and platforms, leading to cost savings.
Refinancing Debt
The expensive loan from the US government at 21% interest had to go. It was obviously an important priority to refinance this when Fiat improved its credit rating. This happened around 2011. Refinancing at even half the cost ($7B debt at 21% interest down to 10%) generated annual savings of $700M.
Mohnish Pabrai’s Nighttime Reading 📖
Many hedge fund guys had seen what was going on in the auto industry. David Einhorn and Ted Weschler had already taken large positions in GM. They might have already bought Fiat too, but didn’t have to disclose European investments - therefore we’ll never know.
In 2012, Mohnish did around 3 weeks of study on the company, encountering what he called an “orgasmic experience”, finding Fiat with around 100B EUR of sales, trading at a market cap of 5B EUR.
He also discovered all the amazing things embedded in the valuation.
What did he mean?
You see, so far we have only talked about Fiat and Chrysler. But what I failed to mention before is that, embedded within the industrial group, were several other assets:
Ferrari - one of the world’s greatest luxury brands
Maserati - a semi-luxury Italian car brand
Magnetti Marelli - an auto parts and electronics manufacturer
Mohnish Pabrai made an investment of around $100M, a big chunk relative to his investment fund. The premise at the time was two-fold:
Sergio had a great track record. If someone had invested $1 in the company that Sergio first worked for, and then tracked that dollar through Sergio’s career, that dollar would have become $100 by 2012.
There was hidden value in all the other non-core assets which could be realised once Chrysler returned to health.
Cracking on 🔨
Sergio and team continued to execute like machines on the ambitious turnaround plan. One of the key moments in 2014 was the buyout of the 41.5% share of Chrysler owned by VEBA.
Fiat injected around $1.75B, while Chrysler itself paid a special distribution of $1.9B to fund the deal. There was a lot of dispute between Fiat and VEBA about the valuation of Chrysler. Fiat’s essential argument (which was true) was that Chrysler would not be worth much, or anything without Fiat’s intervention. And even though Chrysler was resuscitated from near death, it was still vital that Fiat continue to nurse it back to full health.
Ultimately the deal went through and Fiat thereafter owned 100% of Chrysler. A new entity was created called Fiat-Chrysler Automobiles (FCA).
Confessions of a Capital Junkie
Though FCA continued to crush it under the leadership of Sergio, the structural problems of the auto industry remained. It. chewed up capital and, apart from certain niches, eked out meagre profit margins.
There was still the case for consolidation in the industry. Sergio made a presented called “Confessions of a Capital Junkie” which laid out the problems of the auto industry. It also helped signal to other automakers that Sergio was open for business, and willing to do a merger.
FCA was in a good place, however, and able to survive independently for a while. They had some serious earnings engines in place:
RAM - You know those big pick-up trucks? They happen to be protected from foreign competition by US law. Therefore the 3 big domestic brands, RAM, GM Silverado, and Ford F-150 have a license to print money. I’ve heard different stories which place net profit per vehicle sold between $3-10K.
Jeep - One of the brands neglected under Chrysler was Jeep. This brand turned out to be a huge earnings engine for FCA, with global appeal, and large profit per vehicle.
Ferrari - FCA had a controlling stake in one of the best companies on the planet, quietly tucked away in the footnotes of its annual report. Sergio and Elkann had plans for Ferrari, which would go on to unleash huge amounts of value for shareholders.
Ferrari 🏎🏎🏎
This company was a hidden moonshot sitting within FCA. Management made the step to spin off the company in 2016 - improving Ferrari’s access to capital by splitting it from the capital-intensive auto business.
But wasn’t Ferrari itself in the auto business? Not quite. It’s a luxury brand - the ultimate symbol of wealth and exclusivity, apart from those Hermes bags.
Buying a Ferrari is no small feat. “Members” who already have a Ferrari are the first to have access to buy a new Ferrari. Only after this demand is satisfied, are new members admitted to the club. That too, it takes a while for new people to get admitted to the waiting list.
Rich people aren’t being used to being said “no” to. However, brands like Ferrari and Hermes are probably the ones giving them the final “no” that they’ll ever receive in their lives (of course rich, powerful workaholics also get humbled by their spouses divorcing them and their kids leaving them).
