Fiat And Industrial Output

Paris raises in the comments section (Italian link) the recent strong performance from Fiat in the car sector:

Fiat SpA, Italy's best performing stock, increased its sales in Europe by 15 percent in September, the fastest growth among the major manufacturers, while the overall market fell by 2.6 percent.

Fiat sales, including the Lancia, Alfa Romeo, Ferrari and Maserati marques, rose to 94,540 cars in September from 82,462 a year earlier, thanks to the Fiat brand, whose sales jumped 19 percent, the Brussels-based Association of European Automobile Manufacturers said in an e-mailed statement today. Fiat group nine-month sales grew 18 percent to 893,240 cars, compared with a European average of 0.1 percent growth.

``Fiat is for sure doing very well under an industrial point of view. In this moment, it is the best carmaker in Europe for growth potential,'' said Gianpaolo Rivano, who manages about 200 million euros ($251 million) at Gesti-Re SGR SpA in Milan.

Indeed the rise in September sales (remember that confidence index) was particularly spectacular:

Fiat's September sales in Italy grew 5.9 percent, helped to growing demand for Grande Punto and Panda models, the two best- selling cars in the country, the Ministry of Transportation said on Oct. 2. Combined sales at Fiat brands advanced to 55,907 vehicles from 52,772 cars.

This progress is even more astonishing, since as Paola points out in comments, the European car market is in a very sorry state:

Renault SA and General Motors Corp., suffering from a lack of popular new models, led the fourth monthly decline in European car sales in September as fuel prices rose.

Sales decreased 2.6 percent from a year earlier to 1.41 million vehicles, the Brussels-based Association of European Automobile Manufacturers said in a statement today. Nine-month sales inched up 0.1 percent to 11.8 million vehicles......

``The big markets worldwide, which includes Europe of course, are saturated and largely stagnant,'' said Robert Heberger, an analyst at Merck Finck in Munich. ``Unemployment and higher fuel prices are playing a role as well as the fact that the French carmakers' products and GM's to some extent have aged.''

So the first thing to note is that Fiat have some good new models, and they are gaining, at least in the short term, market share. Questions however remain:

i) What kind of offers were Fiat making to get these results? This is a straight question, since I simply don't know, so can anyone fill this in. Obviously it is one thing to get sales, and another to get profitable sales, as we have seen with Ford and GM in the US in recent years (and we have also seen the monthly volatility which goes with the 'offers' season).

ii) Where are the components for these cars being made (indeed where is the assembly being done?). If all of this is still happening in Turin then the news isn't anything like as promising as it might be. Basically this thought relates to a point Sebastian Dullian is making on Eurozone watch blog about how, while unit labour costs in Italy are rising, they are not rising anything like as fast as they are in Spain.

Now as Paris often kindly points out I am not based in Italy, but in Catalonia, Spain. So I am in a position to make some sort of comparison here. Basically Catalonia was the industrial centre of Spain (together with the Basque Country) during the industrial age. But ongoing inflation and generally rising living standards mean that Spain is no longer at all competitive in many of the industrial sectors, and in particular the automotive one. Catalonia used to boast one of the largest concentrations of car component manufacture in Europe, but those days are now long gone. Most of the component companies were, like their Italian equivalents, small family type businesses, and these have now largely migrated to Eastern Europe, and even assembly itself is only hanging on by a thread since the Spanish government pays to keep it going (a luxury which may or may not be advisable, but which the Spanish government is in a much better position than the Italian one to permit itself since the budget is in surplus and the debt to GDP ratio is well within the EU guidlines).

So the question is, how effectively is Fiat leveraging outsourcing in Eastern Europe, and to what extent is this increase in output being achieved by retaining low paying employment in Italy?

Paola also raises two more interesting questions: the degree to which the recent increase in industrial production has been a Fiat story, and to what extent is this increase sustainable in the future (ie won't the competitors respond?). Thus Paola:

Paris is right; there has been an increase in Italian Industrial Output. I went to look closely at the statistical data for the period Aug 2005 - August 2006 and the comparisons between Period January-August 2006 and January-August 2005. My feeling is that the growth is largely due to one company's performance: FIAT, the largest company in Italy. Not surprisingly, given that their revenues and market share have grown steadily in the last year. In spite of some fluctuations, the change in output of other sectors average out to a minimal increase in total industrial output. If I am correct with this analysis, then the next questions to ask are: Why Fiat is performing so well, while the automobile industry is stagnant? And Is FIAT performance sustainable in the future? Lastly, will a superior performance in one industrial sector be enough to push the whole economy also in the future, in order to account for growth in macroeconomics models? I do not know the answer for any of these questions, but I will try to give my opinion about the first one. Fiat, in my eyes, has recently changed management, acquired a fresher look and launched some new models that have better quality than they used to have. The company has realized that Europeans would not buy low quality cars at average prices unless they do not have any other choice, that the Italian Government would not rush to save the company's finances any more (better start selling people what they want!), and that nowadays marketing is an important Department... All this while some competitors (such as the Peugot case reported by the Bloomberg article) are sleeping and have lost market share in Europe.

Update: Well to some extent I have answered my own question, since this article from Polish radio explains the strong performance being achieved in the Tychy plant:

Fiat, Poland’s traditional market leader has maintained its lead in the assembly of new cars. Fiat officials say that three shifts are working 6 days a week at their factory in Tychy in the South, to satisfy West European orders.

And of course the link Paris supplied shows workers at the Melfi plant in Southern Italy.

Also amid all the cheering lets not forget this:

"In Western Europe, new-car sales only increased in Germany, by 4.5 percent, as Europe's largest economy — and second-biggest car buyer — finally went shopping after years of little growth. Car sales dropped 13.3 percent in France, Europe's fourth-largest car market, and by 3.2 percent in Italy. Britain, the biggest purchaser of new cars, saw sales fall just 0.7 percent to 413,991. (September data)"

Now this is important since the extra sales in Germany undoubtedly have some relation to the forthcoming 3% VAT increase, which means that in any rigourous accounting exercise part of them should be counted against 2007, since purchases brought forward will mean less sales to come.

or this:

Italy's Fiat SpA saw sales surge 14.9 percent compared with a year ago. Its core Fiat and luxury Alfa Romeo cars proved more popular, although Lancia sales were down. The company ended 17 successive quarterly losses by reporting higher profits in the final quarter of last year.

Update 2: Paris has kindly found us a link in English on the Fiat turnaround.(Hat-tip FxTalks). The results are obviously impressive, and more impressive I admit than I initially appreciated. Fiat is obviously on the attack again after some very bad years, and seems to be leveraging some substantial productivity improvements, as well as having some obviously popular design ideas.

It would now be interesting to see this spreading across more sectors. However, unfortunately, we are far from out of the woods yet. If we look at the other 'elderly' economies, Japan and German, both have been able to introduce substantial reforms to make their most competitive companies even more competitive, so much so that they are obviously now far more efficient than all but the best US companies. This however does not solve their outsanding macro problem which is how to generate additional internal demand, increase their tax base, and be able to sustain their welfare services. Having globally succesful companies just isn't enough I'm afraid. This nut is a hard one to crack.

Tax Evasion At 50%?

``There are certain provinces and certain sectors where fiscal irregularities are higher than 50 percent and the level of tax evasion is higher even than the income being declared''

This according to Italian Deputy Finance Minister Vincenzo Visco is a reasonable estimate of the efficacy of the fiscal authorities in collecting revenue in some parts of Italy. One example given by Bloomberg: a recent study by the Italian fiscal agency (using 2004 data) found that the median salary declared to tax authorities for 50 professions, ranging from seamstresses to dentists, was 26,095 euros, a figure more or less equivalent to the salary of a public high-school teacher. In 2003 ISTAT estimated the informal economy in Italy as being worth some 16.7 percent of gross domestic product, a figure which is surely a substantial underestimate.

Now one point needs to be made very clear here. The high level of informal economic activity is often cited as evidence for the fact that Italy is a much richer country than appears to be the case, and that is almost certainly true. However this argument is often brought out when discussing the fundability of the Italian government debt moving forward and the possibility of default. Unfortunately this argument is entirely irrelevant here, as Standard and Poor's recently pointed out in the context of Greece's surprising upward revision of of its GDP: informal activity does not in and of itself influence the fundability of the deficit since it is, by definition, not taxed.

However, clearly the existence of such activity does mean there is a potential for revenue raising by incorporating it into the formal economy. One such move has been the regularisation of 'irregular' migrants (and one wonders how much of the industrial output increase this year has been a result of the 'officialisation' of such previously unofficial activity). Other such measures are contained in the 2007 budget proposals, and obviously one way of measuring just how much progress Italy makes next year towards sustainability will be in just how much extra revenue the Italian exchequer is able to generate in this way.