It’s one of the stocks that I always hope to re-own at some point - having been stupid enough to sell a few years ago.
Management of Ferrari
Sergio became the CEO of Ferrari on top of his day job at FCA.
It’s a tough job to balance exclusivity with profitability in a luxury brand. However, Sergio put in a few simple initiatives to boost profitability and give Ferrari the ability to reinvest in itself:
Pricing - Increasing pricing was a no-brainer to boost profitability. Even in 2023, Ferrari improved profitability by 45%, despite only increasing volume by 2%.
Increasing volume - Ferrari had a self-imposed volume cap of 7000 vehicles per year in 2016. Sergio lifted this by around 10% to add extra profitability. Now Ferrari produces around 12000 vehicles per year. Is this too much? Only time will tell. However, there’s a chance that exclusivity still remains the same, given that many more Indian and Chinese rich people are now on the waiting list, that weren’t decades before.
New models - Sergio was more keen to launch new models - for example, an SUV in the luxury range - today costing around 400K EUR. In 2024, Ferrari is on the cusp of also launching their first EV.
Since spinning off Ferrari, the stock price has risen by around 10x - reflecting the value added by Sergio and team.
Sergio’s Management Style and Death
People who knew him rated him higher than any media hyperbole could have done. He juggled 4 cell phones to use in different time zones. He worked non-stop - basically taking zero time off. He was sophisticated, listening to classical music in his office while working - yet could be blunt and direct if you got on his wrong side (in the book Overhaul there’s a beautiful section about Sergio giving the UAW a piece of his mind).
But was there actually anything learnable and applicable to recognising future great leaders? For me there were three standout things:
Behaviour
If you behave a certain way, and you get rewarded, that behaviour gets reinforced. Sergio’s candor was uncommon for a CEO of a major company. Most treat the job like one of a politician, trying not to rock the boat too hard.
For successful founder-led companies this is typically not what happens. This group got rewarded for marching to their own drummer, and success only reinforced it. Take Warren Buffett, Jeff Bezos, or even Joe Rogan, for example - who got rewarded and reinforced into being themselves.
But say for example Warren Buffett’s early investments had not gone right. At a certain point he might have not made money, and therefore taken a different job. There he wouldn’t have had the wealth or social license to speak his mind - as that would jeopardise the pay check. Career growth would have involved some degree of covering his ass, and not rocking the boat too hard (depending on which company he joined).
The typical route to the C-suite is a combination of being likeable to the board, weighing your words, and being lucky with business results. Since executives typically need either the income, validation, or the ego kick from the job, their behaviour tends towards ass-covering more often than not. Honesty disappears, and the interviews with them look like well-rehearsed acting gigs.
This was different with Sergio. Although he was a hired gun - he took zero bullshit. You can see that in the earnings calls with analysts, all the way down to the way he talked in interviews. He was always candid about how bad the auto industry was - never putting lipstick on a pig. In most CEO jobs he would have been fired for saying the things he said. However, in his roles, and his life, his directness got reinforced through amazing results.
And it shows. $1 invested in a company when Sergio took the CEO job, then sold and reinvested in the new company that he joined, would have turned into well over $100 by the end of this life.
Talent Management
Most CEOs that I have observed are people-oriented. But if you ask how they actually fill their diary, it’s doing check-ins with their direct team.
Fair enough. You have to abstract away most of the day-to-day management otherwise you won’t be able to focus your attention on what matters. And also, you want to empower your team to make sure they don’t feel micro-managed. It’s an art, not a science.
Sergio took a very active approach to talent management. He directly reviewed the top 500 (or 1500 depending on whom you talk to) talents in the company and their progress. This is extremely time-intensive! If each one takes an hour per year that’s half the work year for an ordinary employee. However that to me demonstrates how much Sergio actually cared about the people he was leading.
Death
According to Mohnish Pabrai (full interview transcript here):
Sergio knew, a year ago, in July 2017 that he was in serious problems with his health, and it was possibly terminal. He knew that a year before he died. He never told anyone, just his family, the immediate family knew. This is the guy who had a net worth of several hundred million, 15 Ferraris or something. He decided he was going to spend the last year of his life running Fiat Chrysler full out to hit the 2018 plan. That's what he did. He basically ran a million miles an hour in his last 12 months to push the company to where it needed to be.
I don’t blame anyone for spending the last days of their life with family, and away from work. I would probably do the same.
But it was very odd that Sergio was apparently went flat out at work. Maybe his family relations were strained? Maybe he had mental health issues? Who knows?
What was clear, however, was that this was odd behaviour. And it was reflected by an oddly successful track record - and a very capable manager.
RIP Sergio.
Financial returns and learnings 💰
Was there a “Halo Effect” (great book here) around Sergio? Almost certainly. Someone behaving like Sergio and getting bad results would have been labelled a chimpanzee. It’s just how life is.
I think Sergio was astute at knowing potential payoffs - and therefore chose work assignments with meaningful upside. But they were not Big tech-like obvious upside plays.
Side note: Middle level employees in Silicon Valley became multi-millionaires by strategically joining fast-growing firms when they had 1000 employees (stable enough to have 1000 people, and good work-life balance), and then cashing in on stock options when the firm later 5x’d in stock price or got acquired.No, Sergio chose hard and ugly assignments that, if completed well, led to major upside on the other side. The Chrysler deal was very hard to complete, and very hard to make it work. Mohnish Pabrai mentioned this on the topic:
Without Sergio on the scene, I'm not sure it would make it. I'm not sure Chrysler would've made it. The thing that has happened with Fiat Chrysler since then is not only have they proven that they should not have been liquidated, they are now outperforming the other two rivals. Fiat Chrysler has now got Western class margins higher than GM and higher than Ford coming from a distant third getting to basically number one.
Managing the Chrysler deal was hard. However, once Chrysler started to turn a profit, that gave Sergio resources to switch focus to other value-creation levers:
CNHI spin-off
Ferrari spin-off and growth
Jeep and RAM expansion
Maserati
Captive finance arm (the lending arm of automakers - often the most profitable division which hadn’t been established in FCA as yet).
Merger with another automaker
To me it wouldn’t have been clear that Sergio was amazing when he took the Fiat job in 2004. An alternate history could have been Fiat getting acquired and Sergio disappearing (not a bad outcome - but maybe not a great outcome).
However, once Chrysler was acquired and profitable, it could have been clear to a prospective investor that Sergio had something going for him. There were clear value-creating actions on the table for FCA - and a manager that had turned around Chrysler.
Of course incentives have to be aligned, and what’s good for Sergio might not have necessarily been what’s good for shareholders. That’s where the controlling ownership of Exor acted as a constructive force for protecting even minority interests to some extent.
How did Mohnish Pabrai do?
Pabrai invested in Fiat in 2012, to buy 2% of the company at a valuation of around 5B EUR.
Here’s how the sales went:
He sold Ferrari in 2016, almost right after the listing. This got his money back that was initially invested in 2012 (around $100M).
He sold Fiat Chrysler in 2020 during COVID - while the company was under deep distress at around $9-10.
So he achieved a 3x on his money across 8 years. It’s not a fantastic return, but it was achieved with very little risk, in retrospect. And maybe he then went on to redeploy the money into other things. But it gave him a decent return - and even better, a huge learning which probably led him to name one of the Dakshana Foundation halls after Sergio Marchionne.
How could he have done?
Here’s the other question - how could he have done if we had just held on?
Remember shares in the company were purchased at a market cap of 5B EUR. Here’s how the parts have done.
Ferrari - Owners of FCA received 20% of Ferrari as a spinout. This equates to around $15B.
Stellantis (formerly FCA) - FCA merged with Peugeot in 2021 to create Stellantis, a 50/50 merger of equals. The current market cap of Stellantis is 50B EUR - so 50% of that would be 25B EUR.
Dividends - In FCA, a quick Google search suggests that dividends of around $3B were paid before merger. After merger, Stellantis has paid around $15B worth of dividends, where $7.5B was allocated to the former FCA owner. (Taxes really change the equation on dividends though - so take this with a pinch of salt).