Italian Industrial Production

Paris asks me in comments if I could say something about Italian industrial production. Basically production in August was up significantly (month on month 1.2 percent), but this followed a 0.3% month on month fall in July, so the actual increase is not as large as it seems at first sight. The August reading is undoubtedly in line with the September confidence index reading, but again the big question is, where is all this leading?

The EU commission only today has revised down its first quarter 2007 growth estimate:

The European Commission said the economy of the dozen euro nations may not grow at all in the first quarter of next year amid higher interest rates and a slowdown in the U.S.

The forecast of stagnation is the bottom end of the commission's range of between zero and 0.5 percent growth for the first three months of 2007, which is down from an August estimate of between 0.2 percent and 0.8 percent. The European Union's executive arm also lowered its prediction for growth in the current quarter to about 0.5 percent.

and please note this:

``The data is further suggestion that after reasonable growth in the second half of this year there may be a more meaningful slump at the start of next year,'' said Ed Teather, an economist at UBS AG in London.

Part of the reason for the mid-summer surge in activity in the eurozone was an increase in construction activity in Germany which was brought forward to avoid the forthcoming 3% increase in VAT.

The August data is now somewhat old, and all the signs are that the Eurozone has peaked. This situation will only be made worse by the ECB's obsession with raising interest rates, counter cyclically. The future is additionally complicated by the fact that during the good years (2001- 2006) several major European economies used pro-cyclical fiscal policy, and they will now have to move in the direction of tightening at just the time when an expansionary fiscal policy is just what is called for. As you make your bed, so shall you lie, as they say.

Also it is important to take into account what is happening in the services sector, where again a slowdown is also making its presence felt:

Euro zone services growth slipped to a 10-month low in September, a survey showed on Wednesday, but analysts said this won't stop the European Central Bank raising interest rates this week and again later this year.

The RBS/NTC Research survey of 2,000 companies, ranging from financial services to hotels, showed business in the euro zone's dominant services sector remained robust, but eased for the third consecutive month.

The euro zone services activity index fell to 56.7 in September from an upwardly-revised 57.4, still well above the 50 mark that separates growth from contraction. Economists had expected a stable reading of 57.0.

That left the index at its lowest level since November 2005 and puts it sharply lower than a World Cup-related high of 60.7 in June, with a slowing in input cost rises and the rate of growth in new business.

It is important here to remember that in a developed economy services make up around 70% of total economic activity (with industry accounting for around 25% and agriculture around 5%). So services are really a much more important indicator than industrial activity. Clearly services activity is still growing, but the rate of expansion is slowing.

All in all it is important to remember that one swallow doesn't make a summer, and above all that Rome certainly wasn't built in a day.

2007 Budget To Be Changed (Already!!)

Well the FT this morning reprorts that Prodi is now 'vowing' to change the budget:

Italy’s centre-left government promised to make changes to its 2007 budget after coming under intense criticism from business leaders at the weekend for raising taxes and failing to introduce economic reforms.

“It’s clear that we will make technical corrections and adjustments, but we absolutely won’t renounce the three objectives of fairness, restoring the health of the public finances and development,” said Romano Prodi, prime minister.

Much of the 'intense criticism' has centred around the proposal which would have compelled companies to transfer about €5bn in funds, held in reserve for employees’ severance pay, to the state pension system which was covered in my post yesterday. As the FT notes:

This has caused uproar among the several million Italians who run small companies with fewer than 10 employees. They fear it would prevent them from meeting their obligations on severance pay and that banks might refuse to help them out with loans.

While denying that the pension funds transfer was a major issue, Mr Padoa-Schioppa acknowledged the objections of small companies and said: “I recognise that for them it’s a problem and something will have to be done.”

The government might in any case have needed to redesign this proposal, because the European Union’s accounting rules would not necessarily let Italy count such transferred pension contributions as extra government revenues.

Well, now we may well get a more serious and realistic version of the budget up and on the table, since in this case at least, all may be well that ends well, always assuming the Padoa-Scioppa is a man of his word, and not like that other European leader who was lying in the morning, in the afternoon and in the evening.

Mr Padoa-Schioppa was adamant any adjustments to the budget, which MPs must approve, would not affect its goal of cutting Italy’s budget deficit to 2.8 per cent.