Summing all this up, this would have been around $50B of value in 2024 (not counting reinvestment of dividends) for an initial investment of 5B EUR.
To me it’s a lesson on how little actually needs to be done once you find a great opportunity. And very many investors fall into the trap of selling things too early.
I understand why FCA was a difficult hold though. The auto business is very tough, and there are headwinds around the corner…
Pabrai’s sales also point out the limitations of many fund structures. As an investment manager, your clients will sometimes determine whether you can let an idea play out fully. Perhaps in this case, client redemptions caused Pabrai to sell for non-fundamental reasons.
Future of the Western Auto Industry 🚐
The old industry problems still exist:
Capital intensity
Demand subject to fickle consumer taste
Unionised workforce
Declining % of youths obtaining drivers licenses - especially in the West.
But now there are new problems!
EV regulation forcing automakers to invest outside core competency.
Strong competition from Chinese companies who have far lower cost structures
Self driving making car-sharing a real possibility
In the coming years, automakers like Stellantis will have to invest billions in EVs and emissions regulation without any guaranteed rate of return.
You could ask, why don’t they just return money back to shareholders if they clearly don’t have an advantage in the new world?
They are - and Exor (investment vehicle of John Elkann) in Stellantis will make management do exactly that.
But most automakers aren’t in a similar place. Managements of most automakers were born and raised in the auto industry, and only know how to play one game. So they’ll try and reinvest money rather than take chips off the table.
Unionised Labour
Generally it’s OK for capital to share the pie with labour when the pie is growing. In fact, automakers depended upon labour so heavily that it was rational to give into unions while the money machine was printing cash.
However, when management needs to pivot an entire business model to EVs and restructure quickly, unionised labour with 35-hour week contracts and 35 days of holidays per year (like at VW in Germany) don’t work. Legacy automakers, burdened by the past, are strangling themselves with unionised labour.
The US is no different, almost 14 years after the GM and Chrysler bankruptcies. The concessions made by the UAW then were never repeated. The US legacy auto industry also strangles itself slowly after escaping near death just 14 years ago.
Side note: Some CEOs like Carlos Tavares (Stellantis) get rid of unionised labour through restructuring. Stellantis offers to pay expensive unionised workers their salary for a few years in exchange for letting them go. Stellantis accrues the cost expected across years and dumps it onto the P&L in one go as a “Restructuring Expense”, and then shows higher margins the next year when these costs have “disappeared”. In reality, the costs haven't disappeared - but have been managed away by clever accounting.Competition
Chinese competitors like BYD, and new competitors like Tesla have shown up without any of the legacy cost structures or unions. They can move a lot faster, and have founder-CEOs who can change cost structures overnight.
Auto industry profit margins were already fragile due to consumer tastes. More competition for the consumer means they get even more models to choose from - putting another dent in automaker margins across the board. However, the newer automakers can handle the blow better than the old ones, given they can more easily take cost out.
The race against time on emissions regulation also makes the price of investing behind battery technology much higher. The few existing winners in the battery value chain are cashing in, just like the person selling pickaxes during a gold rush. Again, players like Tesla or BYD, who have invested behind the technology for years already, have an advantage against legacy automakers.
Decline of the Driver
In the West, driving is expensive. Companies like Uber make car sharing more attractive already. People are having fewer kids, and those fewer kids are not getting their drivers licenses as quickly.
If you then add self-driving into the mix, this means that someone could:
Avoid driving all together
People can “rent” their cars out, improving utilisation of the car, and then dropping overall auto demand one step lower.
FSD (Full self driving) is still a while away. However, once it’s cracked, it will probably deal another blow to auto demand.
Sum all of this up and it doesn’t look great for legacy automakers in the West. It’s such a pure example of how nothing lasts forever.
When I read about GM under Sloan in the 1950s, I feel like the books and articles are talking about Google or Microsoft today. They were giants of industry and the economy. Seemingly invincible. Now slowly strangling themselves to death, while being attacked from all sides.
But the example of Sergio Marchionne and Fiat shows me that there’s always a good investment available, even in ugly environments.
Very well-written and well-researched! I’m looking forward to your next article!